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.
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. 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.
The gratuities tax directive is used when a company makes a payment to an employee, or their dependents, in the case of:
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.
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 tax payer 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.
This directive is issued to instruct a company the remuneration amount (which may differ from actual remuneration amount) to be used to calculate tax liability for:
The Form AD directive is issued when a taxpayer withdraws a lump sum from a provident or pension fund due to:
The Form B directive is used when a lump sum needs to be paid by a provident or pension fund for:
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:
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.