What is a tax directive?
The purpose of a tax directive is to enable SARS to instruct an Employer, Fund Administrator or Insurer how to deduct employees’ tax from certain lump sums to a taxpayer or member.
ONLY Employers, Fund Administrators and Insurers can request a tax directive from SARS via the following channels:
- eFiling – Employers and Fund Administrators who have an organisation profile can log in and request a directive online;
- Register as an Interface agent;
- In exceptional cases use the email address on the SARS website. The required supporting documents and reason why the lump sum tax directive cannot be submitted through the above channels must be provided.
Tax calculations according to the tax directive should be regarded merely as an estimate according to the information on the SARS tax directive system. Some employees may find that they still have to pay in substantial amounts on assessment or that a credit may be due to them.
When should a tax directive be applied for?
- Gratuities paid by an employer (e.g. death / retirement / retirement due to ill health / retrenchment / other);
- Employees’ tax to be deducted at a fixed percentage (e.g. commission agents / personal service company / personal service trust);
- Employees’ tax to be deducted at a fixed amount (e.g. Paragraph 11 of the 4th Schedule (hardship) / assessed loss carried forward);
- Employees’ tax to be deducted on any amount to be included under section 8A or 8C (gains made by directors or employees on share options) of the Income Tax Act;
- Doubtful Debts 11(j)(1)(2);.
- Foreign Tax Credits under paragraph 10 of the 4th Schedule to the Income Tax Act. For taxpayers with foreign employment income – to allow an employer to apply for a different basis to calculate the amount of employees’ tax to be withheld from the employee’s remuneration on a monthly basis.
- Lump sums paid by pension, pension preservation fund, provident or provident preservation fund. (e.g. death before retirement / retirement due to ill health / retirement / provident fund – deemed retirement).
- Lump sums paid by pension or provident fund (e.g. resignation / withdrawal / winding up / transfer / Section 1, Paragraph (eA) of the definition of gross income transfer or payment / future surplus / unclaimed benefit / divorce – transfer, divorce – non-member spouse / divorce – member spouse / housing loan / involuntary termination of employment (retrenchment) including withdrawals from a pension preservation or provident preservation fund).
- Lump sums paid by a RAF to a member (e.g. death before retirement / retirement due to ill health / retirement / transfer from one RAF to another / discontinued contributions / future surplus / divorce – transfer, divorce – non-member spouse / divorce – member spouse / emigration withdrawal / visa expiry).
- Lump sums paid after retirement by an insurer or a fund (e.g. Death Member / Former Member after Retirement, Par. (c) Living Annuity Commutation, Death – Next Generation Annuitant, Next Generation Annuitant Commutation and Transfer of an annuity to another insurer).
- Recognition of transfer between two funds before retirement must be used where a benefit was transferred to another approved fund.
- Recognition of GN18 purchase of a member / beneficiary owned pension / annuity from an insurer must be used to acknowledge the purchase of annuities.
What can go wrong?
An employer is required to abide by a tax directive. What can go wrong if not done properly?
- Incorrect information is used resulting in the employee being taxed incorrectly.
- Incorrect dates (e.g. incorrect accrual date) are used leading to incorrect tax being deducted. This will mean that the employee’s annual tax assessment will also be incorrect.
- The wrong directive is applied.
- SARS makes a mistake and this is not picked up on review.
- The wrong process is followed to apply for the directive.
- The employee tries to claim on their own behalf (remember is the employer’s obligation and the employer cannot impose this obligation on the employee).
- Poor communication – the employee believes that no further tax is due on assessment because they are not told how the process works.
- No directive is applied for resulting in an unexpected treatment on assessment (taxable where an employee expects the income to be non taxable)
Key items to note when applying for a tax directive
- A tax directive is only valid for the tax year or period stated therein.
- Employers may decline to accept photocopies of directives.
- Employers may under no circumstances deviate from the instructions of the directive.
- Tax directives issued to electronic clients via the SARS Interface are valid directives.
- Employers must apply the percentage of employees’ tax as indicated in the directive prior to taking into account allowable deductions for employees’ tax purposes (e.g. pension, retirement annuity fund contributions, etc.). Where the employer received a directive and the employee’s commission income is not more than 50% of the gross remuneration income the employer can ignore the directive instruction.