1 PROPERTY RATING AND PROPERTY TAXATION

1 PROPERTY TAXATION

Property tax is a form of tax that is levied by the Local government in order to ensure the sustained
provision of certain services which are enjoyed by all. This source of revenue forms a substantial part of
government revenue world over (Nor Azriyatet. al, 2007). In the United Kingdom and Nigeria, this form
of tax is referred to as property rating, in Germany, Austria and the Netherlands it is referred to as
property tax while in Estonia, Georgia and in Hungary it is known as land tax (Almy, 2001).Real Estate
Encyclopedia defined rating as the valuation done to ascertain rate payable on a property. It is also
known as an assessment tax which is paid for the services made available by the Local authorities. The
process of rate collection is kick started with the determination of the values of hereditament. This is
carried out in accordance with the provision of statutes. Kuye (2002) pointed out that this rate is paid by
the owners of the properties rather than the occupier. Where the property is not in occupation, empty
rate is chargeable. A general rate is expected to be fixed by the rating authority for all hereditaments
within a particular rating area. This value is a fair reflection of the value of those hereditaments in their
present state (Kuye, 2002). In the event where some properties were not captured in an earlier
assessment, there is a statutory provision for them to be included via toning of list (Kuye, 2002).

2. OVERVIEW OF PROPERTY TAX

Property tax has to do with establishing a value that should be charged by the government on citizens
for the use of infrastructures and services that have been made available. This rate is charged for the
upkeep of the infrastructures (Hakim, 1987). It is important that its assessment be comprehensive and
consistent (Bardai, 1987). Depending on the prevailing provisions of the law, a number of methods are
available in arriving at the market value of rateable hereditament. (Bird and Slack, 2005). However,
Young and Malme (1994) posited that there are two basic and widely accepted approaches of
assessment; these are area-based assessment and value-based assessment.

3. OBJECTIVES OF PROPERTY TAX

The objectives property tax are set out to achieve varies from one country to another based on their
economy and policies. Property tax objectives as indicated by (Kuye, 2002) are:

1. REVENUE GENERATION: revenue generation is the utmost objective of tax administration in Nigeria.
Because of the huge amount of money needed to provide infrastructures and services, it is important
that adequate revenue is generated to aid government at all levels to continue providing and
maintaining these services.

2. REDISTRIBUTION OF INCOME: property tax seeks to bridge the ever widening gap between the
wealthy and the poor. The ability to pay and benefit principles must come to bear for this objective to
be attainable.

3. PROVISION OF RELIEF: property tax makes exemption and relief available to different categories of
people based their conditions or inability to bear the burden of taxes.

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4. Administration Of Taxes In Nigeria

Tax administration in Nigeria is vested in the three tiers of government. Taxes payable to the Federal
Government are administered by the Federal Inland Revenue Service (FIRS), while those payable to the
State Governments are administered by the State Boards of Internal Revenue (SBIRs) of the thirty- six
states of the Federation. Local Governments also administer rates and levies collectible by them
through their various councils.

There are a good number of taxes payable by persons doing business in Nigeria. These include
companies' income tax, personal income tax, capital gains tax, value-added tax, education tax,
technology tax, stamp duties, and withholding tax. Penalties are imposed for failure to pay taxes when
due.

A Tax Clearance Certificate is issued on demand when taxes due have been fully paid for three years
immediately preceding the current year of assessment. A Tax Clearance Certificate is usually required for
official transactions with Government Ministries, Departments, and Agencies (MDAs).

5. PROPERTY RATING AND ITS ORIGIN

Property rating is a form of property taxation. It is a sum of money levied by the local government on
occupier or owners of property so as to raise fund in order to promote the general wellbeing of the
inhabitants and provide the needed developmental projects such as roads, hospitals and so on. Other
forms of property tax include ground rent, probate tax, capital gains tax, stamp duties and so on.The
origin of property rating can be traced to the United Kingdom where the Church leaders noticed the lack
of amenities in the community. They sought to improve this by sponsoring what was the first Act in the
United Kingdom; the Poor Relief Act of 1601. This Act is also known as the Statute of Elizabeth.
However, there was no fixed amount expected to be contributed by individuals. In 1836, the Parochial
Act was enacted and this gave annual value as the basis of individual contribution. As time went on,
other Acts were promulgated among them was the 1925 Act as well as the Local Government Act of
1948.

