Property rates are always payable

Property owners who think that they will save money by providing their own basic services should think again. This is because a recent Supreme Court of Appeal judgment has found that homeowners who utilise their own basic services can't expect to pay a lower amount for rates than households who enjoy the full benefit of the services on offer by a municipality.

According to the judgement, the development (named Blair Atholl Estate and situated some 50kms west of Pretoria) was approved as a township, subject to specific conditions under the Town-Planning and Township Ordinance 15 of 1986. This was because the relevant area fell outside the municipality’s priority areas for the establishment of new townships and had no water and sewerage facilities. So approval was given on condition that the developer installed these services.

The developer and the municipality concluded an Engineering Services Agreement (ESA) in 2008 and as such, the developer undertook to install all engineering services for which municipalities are usually responsible – these included water, electricity, sewerage networks, storm water drainage systems and road infrastructure. The Home Owners Association (HOA), the establishment of which was one of the conditions of the agreement, became responsible for the maintenance of the services inside the estate. A monthly levy is payable by every member of the HOA to cover these costs.

Interestingly, the ESA specifically provided for rates to levied in accordance to the municipality’s policies once the township had been proclaimed.

However, in 2011 the homeowners argued that the rates policy of the municipality only recognised one category of residential property and one category of vacant land. In other words, all residential properties attract the same rates. The fact that they were paying for services that they weren't receiving from the municipality in the form of rates as well as paying a levy to the HOA, in their opinion, meant that they were essentially paying a double tax.

The municipality on the other hand took a different view and noted: “property tax is not payable upon receiving basic services. The taxpayers do not receive direct or measurable benefits from the payment if property tax and the value of the benefit, which an individual derives, cannot be quantified. It is the responsibility of an individual property owner to pay property tax irrespective of receiving a direct benefit from making use of the collective services.”

The municipality also noted that the fewer the number of properties that were subject to property rates, the smaller the tax base and the more exceptions and rebates granted, the greater the tax burden became on property owners whose properties remain subject to non-discounted rates.

Unhappy with the municipality’s decision, the HOA, the developer and one of the directors of the developer took the matter to court… and lost. They then took the matter on appeal, however the HOA withdrew the day before the appeal was heard.

Appeal Judge Azhar Cachalia rejected the appeal saying: “Ratepayers who have the means are required to bear an additional burden to subsidise those who cannot afford to pay for their services."

He noted that rates are imposed on all rateable property in a municipality and are not linked to services such as water, waste removal and electricity that owners pay in respect of the property. “Unlike the costs of services, there are no measurable benefits from the payment of property taxes. There may be indirect benefits such as the use of parks, libraries, public health and law enforcement services, which may be referred to as collective goods and services. For these services everyone pays, whether or not they are used. Rates policy is also based on affordability and the principle of a progressive sliding scale; the higher the value of the property the more the owner pays.

Developers who plan to deliver their own services should perhaps alert buyers to this judgement before proceeding.