Cape Town 'wealth tax' rates increase

 

 

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa

 

Fixed income ratepayers face ‘wealth tax’

Dear Cape Town City Mayor Hill-Lewis

An Open Letter: Cape Town rates and fixed income property owners, which includes pensioners..

‘If the South African Property Owner Associations (SAPOA) were to succeed in their argument (against current rates increases), the effect would be to have ordinary families effectively subsidising the wealthiest property owners,’ says Geordin Hill-Lewis, the mayor of Cape Town, rejecting claims about the massive increase in rates.

What? What nonsense Mr Mayor!

Your qualifications in finance and economics seems to belie your knowledge of the basic economic principle of ‘price elasticity’. It seems you have stretched this elasticity to breaking point.

The Cape Town City Council seems to in seem to be on average increasing rates by an amount far above inflation. My current calculations show about a 28%, before inflation of 2,9% year-on-year. This does not take account of anyone who, on the Council’s lower income means test, receive a discount. But this average inflation rate on property rates and services seems to apply to most middle to higher-income ratepayers.

 

A ‘wealth tax’

This is a ‘wealth tax’ based on the value of your property. It is not an income tax rate. The Cape Town city council does not seem to know the difference between a ‘wealth tax’ and an income tax. One taxes what you own (namely your home) and the other taxes your income. Imagine the Government putting up your income tax by 25 %!

It is the job of central government to balance out income distribution to a major extent. The government does it with a top marginal rate of 45 % of income. It is not for a City Council to play the same role; and, particularly not with a ‘wealth tax’.

SAPOA is suing the City of Cape Town in court for this high increase in rates and services. If SAPOA does not succeed in the court case, it can be presumed the additional rates charges will be passed onto tenants. Many are small business owners. It is not clear how many will be affected, but many people can be expected to lose jobs and some businesses are likely to close.

 

Wealth tax a big problem

The main group of ratepayers, who are going to find this unsustainable, massive increase in rates and taxes, are those ratepayers who are on fixed incomes. Many pensioners see their income decreasing every year. For example:

* Where defined benefit funds have increases less than inflation. Take the Transnet Second Defined Pension Fund, where most increases are4 limited to two % of inflation.

* Investment Linked Living Annuities (where most pension fund investors have their money). Most have too high a drawdown rate and/or high risk investments. No drawdown rate should exceed an initial 4% but most are way beyond this. This means that in the near future the fixed income stream will meet the breaking point where they will have reached the maximum drawdown of 17,5% and they will receive substantially less (inflation plus capital loss) in each ensuring year.

Fixed income groups have little way of earning more income. They have to readjust their budgets (based on their pensions) or run up debt, which they will never pay off.

Fixed income ratepayers include most pensioners and those covered by permanent disability insurance (both mentally and physically). Incidentally the top rate of permanent disability assurance is 75% of basic pay on last salary, which makes it even worse for them.

Most ratepayers on fixed incomes, can just keep up with the inflation rate let alone paying this ‘wealth tax’. These are the reasons why fixed income ratepayers will be so badly affected:

• Property valuations. Current rates are based on the City of Cape Town assessment of the value of your home. The recent price increases have gone up considerably particularly in some areas. About 30 years ago, Tamboerskloof on the slopes of Lions Head, was a lower income area with much lower property values. People who bought there, even 10 years ago, now face a significant increase in rates because of what is being paid for properties. Tamboerskloof and the City bowl has become highly popular with people forcing up prices. Most are escaping Johannesburg or foreigners who, for them, pay peanuts for properties in Cape Town.

• Surveys: Is this a guessing game? Was any survey done by the Cape Town City Council on fixed income ratepayers? If it was, where is it? If not, why not?

• Sanlam survey: If, Mr Mayor, you look at the latest Sanlam Benchmark survey on retirement funds you will find pensioners are reducing their commitments to medical aids by downgrading or getting out of medical cover altogether - at the very time they need medical aids the most. In other words, they do not have the income to afford medical contribution payments. Now you are going to make the situation even worse with your “wealth tax’. Incidentally the Sanlam survey also indicates that many people cannot retire before the age of 85 – but this in most cases is not possible for health and employment reasons. (See: www.retirementplanning.co.za)

It is very doubtful that fixed income ratepayers, who dropping out of medical aids, or are reducing contributions by opting for a cheaper option (with less benefits) can then afford a massive ‘wealth tax’ on property.

• At best only 10 % of retirement fund pensioners retire financially secure. This does not include those on the State Old Age pension. There are many reasons for this failure, but it is still a fact. Further many people, who have taken advantage of cashing in retirement savings, using the two-point legislation, spend the money for such things as general debt. People doing this are hardly likely to retire financially secure. They will suffer even more when they retire.

In effect what you are doing, Mr Mayor, is forcing fixed income people to sell and find somewhere else to stay outside of Cape Town. This will mean they will have to pay transfer duty, capital gains tax, the multitude of transfer costs and commission on the sale. And again, when they repurchase. Well done Mr Mayor!

This also smells distinctly of ‘ageism’. This means taking unfair advantage of elderly people.

 

Other issues

• Debt forgiveness: Mr Mayor, you are allowing what seems to be large scale debt forgiveness on debts to the Council. Most ratepayers might be interested to see the total ‘debt forgiveness’ figure and who gets let off. So, part of this rates increase is going to pay for those debts. It would be interesting to see how many people, who are being forgiven their municipal debts, are addicted to gambling. But then the City Council has probably not surveyed this. (As an aside: A question: why don’t all people on a fixed income simply refuse to pay and then benefit from the next debt forgiveness!)

• Extra costs: Many ratepayers, at great cost, installed water tanks, solar heating, paying towards security upgrades. Solar is a good example of how many ratepayers, who financially struggled to install solar because their home alarms could be affected by the lack of power. Many houses were burgled because of electricity failures. Now Cape Town is charging a flat rate on that on both electricity and water.

• Pavements: The infamous new cleaning bill is applied to all ratepayers. Many ratepayers repair their pavements and keep them clean – not the City Council.

 

Election engineering

There is now a suspicion that all this is election engineering for next year’s municipal elections. The Democratic Alliance is attempting to draw lower income votes.

But what are the consequences for the Democratic Alliance of this unfair rates increase. Are those badly affected now reconsidering voting for the Democratic Alliance and how many ratepayers will continue donating to the Democratic Alliance?

The Democratic Alliance keeps going on about how badly handled other municipalities are riddled with corruption. The comparison is odious. Fair and non-corrupt spending has little to do with the horrific increase in rates.

To add to all the suggested alternatives:

• Start making a real effort to control traffic, with substantial fines when people break nearly all traffic rules and drive unroadworthy vehicles. Starting with Uber would generate many fines and improve road safety for the rest of us.

• Your boast about replacing water piping does not ring true. What seems to currently happen you replace a few meters and the next leak appears. A further repair (and with the loss of water). Rather replace at least a street at a time – it will cost far less.

Mr Mayor you should do far less self-publicity photoshoots, particularly where other non-City Council projects are involved, or where you try to pretend you are running a marathon. A good place to start will be fixed income ratepayers!

For more detail on why pensioners cannot afford a ‘wealth tax’ read the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on the website  www.retirementplanning.co.za

 

Read more on this topic here:

https://retirementplanning.co.za/what-99-of-retirees-regret-and-how-you-can-avoid-it/

https://retirementplanning.co.za/you-may-need-to-be-80-before-you-retire/

https://ascor.co.za/how-to-draft-a-will/

https://ascor.co.za/you-need-an-estate-plan-to-protect-the-future-of-your-loved-ones/

https://ascor.co.za/things-to-have-handy-in-case-you-pass-away/