ORIGIN OF PROPERTY RATING IN NIGERIA

Property rating in Nigeria can be traced back to the history of the colonization. It gained wide
acceptance when it was introduced, largely due to the fact that it was seen to be similar to the
communal development system that was practice by our fore-fathers. Their contribution at that time
was either in cash or kind and the money contributed is used to execute projects based in order of
priority. Strangers were exempted from this contribution however. The major difference between this
system and the one practiced in the United Kingdom is just standardization. The first rating law in
Nigeria was sponsored by the British in the year 1915 but collection of rates was largely unaccounted for
and arbitrarily fixed. Later the local government edict of 1976 came into play and this helped property
rating gain prominence.

6.Taxation Principle

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Property Rating and Taxation conforms with the main principles of taxation as enunciated by Adam
Smith inhis book titled Wealth of the Nations\(1776) whereby he marshaled fourcanons for fair and
sound taxation in society to include:

(a) Equity;

(b) Convenience

;(c) Certainty and

(d) Economy.

Any good taxation system must comply with the above four principles. Ogbuefi (2001: 35) not only
agreed with Adam Smith position but modified Smith’s thought in what he termed test of modem
taxation to be

1.Social Equity

2.Consistency with economic goals

3.Ease of Administration and

4.Revenue Adequacy

Property rating and taxation embodies the above tests/principles and qualify as a good taxation

system.

7. REASONS FOR LEVYING PROPERTY RATE

The main reason for levying property rate is to improve the quality of the environment and to stop the
degeneration of the environment and make it conducive for human habitation. Providing the necessary
facilities is cost intensive and because money at the disposal of the Local government may not be
enough, it becomes imperative for the Local government to levy rates. Although a number of financial
sources are available to the local government, property rating is one of the viable means. Other sources
include:

a. MAJOR SOURCE; grant and aid, local government consolidation fund, loan, commercial tax, value
added tax (VAT), market fees, motor park fees

b. MINOR SOURCES; donations, entertainment charge, tourism, pool/betting tax

c. OTHER SOURCES; wheel-barrow fee, truck license, slaughter fee, marriage registration fee, advert
license, radio license, fishing license

d. FEDERAL FUNDS; statutory allocation from the federation accounts, custom duties, loans, grants and
aids

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e. STATE FUND; earning from state public entertainment, pools, betting and lottery, loans, grants and
aids.

Apart from the primary reason of property rate being to generate funds, there are some other reasons
why rates are levied on properties. These are:

a. Property rating is responsive to economic growth

b. The yield from property rating are predictable and as such helps in planning

c. Property rating also help in achieving social equity

d. It offers ease of administration than other forms of taxation

e. It offers ease of administration than other forms of taxation.

Taxes Applicable to Companies in Nigeria

Key taxes chargeable in Nigeria, their application and rates:

Companies Income Tax (CIT)

30 % of total profits of a company less allowable deductions

Companies Income Tax Act

Capital Gains Tax (CGT)

10% of gains realized upon disposal of a chargeable asset

Capital Gains Tax Act

Value Added Tax (VAT)

7.5% on the supply of goods and services

Education Tax

2% of assessable profits of a comp

RATE OF TAX

3. Stamp Duties

Stamp duty is a tax on documents, which is payable by virtue of the Stamp Duties Act, (Chapter S8), LFN
2004 (the "Stamp Duties Act"). The rate of stamp duties depends on the type of document and the value
of the transaction evidenced by such a document. When a document is executed between a company
and an individual, the stamp duty is payable to the Federal Inland Revenue Service, whereas, where the

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document is executed solely by individuals, the State Board of Internal Revenue is the appropriate
collecting authority.

4. Withholding Tax

Nigeria's tax laws provide for the withholding of tax from payments due to any person or company
(whether or not resident in Nigeria) that provides goods or services to another person or company in
Nigeria. Withholding tax is not a separate category of tax but simply represents an advance payment of
income tax.

PREREQUOSITE TO THAT MUST QUALIFY ABPROPERTY FOR RATING ASSESSMENT

ACTUAL OCCUPATION: there must be actual physical possession of a property for it to be liable for the
payment of property rates. It does not really matter whether such an occupier is the freeholder or the
leaseholder, provided such occupier has been vested with the right of usage or mortgage. It is only in
physically occupied properties that rating officers can levy and collect property rates as appropriate.

