Can a Creditor Sell the Home of a Debtor to Recover Outstanding Debt?
Most South Africans today, are overburdened and overwhelmed with debt and are struggling to repay creditors. According to recent statistics, a third of people in South Africa with credit are struggling to repay their debts. This means, there are approximately 10 million people who are three months or more behind on debt repayments. This article will explore under what circumstances can a creditor (someone to who you owe money) have your residential home or immovable property sold in execution to obtain payment of an outstanding debt after judgment has been granted in their favour. The case of Jaftha v Schoeman and Others, Van Rooyen v Stoltz and Others (Jaftha) concerned a person who was overburdened with debt and was unable to repay her creditors. The facts of the case were as follows: Ms Jaftha was unemployed, ill, and poor. She only had standard two education. In 1997, Ms Jaftha was granted a state housing subsidy with which she bought a home where she lived with her two children. In 1998, Ms Jaftha borrowed R250 from Ms Skaarnek which was to be repaid in instalments. Ms Jaftha was unable to repay the amount owed and Ms Skaarnek approached a law firm to enforce payment. In March 2001, she was informed by Markotter Attorneys that she would need to pay R5,500, including accrued interest, otherwise, her residential home would be sold. Ms Jaftha was unable to pay this amount and was forced to vacate her home following its sale in execution for R5,000 on 17 August 2001. The Constitutional Court in the Jaftha case, clearly outlined the legal process which ought to be followed before a creditor can have the residential home of a debtor sold in execution to recover payment of an outstanding debt. In principle, the court held that a creditor after obtaining judgement, must first resort to attaching the movable property of a debtor to enforce payment of an outstanding debt. It is only once there is insufficient movable property to satisfy a debt, then a creditor may proceed to apply to the court to request the immovable property or residential home of a debtor to be sold to obtain payment of the debt. Therefore, a creditor cannot, as a first resort, have a debtor’s residential home sold to obtain payment when the debtor has not paid their debts. The court introduced in this case the mechanism of “judicial oversight”, which means, that before the residential home of a debtor may be sold to satisfy a debt, the court must grant permission to do so. The following factors will be taken into consideration by the court before permitting such an order: the circumstances in which the debt was incurred; any attempts made by the debtor to pay off the debt; the financial situation of the parties; the amount of the debt; whether the debtor is employed or has a source of income to pay off the debt and any other factor relevant to the particular facts of the case before the court. However, recent case law developments have indicated that it may be possible for creditors, in specific circumstances, to have the immovable property of a debtor sold to obtain payment of a debt as a first resort. Effectively, this opens the possibility of creditors being able to bypass the requirement of attaching the movable property of a debtor first. The Supreme Court of Appeal in the Mapea v M.A Selota Attorneys and Another case has recently endorsed the decision of Silva v Transcope Transport Consultants and Another in which the court held that where a debtor acts in a tricky manner and deliberately frustrates the creditors’ efforts to obtain payment. The court can exercise its discretion to allow execution against the debtor’s immovable property without resorting to the attachment of movable property first. The implication of this case is that a court can order the sale of immovable property to obtain payment in instances where a debtor is wilfully and intentionally acting in a way that frustrates the creditors’ right to obtain payment. For example, if the debtor has fled the country to avoid payment, or the debtor is hiding their movable property from the creditor. In conclusion, a creditor cannot, as a first resort, have the residential home of a debtor attached to recover payment of an outstanding debt. The creditor is first required to enforce payment by attaching the movable property of a debtor. However, there may be instances where a creditor can surpass/bypass attaching the movable property of a debtor and could have the immovable property of a debtor sold as a first resort. Reference List: https://www.theoutlier.co.za/economy/2024-04-08/87042/south-africans-debt-problem (accessed: 19-07-2024). Jaftha v Schoeman and Others, Van Rooyen v Stoltz and Others (CCT74/03) [2004] ZACC 25; 2005 (2) SA 140 (CC). Mapea v M.A Selota Attorneys and Another [2023] ZAGPPHC 437. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
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
Prescription: Have my debts prescribed?
What is prescription? As a general rule, prescription occurs when a debtor’s liability to pay a specific debt is extinguished as a result of the passing of a prescribed time period. As soon as a debt prescribes, a debtor is no longer under any obligation to pay it. It is still legal for the creditor to demand payment or even sue for a prescribed debt. The debtor will then, however, be able to raise the defence of prescription. It is for this reason, that debtors need to be aware of prescription – to protect themselves from debts they are no longer liable for. On the other hand, creditors must also be cognizant to pursue claims timeously. The Prescription Act prescribes the time periods after which specific debts prescribe. Most civil claims prescribe after 3 years. There are however various exceptions hereto, but only a few is listed below: Debts relating to negotiable instruments prescribe after 6 years. Judgment debts, debts secured by mortgaged bonds and debts owed to the state, for example, prescribe after 30 years. When does prescription start to run? The abovementioned prescriptive periods start to run as soon as the debt is due. When the debt is “due” will depend on when the identity of the debtor is known and when the facts from which the debt arises are known to the claimant. Importantly, prescription will start running irrespective of whether the creditor is aware of his/her rights. Can the prescriptive time period be delayed? The prescription period can be delayed in certain circumstances in terms of the Prescription Act. A few examples include when the debtor is outside of South Africa, the creditor is a minor, or the debt is the object of a dispute in arbitration. Such a restriction will stop on, after, or within one year before the normal prescription period will end. If the latter happens, one year will be added after the date on which the restriction stopped. The running of prescription will be interrupted by an acknowledgement of debt by the debtor and/or a summons being served by the creditor on the debtor, claiming performance in terms of the debt. An acknowledgement of debt can take various forms and may be written or verbal. It is however advisable that creditors should reduce acknowledgements of debt to writing, because of its evidentiary value. Conclusion A debtor should not be burdened by a debt indefinity, especially since costs and interest will be added to the outstanding debt. A creditor also benefits from the sense of urgency created by prescription, in that the recovery of his/her debt will be quicker. Whether a debt is due by you or owed to you, it would be advisable to consult with your attorney to determine the best way forward. 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)