Land tax could ruin Eastern Cape farmers

More than half the commercial farmers in the Eastern Cape will face bankruptcy if they are forced to pay a land tax set at 2% of market value, according to research released on Wednesday.

That rate would lead to an 89% drop in profits for farmers in the province and have other equally serious knock-on effects, said Willem van Heerden, senior lecturer in agriculture at the Port Elizabeth Technikon.

In a presentation to the Agricultural Economics Association of South Africa conference in Somerset West, he said a survey of 494 farmers across the province showed that 139 of them, or 29%, were already producing at a loss.

He said this survey, conducted through a questionnaire distributed to Agri Eastern Cape members and returned anonymously mostly through its accountants, probably presented a rosier picture than the actual situation.

The farm sizes indicated on the returns showed it was mostly bigger and therefore more effective and profitable farmers who responded.

Van Heerden said as far as he knew, the Nelson Mandela Municipality is the only one in the province to have implemented the tax so far. It has set a rate that this year stands at 5% and will climb to 7,4%.

Municipalities are able to set their own rates for the tax.

Average profit on the farms surveyed over the past three financial years—which included a bumper year in 2003—was R68 867.

A 2% tax would reduce that to R7 324 and push 52% of farmers into the red.

Average profit per hectare in the Eastern Cape over the same three years was R20,61. If one subtracts from this a 2% tax capitalised at a “clearly conservative” 80%—which means the farmer is getting a 20% return on his tax in the form of better roads or other services—that profit shrinks to R5,76.

“If there’s no profit, there’s no value in the land,” Van Heerden said.
“This affects its collateral value as well. All the banks are going to tighten up on loans.”

Asked if the pressures of having to meet the added tax burden would not force farmers to become more efficient, he said: “Land has a physical restriction. You can only keep so many sheep. It’s not a factory where you can increase your turnover.”

He said he fears farmers under financial strain would be tempted to “mine” their farms in a non-sustainable way to keep afloat in the short term.

The tax should ideally be set at no more than 0,2%, which would lead to a reduction in land value of about 7%, Van Heerden said.

The number of farms producing at a loss would grow from 29% to 32%, which is “not that drastic”.—Sapa

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