BENEFICIAL OCCUPATION: the property must be of benefit to its owner or occupier for it to be liable for
the payment of property rates. This benefit need not be pecuniary; it could be any other benefit
accruable to the occupier or owner of the property. The properties benefit from the social amenities
provided by the government (Federal, State and Local Governments). These benefits translate into
increase in property values by way of betterment values. The local government area in which the
properties are located ought to have access to enhanced values since rating and taxation is proportional
to the properties assessed annual values.

EXCLUSIVE OCCUPATION: for a property to be liable for the property rates its owner or occupier must
possess an exclusive right on it. Such a right that is exercisable against every other person

PERMANENT OCCUPATION: occupation has to be permanent for a property to be rateable. Where

occupation is just for a short while, the property will not be liable for the payment of property rate.
Where a property is suffering from void the owner may not be willing to pay rates. However in other
countries owners of void property are required to pay half rate. This is referred to as empty rate and it is
paid three (3) months after the emptiness of the property. For a new property, empty rate would be
paid after six (6) months of emptiness. This is however, not applicable in Nigeria.

8. BASIS OF RATING VALUATION

Current annual value of hereditament is the basis of rating valuation. This value is known as rateable
value or assessed value. This annual value can either be gross or net annual value.

STAGES IN PROPERTY RATE ADMINISTRATION

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It is the duty of the commission to announce the commencement of the rating activity, the method to
be adopted, properties to be exempted and other necessary information about the rating exercise.
Below are the procedures involved in property rating assessment:

9. METHOD OF RATING VALUATION/ASSESSMENT

This is a very important aspect of Rating and Taxation. Depending on the enabling Law, the assessment
prescribes the persons that handle the assessment and who should appoint them. Some refer to them
as appraisers, assessors and so on. Whatever name such personnel are called, it is important that they
must be qualified Estate Surveyors and Valuers, otherwise, the assessment becomes void ab initio since
landed properties are involved and assessed. This is due to the provision of Estate Surveyors and Valuers
(Registration, Etc) Decree No 24 (Now Act), 1975, Cap 111 LFN 1990. The Rules and Regulations for the
practice of Estate Surveying and Valuation made under the above Act of 1975 in pursuance of its
section. 2 (d) on the functions of Estate Surveyors and Valuers Registration Board of Nigerian
(ESVARBON) and the powers conferred on the Minister by Section 18 to make Rules and regulation had
at Section 2 that “Nobody shall determine or estimate the value of any or all interests in real property
unless he is an Estate Surveyor and Valuer”. This is in line with the definition of appraisal and valuation
handled by the professional Valuer/Appriser as “The art and science of determining, at some specific
date, for a specific purpose or purposes, and by one authorised, the monetary value of the property
rights encompassed in an ownership and the value so determined”,

The property appraiser being an expert and a qualified Estate Surveyor and Valuer whether in public
service (in-source) or private sector (out-dourcr), possesses the required skills for such enormous task of
rating valuation. Hence, the following are the methods use in determining the rateable value of an
hereditament.

A. RENTAL COMPARISON METHOD OF VALUATION

This is the most widely used method in property rating valuation. It is applicable where there is is
obtained and adjusted to suit the subject property’s physical condition, age, structural layout, adequate
information about rent passing in the rating area or similar area and comparable properties that are
currently let. The rental evidence of the comparable property location, amenities, internal finishing as
well as the value of the premisesis obtained and adjusted to suit the subject property’s physical
condition, age, structural layout location, amenities, internal finishing as well as the value of the
premise. Th following should also be taking into consideration when using this method;

a. The property must be similar

b. It must be within the same neighbourhood

c. The transaction must be recent

PROFIT/ACCOUNT METHOD OF VALUATION

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In this method, the gross receipt from a business is determined and the operational cost profit as a long
term determinant of agricultural land’s rental value. In the same vein, tenants of only applicable where
available rental evidences are not reliable and for property that enjoys rateable property rely on the
earning capacity of their properties to pay rents. This method is rateable value. This method originated
from the Ricardian Theory of rent which identified removed from it to arrive at the divisible balance and
a proportion of this is taken as the some sort of legal or locational monopoly.

B. DEPRECIATED REPLACEMENT/CONTRACTORS APPROACH

This method is based on the premise that a prudent tenant will not pay more for a property than it will
cost him to build a replica capable of offering the same level of satisfaction in terms of functionality and
the occupational demands of such property. It is applicable to properties that are rarely let and
therefore, have little or no rental evidence. It uses current rate of construction per square metre to
determine the cost of building a replica of the property putting into consideration the level of physical,
functional and economic obsolescence.

