“Land-based financing (LBF) is a collective name for a wide range of instruments used globally by governments, especially local authorities, to expand their revenue base and generate additional funds to realise service delivery as well as infrastructure development and maintenance goals,” explained Riël Franzsen of the African Tax Institute at the University of Pretoria. “By granting targeted relief, some LBF instruments can also be used to influence the behaviour of landowners and contribute to biodiversity conservation.”
Franzsen explained that LBF instruments include recurrent property taxes (rates), special assessments, developer charges, change of use or building heights, sale of development rights, betterment levies, land readjustment, vacant-land taxes, lease of land, sale of land, air rights, land banking, as well as property transfer tax, the oldest tax in South Africa.
“South Africa is recognised as one of the planet’s 17 megadiverse countries boasting three (out of 37) biodiversity hotspots – the Cape Floristic Region, Succulent Karoo ecoregion and the Maputaland-Pondoland-Albany corridor,” he said. “The Cape Floristic Region is the smallest yet richest of the six plant kingdoms and the only one in a single country. It’s home to over 9000 plant species of which about 6200 are only found in South Africa. The Table Mountain National Park supports 2200 plant species more than the entire United Kingdom.”
“Cape Town is a magical place from a biodiversity point of view but it’s urbanising rapidly – faster than the rest of the country – the overall rate of urbanisation is about 1.72% but Cape Town is probably at about 2.4%. We need to think about protection.”
He pointed out that within the constitutional and legal environment there are many laws dealing directly or indirectly with nature, biodiversity and conservation of which the Climate Change Act of 2024 is the latest. This environment is also complex with multiple role players (national, provincial and local government, civil-society organisations, and property owners); complex legislation; limited skills and capacity at municipal level; and, limited financial and fiscal incentives.
“Currently there is some relief for biodiversity protection in South African fiscal legislation. Section 37D and – rather indirectly – section 6C of the Income Tax Act 58 of 1962 provide biodiversity tax relief at the national level. At municipal level, section 17(1)(e) of the Local Government: Municipal Property Rates Act 6 of 2004 provides property owners of protected areas relief by excluding parts of the property that ‘are not developed for commercial, business, agricultural, or residential purposes’ from the property tax base.”
“Large cities can generate their own revenue through taxes, rates and selling services but rural areas with smaller tax bases are more dependent on grants and subsidies,” he continued. “This is not unique to South Africa.”
“Although ‘protected areas’ in national parks and nature reserves are excluded from the tax base, the presence of these properties within municipal areas does not currently entitle municipalities to compensatory grants as in some countries,” he added.
To tax or not to tax
Explaining property taxes or rates in more detail, Franzsen said: “They are based on market value and there is limited national oversight, the municipalities have freedom to manipulate as they can decide on differential tax rates, exemptions, rebates and reductions.”
For properties with multiple uses, municipalities have to apportion taxable values and concomitantly tax rates. If the use of the undeveloped part of a property changes, the tax previously foregone as a result of the exclusion is recouped. The municipality may exempt a specific category of owners of properties or the owners of a specific category of properties from payment of rates; or they may grant a rebate or reduction in rates to specific categories of owners or specific categories of properties. They may not levy rates on those parts of nature reserves and national parks that are not developed or used for commercial, business, agriculture or residential purposes.
“The Municipal Property Rates Act is a wonderful tool for enhancing biodiversity if used properly,” he added. “Granting exclusions, exemptions, rebates or other relief may influence property owners’ behaviour.”
However, there are major implementation issues including the apportioning of value in multiple-use land, and incorrect application of the law because of unclear wording, different interpretations and because some municipalities view it as loss of revenue.
“Badly written or misinterpreted law may include individuals or groups who don’t deserve incentives.”
He also highlighted problems in valuation issues – “What determines the market value of a nature reserve – the fancy guest facilities or the existence of the Big Five roaming the undeveloped part? Where is the real value?”
Another problem is capacity at municipal level. Quoting Milka Casanegra de Jantscher, Franzsen said: “Tax policy is tax administration.”
“Only 34 (just over 13%) out of 257of municipalities received a clean audit for the 2022/23 financial year.”
“We need to be smarter in how we deal with all of this. And rather than introducing new instruments we need to make better use of existing ones. In principle section 17 can provide good biodiversity protection but it needs to be reinforced with amendments addressing ambiguities in the wording and clarifying regulations regarding the determination of the value of properties, while acknowledging that some municipalities have a limited tax base.”
He also highlighted the need to change mindsets. “Tax-relief mechanisms are generally seen to imply revenue foregone. Exemptions, rates differentiations or rebates to change property owner’s behaviour may imply short-term loss but long-term gain (through value increases) and overall provide better biodiversity protection. What you lose on the swings you gain on the roundabouts.”
“Municipalities deal with rates differently. They need training to think out of the box.”
Other instruments
Franzsen also explained other instruments that can be used. These include EFTs – or Ecological Fiscal Transfers – which integrate ecological criteria into the intergovernmental fiscal system. They aim to distribute public money not merely in accordance with traditional economic and social indicators but also by considering ecological indicators. The purpose is to compensate subnational governments for the costs of conserving ecosystems and incentivise greater ecological conservation. “They are not currently used in South Africa but it is a debate we should have,” he said.
Another tool is the special-rating area (SRA)or community-improvement district (CID), established in terms of section 22 of the Municipal Property Rates Act and found across South Africa. In these areas an additional rate is levied to upgrade or improve an area – and it’s often used for security, maintenance and beautification. The designation of an area as an SRA or CID must have the consent of the majority of property owners. “This could also be used to directly protect biodiversity,” said Franzsen, “by asking such communities to help protect biodiversity hotspots in these areas.”
He will also be investigating other mechanisms such as developer charges. “Municipalities use development charges to recoup some or all of the cost of public infrastructure required by new urban development. The recently introduced Chapter 3A of the Municipal Fiscal Powers and Functions Act 12 of 2007, provides for the regulation of development charges on a uniform, national basis. Municipalities may therefore have some scope to use development charges to support biodiversity conservation.”
In discussion, he noted that traditional and tribal-owned lands in South Africa are also a huge issue from a property tax point of view – “Who owns such lands and against whom can you enforce tax regulations? We have not figured out all aspects of property rating of community land in South Africa yet,” he said.
“We all benefit from biodiversity,” he concluded. “It’s in everyone’s interest to protect it. If it’s well done, adjacent communities benefit in terms of job creation, tourism and other opportunities. It’s a balancing act but we cannot afford not to think how we can use tax to change behaviours for something this important.”
Michelle Galloway: Part-time media officer at STIAS
Photograph: SCPS Photography