South Africa’s already-struggling property development industry could face a heftier municipal tax burden. National Treasury is publishing a new amendment Bill, aimed at creating a legislative framework around how municipalities levy development charges for new property projects.
The Municipal Fiscal Powers and Functions Amendment Bill, which provides for uniform regulation of development charges, was released for public comment last week (January 8) and the closing date for submissions is the end of March.
According to Treasury, development charges are a once-off charge levied by a municipality on a land owner as a condition for approving a land development application.
“They [development charges] are imposed to cover the costs incurred by the municipality, when installing new infrastructure or upgrading an existing infrastructure that is required to service the proposed development,” it notes in a statement.
Municipalities across the country already levy development charges for providing bulk infrastructure – such as for water, roads, electricity and sewerage – that are linked to new property projects. However, the costs vary and not all new developments are levied this fee. Also worth mentioning is the issue of a ‘development surcharge’ on new property projects, proposed by the eThekwini Municipality in Durban back in 2011, which raised significant opposition from local business and the SA Property Owners Association (Sapoa) at the time. The plan was later canned.
Now it seems Treasury is looking seriously at development charges as bigger revenue source for municipalities to finance new infrastructure.
“A key reform in the Bill is to establish an unambiguous, fair and consistent basis for municipalities to recover development charges, for all new land development projects that require statutory approvals through the municipal land use planning system,” Treasury states.
“The aim of the amendment Bill is to increase the amount and the predictability of development charge revenue, to provide both municipalities and developers with more certainty and assurance that the costs of infrastructure are covered by its users,” it said.
“The Bill ensures that the cost of the municipal infrastructure required to service a new land development (including an intensification in land use) is primarily borne by its direct beneficiaries. This promotes the principles of aligning costs with benefits and intergenerational equity (i.e. the burden of payment for infrastructure) is shifted from the existing tax payers to land owners and new users of the infrastructure,” the statement added.
Speaking to Moneyweb, Sapoa CEO Neil Gopal says the commercial property body is still studying the Bill, so “it is premature to comment in detail”. However, he hopes the plan will not result in “double taxation” – with property developers paying upfront for infrastructure costs and then still paying high commercial property municipal rates.
Sapoa and property company bosses have been very vocal about the spiralling cost of municipal rates and taxes over the past several years. Moneyweb reported in July last year that municipal rates and tariffs made up 63.9% of the commercial property sector’s operating costs in 2018, according to FNB’s Macro-Commercial Property Outlook report. This was up from around 41% in 2000.
“The Treasury plan is not necessarily a bad idea, if the Bill provides a constitutional basis for municipalities to levy development charges in a more uniform way,” says Gopal. “eThekwini’s property surcharge plan several years back was unconstitutional in our view, that is why we opposed it. This bill seems to provide a constitutional basis for levying the development charge.”
Gopal cautioned that the move must be done legally and in accordance with a properly adopted policy framework. He says Sapoa plans to submit detailed comment on the Bill to Treasury.
“Development charges must be integrated into the overall municipal fiscal system, particularly every aspect that involves the financing of municipal infrastructure. Developers should not be required to pay twice for capital expenditure on establishing service infrastructure or maintaining service infrastructure,” he says.
“As a consequence, significant changes will need to be made to the relevant other [municipal] levies such as rates, to ensure that a development charge is introduced on a fair and equitable basis.”
Urban and regional planning economist Glen Robbins tells Moneyweb that the issue of development charges has been discussed “for well over a decade in municipal infrastructure and finance policy circles” so the new Bill is not a surprise.
“As always with municipal regulations/policy the national sphere tries to do something which talks across the wide range of municipalities,” he says. “The approach across municipalities has varied substantially and National Treasury has felt this undermines the scope of municipalities to legitimately use development charges to secure direct development revenue from expenses incurred.”