This is known as the method of last resort as it is usually used when there are no rental evidences,
comparables or even where there are no records of income and expenditure in respect of business
conducted in the hereditament.

C. THROUGH-PUT APPROACH

This method is an abridged version of the profit method. It is used in assessing garages and petrol/gas
service stations. This method is based on the potential annual profit on sale of petroleum/gas products
put through containers. In order to arrive at annual value, values attributable to other properties and
services that go along with the filling station such as lube bay, supermarket are considered.

OUTPUT APPROACH

This method is adopted in assessing mines where different minerals are produced. The amount payable
is based on the total output of the mineral concerned. A rate per tonne is fixed and this is applied to the
level of production to arrive at the rate payable.

D. ZONING APPROACH

This method is used in the assessment of shops and departmental stores. It is based on the application
and analysis of the rental evidence available to the rating valuer. Due to the difference in the level of
usage of different portions of shops, the half-bag principle is used to obtain the value of the various
portions from the total value of the shop. The value of the shops on the ground floor is usually greater
than the value of the shops on the subsequent floors.

RATE NAIRAGE

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Rate Nairage is the rate in naira which is paid in a rating area where a property is located.It is fixed on a
periodic basis usually every five (5) years after considering the financial requirement of the Local
government. the total value of rateable property in the rating area as well as other sources of revenue
available to the Local government. It is mathematically expressed as

ematically expressed as

Where:R = Rate Nairage being calculated

T = Total Annual Budget of the Local Government

C= Total Annual Income accruing to the Local Government.

Property Rate Collection

The property rate collection is the reason for embarking on rating assessment and also the most
problematic. The success of the Property Rating and Taxation System is judged by the rate of collection.
In Nigeria, the urban based local government councils that seem to be practicing property Rating and
Taxation record very low mark on collection. Property Rate Collection Efficiency is measured using this
formula

1. The Amount of Property Rate collected /Total Rateliability Billed X100%

The local governments are ill - equipped for the collection of property rates as prescribed by the
Constitution. This has made some of them to resort to using the revenue/outside consultants to do the
collection of assessed rates amidst fear of sharp practices on the part of the local government
revenue/rate collecting staff. Whatever system of property rate collection adopted, in - house collectors
or outside contractors, it is important that higher efficiency be achieved in orde to realize rating and
taxation that is economical and cost - effective.

PROPERTY RATING AND PROPERTY TAX JURISDICTION

Before the advent of democracy, the Military government enacted Decrees and Edicts at Federal and
State levels respectively. States enacted Local Government Edicts that included legislating on LG related
matters pursuant to Section 7 (6)(b) and 4thSchedule of the property rating related matters. Today, the
State House of Assembly is now responsible for Constitution (Ezeudunn.d).

The LG is enabled by law to levy property rates on property owners/occupiers within their jurisdiction.
There are two main systems of rating namely, the ownership rating and the occupation rating.In the
ownership rating system, the burden of property rateis to be borne by the owner while the occupier
bears the burden of paying property rates in the occupation system. The most practiced system of rating
in many Nigerian states is the ownership rating system.

COMPONENTS OF PROPERTY RATING

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c.It is levied by the local government

b.It is levied on either the occupier or the owner of a property

d.It is levied to raise fund

a.It is a form of property taxation

e.The fund so generated are meant to finance developmental projects in the community

f.It is meant to improve wellbeing by providing the necessary amenities

PROPERTY RATING ADMINISTRATION

COMPONENTS OF PROPERTY RATING ADMINISTRATION

Property rating administration is made up of four (4) major components namely:

c.Objection and appeals

b.Assessment

a.Information gathering

d.Collection and recovery of rates

The Role of Estate Surveyors and Valuers in Tax Administration

1. As an individual, he must pay tax to the relevant authority on all his incomes i.e. 5% of fees charged
(VAT) as professional fees and 10% of gross rent realizable as withholding

tax.

2. Where necessary, he can initiate a tax proposal to government.

3.He determines the probate value on which the estate duty (capital transfer tax) will be

based.

4. Determines the capital value (open market value) of a property on which the capital gains tax will be
based.

5.Can be appointed as assessort to head valuation office of the rating office of a Local

Government.

6.Can serve as member of tax appeal tribunals

7.Can represent clients at rating valuation courts

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8.Can act as collection agents for tax authorities

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