Tax Directives: What They Are & How to Apply

A tax directive is an official instruction from the South African Revenue Service (SARS) to an employer or fund administrator. It specifies the exact rate of tax that must be deducted from a lump sum payment before it is released to an individual, ensuring a fair amount of tax is withheld. The purpose of the directive is to prevent a situation where an individual receives a large, irregular payment and is left with a significant tax liability at the end of the tax year. While this calculation is an estimate, with the final liability determined upon annual assessment, it provides a more accurate withholding than standard payroll deductions would allow.

When a Tax Directive is Required

A tax directive is required in several financial situations involving a significant, one-time payment. The process is initiated by the entity making the payment, such as an employer or a fund, to ensure compliance with tax law. Without this official instruction from SARS, the paying entity cannot release the funds because they would not know the correct amount of tax to withhold.

Retirement and Pension Fund Withdrawals

When an individual retires and takes a portion of their pension, provident, or preservation fund as a cash lump sum, a directive is necessary. The directive allows SARS to consider the specific tax-free portions applicable to retirement lump sums and apply the correct tax rates. This ensures the retiree benefits from any applicable tax concessions at the moment of withdrawal. A similar requirement exists for those taking a cash lump sum from a retirement annuity. The instruction from SARS is needed to calculate the tax according to the withdrawal tax tables, which differ from the tables used for retirement.

Severance and Retrenchment Benefits

Payments related to the termination of employment, such as severance benefits from a retrenchment package, also require a tax directive. The directive application allows SARS to verify that the reason for termination meets the legal definition of a severance benefit, which may qualify for preferential tax rates. This ensures that any tax relief available for retrenchment packages is correctly applied by the employer. This prevents the lump sum from being taxed at a standard, and likely higher, income tax rate.

Death and Non-Resident Payouts

In the event of a fund member’s death, any lump sum payment made from their retirement fund to their beneficiaries or estate must be preceded by a tax directive. This allows for the application of the specific tax rules that govern death benefits. The tax liability is calculated based on the deceased member’s tax history and any previous lump sums received.

For individuals who are non-resident for tax purposes and are permitted to withdraw from their retirement funds, a tax directive is also mandatory. The concept of “formal emigration” has been phased out and replaced with a verification of tax residency status. The directive ensures the withdrawal is taxed correctly according to the rules for non-residents before the funds are transferred out of the country.

Information and Documents for the Application

Applying for a tax directive involves gathering a comprehensive set of information and documents. This is handled by the employer or fund administrator, but the individual receiving the funds must supply many of the core details. Organizing these items beforehand helps ensure the application is processed without delays.

Personal and Financial Information

The application requires the taxpayer’s personal details, including their full name, date of birth, identification number, and income tax reference number. Contact details are also required. The submission must also include the name and Pay-As-You-Earn (PAYE) reference number of the employer or fund making the payment. Finally, the application must state the gross amount of the lump sum and provide a clear reason for the payment, such as “retirement” or “retrenchment.”

Required Application Forms

Different situations call for different SARS application forms, and using the correct one is necessary for a successful submission. The employer or fund administrator submits these forms, which are obtained from the SARS eFiling portal. Common forms include:

• IRP3(a): For gratuities, severance benefits, or the “Two-Pot Savings Withdrawals Benefit.”
• IRP3(s): For gains related to share options.
• Form A&D: For lump sums from a pension, preservation, or provident fund upon retirement or death before retirement.
• Form B: For withdrawals due to resignation or transfer.
• Form C: For payouts from a Retirement Annuity Fund.

Supporting Documentation

While many applications submitted via eFiling do not require supporting documents, some situations require them to validate the payment reason. For example, a severance benefit may require a formal letter from the employer, while a death benefit payout requires a certified copy of the death certificate. For applications related to non-residents, a certificate of residence may be necessary. These documents are generally uploaded electronically with the application form.

The Application Submission Process

Once all necessary information is gathered and the correct forms are completed, the application is submitted by the employer or fund administrator. The primary method of submission is electronic, designed for efficiency and direct communication with SARS.

Electronic Submission via eFiling

The most common method for submitting a tax directive application is through the SARS eFiling portal. Employers and fund administrators can log in to their profile to select and complete the relevant electronic form and upload any required supporting documents. The eFiling system guides the user through the process, which minimizes errors and accelerates the processing time. Individuals may also apply for certain directives themselves, such as an IRP3(b) for commission earners or an IRP3(c) in cases of financial hardship.

Alternative Submission and Post-Submission Steps

After submitting the application through eFiling, the system generates a case reference number for tracking its status. The processing time is between two to five business days, provided all information is correct. The employer or fund administrator can monitor the application’s progress on their eFiling dashboard. Once processed, the approved directive becomes available for download within the portal.

In exceptional cases where eFiling cannot be used, a manual application might be permitted, though this is increasingly rare.

Receiving and Understanding Your Tax Directive

Once SARS has reviewed and approved the application, the resulting directive is a formal document. It dictates the next steps for the employer or fund administrator.

Issuance and Interpretation of the Directive

The approved tax directive is issued electronically to the employer or fund administrator that submitted the application. It is not typically sent to the individual taxpayer, though they can request a copy from the payer or view it on their eFiling profile. The directive presents its instruction as either a fixed percentage to be applied to the lump sum or a specific monetary amount to be deducted. This calculation is based on the information provided in the application and the taxpayer’s history of previous lump sums.

Final Payout and Tax Certificates

With the directive, the fund administrator or employer will deduct the specified tax amount from the gross lump sum. The remaining net amount is then paid out to the individual, completing the transaction.

The details of this transaction are recorded on the taxpayer’s annual tax certificate, either an IRP5 or an IT3(a). The gross lump sum, the tax deducted per the directive, and the directive number itself will be reflected. An IRP5 is issued if tax was deducted, while an IT3(a) is issued if the directive indicated a zero-tax liability. This certificate is used to complete the annual income tax return, where the lump sum is reconciled with total income for the year.