Imagine you’re an estate agent or luxury car salesman. Chances are that you don’t earn much (if anything) as a basic salary and you rely on a few big deals and commission payments to keep you afloat during quieter months.
Or imagine the company where you’ve been employed for almost 12 years is in trouble and you’ve been offered a retrenchment package, meaning you’ll receive a rather substantial severance amount on your last day. Or perhaps you’ve decided to leave South African shores for good and you’re cashing in your sizable retirement annuity fund to pay for your relocation.
In any of these situations, the money you receive is taxable. But as substantially larger or abnormal amounts compared to your normal pay cheques, you may find yourself paying over too much tax if charged at the standard income tax rates. This is because the standard income tax rates are calculated by adding the presented amount to any other income you may earn and then aggregated out to an annual amount. In other words, it’s assumed that this amount will be the amount you’ll earn each month for the tax year, which isn’t the case. In these instances, and a select few others, it’s worthwhile to consider applying for a tax directive from SARS.
What is a Tax Directive from SARS?
A tax directive is simply an official instruction from SARS to your employer or fund manager to deduct tax at a set rate, determined by SARS for your individual case, and not the general income tax rates. This directive ensures you pay a fair rate of tax on your earnings, most importantly for larger or irregular payments.
An approved tax directive is only valid for the tax year/period (i.e. in the case of the fixed percentage tax directive) or for the payout/lumpsum for which it was applied. It is also important to take note that tax calculation according to the tax directive is only an estimate according to the information SARS has on their system. It is possible that the taxpayer may get a refund or still need to pay in on final assessment for the applicable tax year.
There are several types of tax directives available based on the purpose and the type of income earned. Let's take a look at these now.
1. Gratuities Tax Directive - The IRP3(a)
The gratuities tax directive is used when a company makes a payment to an employee, or their dependents, in the case of:
2. Fixed Percentage Directive – The IRP3(b)
The fixed percentage directive is issued to commission earners and personal service companies and trusts, instructing tax to be deducted at a pre-determined set rate each month, irrespective of amount earned. This is beneficial when earnings fluctuate from month to month. A set fixed percentage will help to ‘normalise’ tax payments across the full tax period and may alleviate a hefty tax liability at the end of a tax year.
3. Fixed Amount Directive – The IRP3(c)
The fixed amount directive applies to sole proprietors who’ve been assessed to be running at a loss or taxpayers experiencing financial hardship due to extenuating circumstances beyond their control.
The SARS definition of financial hardship is: “Inability to meet minimum living standards / depriving the taxpayer of the ability to maintain minimum living expenses if ignored / or extraordinary circumstances beyond Taxpayer’s control.”
It should be remembered that SARS has the final decision with regards to what is deemed to be hardship and cases are reviewed on an individual basis to determine whether the taxpayer qualifies for a tax directive under these circumstances.
A hardship directive is for taxpayers to lessen their hardship due to circumstances outside the control of the taxpayer that caused them financial hardship, for example the current COVID-19 pandemic. It is the taxpayer’s responsibility to proof to SARS that they suffered a financial hardship due to the circumstances that is outside of their control. This also applies to point 2.
4. Share Option Gains – The IRP3(s)
This directive is issued when gains were made in respect of rights to acquire marketable securities; and amounts in respect of the vesting of equity instruments.
5. Form AD Tax Directive - Pension and Provident Funds on Retirement/Death before Retirement
The Form AD directive is issued when a taxpayer withdraws a lump sum from a provident or pension fund due to:
6. Form B Tax Directive – Pension and Provident Funds – Events Before Retirement or Death
The Form B directive is used when a lump sum needs to be paid by a provident or pension fund for:
7. Form C Tax Directive – Retirement Annuity Fund Lump Sum Payment
The Form C directive is used when a Retirement Annuity Fund needs to make a payment to a member, this will be in the case of:
8. Form E Tax Directive – After Retirement and Death: Annuity Commutations
The Form E directive is used for commutation of annuities or other exit events after retirement:
9. Form ROT01 Tax Directive – Recognition of Transfer between Approved/Public Sector Funds
The ROT01 directive is used when a Fund transfers any lump sum benefit from on Fund to another Fund before the member retires, and where the member has reached retirement age and has elected to transfer his or her retirement interest to a Preservation Fund or Retirement Annuity Fund in terms of paragraph 2(1)(c) of the Second Schedule
10. Form ROT02 Tax Directive – Recognition of GN18 Purchase of a member/beneficiary owned pension/annuity.
The ROT02 directive is used when a Fund (pension, provident, pension preservation fund or retirement annuity fund) purchases an annuity from a Long-term Insurer or a Long-term Insurer purchases an annuity from another Long-term Insurer (transfer between Long-term insurers)
If you find yourself in any of the situations above, it's recommended you seek out a tax directive from SARS to help ease tax calculation and payment. In the instances where the payments are made from funds or employers, they will request the tax directive on your behalf, but for further information on how to apply, you can see the tax directive guidelines on SARS.
If you would like TaxTim to assist with your application for a Fixed Percentage and/or Fixed amount tax directive, please submit a query to our Helpdesk.
11. Form RST01 - Application by Non-Resident for a Directive for Relief from South African Tax for Pensin and Annuities in terms of DTA.
Form to be completed by a resident of a foreign country who claims relief from South African (SA) tax in respect of pension and annuities in terms of a Double Taxation Agreement.
You can apply for a directive if you qualify as a non-resident. Follow these steps to apply: