I can no longer afford to pay maintenance, what should I do?
Many of us are still recovering from the harsh effects of the Covid-19 pandemic. Some of us are faced with the issue of not being able to meet our financial obligations. One such obligation could be a maintenance order. South African law, imposes harsh sanctions on maintenance debtors who fail to adhere to their maintenance obligations. Therefore, If you ever find yourself in a position where you are no longer able to meet your maintenance obligations, it is imperative to use the avenues available to you in terms of the law. It so often occurs that the financial circumstances of the party responsible for paying maintenance may change and resultantly the party may no longer be able to meet his or her maintenance obligations in terms of the maintenance order. Section 31 of the Maintenance Act renders any failure to comply with a maintenance order a criminal offence punishable by up to 3 years of imprisonment. It is, therefore, imperative for a person who is no longer able to afford to pay maintenance to use the avenues available to him or her in terms of the law. Substitution or Discharge of a Maintenance Order The Maintenance Act confers on Maintenance Courts the power to vary or discharge maintenance orders including maintenance orders made by the High Court. Spousal Maintenance In terms of section 8 of the Divorce Act, a maintenance order may be rescinded, varied or suspended if there exists ‘sufficient reason’ to do so. This could also be read together with section 6 of the Maintenance Act which provides that a maintenance order can be substituted or discharged if ‘good cause’ is shown. South African courts have accepted the view that it is not possible to give a precise definition to the term ‘sufficient reason’ (good cause) and that the circumstances of each case must be considered. In the case of Havenga v Havenga Harms J held that, in general, in the absence of a real change in circumstances there would not be sufficient reason for the variation or rescission of a maintenance order. However, a change in circumstances is not a statutory requirement and there might be any other sufficient reason for a maintenance order to be varied. In light of the above-mentioned, it stands to reason that a change in one’s financial circumstances can be a factor to consider whether sufficient reason (good cause) exists for one to obtain a reduction in spousal maintenance. Child Maintenance It is important to distinguish the variation of maintenance orders in respect of child maintenance from the variation of maintenance orders in respect of spousal maintenance. The duty to maintain a child derives from common law and not from the statute. In addition to good cause, the court will also consider whether it will be detrimental to the child’s best interest if the court grants an order for the reduction of maintenance. In Hossack v Hossack the court held that the needs of the minor children and the ability of the maintenance debtor to pay constitute ‘good cause’ for a variation. Furthermore, in Vedovato v Vedevato the court emphasised that once ‘good cause’ is shown, the factors that then primarily need to be considered are the needs of the children. Conclusion In light of the above, it is evident that our law does provide for an avenue that a maintenance debtor who can no longer afford to pay maintenance could pursue. In respect of spousal maintenance, the maintenance debtor will have to prove that sufficient reason (good cause) exists to be successful with a variation of maintenance order. In respect of child maintenance, the maintenance debtor, will in addition to proving sufficient reason (good cause), also have to prove that it will not be detrimental to the child’s best interests if a reduction in maintenance is granted. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
VAT treatment of irrecoverable debts
What happens to the VAT that was paid over to SARS? Vendors often provide goods or services to clients on credit. In the current economic climate, clients are more likely to acquire goods or services on credit and may thereafter be unable to settle these debts. Other factors, for example disputes, may also result in vendors being unable or unwilling to make payment of debts. This results in the vendor having to write off this debt as ‘bad’ or irrecoverable. In this article we take a closer look at the VAT implications of bad debts. Legislative provisions The Value-Added Tax (VAT) Act 89 of 1991 generally requires a vendor to register and account for VAT on the invoice basis. This means that the vendor is required to account for output tax on the supply of goods or services in the tax period where the time of supply is deemed to take place. The general ‘time of supply rule’ envisaged in Section 9(1), requires the vendor to account for output tax at the earlier of an invoice being issued or receipt of payment. In instances where goods or services are provided on credit, output tax will be accounted for in the tax period during which the invoice is issued. Under these circumstances, the vendor is required to pay output tax to SARS before it receives the actual payment from the recipient. In order to allow for instances where no payment is eventually received by the vendor for the supply, Section 22 makes provision for a reversal of output tax previously paid on a debt that becomes irrecoverable. Section 22(1) provides that where a vendor has made a taxable supply for consideration in money; and has furnished a return in respect of the tax period for which the output tax on the supply was payable and has properly accounted for the output tax; and has written off so much of the said consideration as has become irrecoverable, the vendor may make a deduction of that portion of the VAT charged in relation to that supply as bears to the full amount of such VAT the same ratio as the amount of consideration so written off as irrecoverable bears to the total consideration for the supply. The amount calculated under Section 22(1) may be deducted as input tax in terms of Section 16(3)(a)(v). However, before this deduction can be made, there are certain requirements that must be met. What does this mean? In simple terms, a vendor is effectively a collecting agent of the tax for SARS. This was confirmed by the Constitutional Court in the case of Metcash Trading Ltd v Commissioner of SARS and Another [(CCT3/00) [2000] ZACC 21; 2001 (1) SA 1109 (CC), 2001 (1) BCLR 1 (C)], where the Court referred to vendors as ‘involuntary’ tax-collectors. The VAT Act therefore gives consideration to the fact that a vendor had to account for (collect and pay over) VAT to SARS on a taxable supply made by it, but may never receive the payment (cash) for such supply from the recipient. However, in order to claim the input tax on bad debts, there are three requirements that must be met by the vendor: A taxable supply was made at standard rates (i.e. not exempt or zero-rated); The output tax on such supply must have been accounted for and paid over to SARS as part of a VAT return; and The debt, or a portion thereof, must be written off as irrecoverable. The third requirement must be carefully considered before making a deduction, that is: when is a debt considered as being written off?; and what if the debt is a mixture of taxable (0% and 15%) and exempt supplies? When is a debt considered as written off? The VAT Act does not provide any guidance on when the consideration would be regarded as being written off as irrecoverable, but SARS has previously stated in its VAT 404 Guide for Vendors (2015 edition) that a debt is considered irrecoverable when: The vendor has done all the necessary accounting entries in its accounting system to record that the amount is written off; and Must have ceased any recovery action taken by himself and have decided to either not take any further action or have handed the debt over to an attorney or debt collector. This no longer appears in the latest version of the VAT 404 guide but is still applicable, as in our experience SARS still applies this approach. It is noted that the Inland Revenue, New Zealand adopts a similar approach, as it views ‘written off’ being when the debt is written off in the accounting and record-keeping systems maintained by the vendor. Based on the above, it is important to ensure that an actual write-off of the debt has taken place. An input tax deduction will not be allowed based on a provision that has been raised even if this is required in terms of the relevant accounting standards. No deduction is allowed for doubtful debts, as this is an accounting provision and not a debt written off. The writing-off of a debt must be based on an objective test evidencing that there is no reasonable likelihood that the debt will be paid. Factors that can be taken into account include how long the debt is outstanding, efforts taken to collect the debt; and the debtor’s financial position. All of the above will provide a vendor with sufficient evidence to support an input tax deduction in respect of irrecoverable debts. We therefore recommend that in support of this approach, a vendor has a formal policy setting out its write-off process. Methodology for write-offs of ‘combined’ supplies The complication that arises with applying the provisions of Section 22 is in instances where a debt comprises a mixture of standard rated, zero rated and/or exempt supplies. Section 22 unfortunately does not prescribe a methodology for allocation of the outstanding debt to different types of supplies, nor does it require the vendor