What is a tax directive?
A tax directive in South Africa is an official instruction issued by the South African Revenue Service (SARS) to an employer, fund administrator, or financial institution, specifying the exact tax rate that must be applied when deducting tax from a taxpayer’s lump sum payment or certain other taxable income. Tax directives are commonly used in cases where an individual receives an irregular or once-off payment, such as severance packages, retirement fund withdrawals, retrenchment benefits, or commission-based earnings. Since these payments can result in a significantly higher tax liability if taxed at standard PAYE (Pay As You Earn) rates, a tax directive ensures that tax is deducted fairly, preventing excessive withholding and the need for a large tax refund or liability when filing an annual tax return. SARS provides different types of directives depending on the situation, including lump sum tax directives (for retirement or retrenchment payouts), fixed percentage directives (for commission earners or freelancers), and special directives for hardship cases. Employers or fund administrators must apply for a directive on behalf of the taxpayer via the SARS eFiling system, and SARS then determines the applicable tax rate based on the individual’s income profile, tax history, and the nature of the payment. Once granted, the tax directive must be strictly adhered to, as failure to apply the correct tax rate can lead to penalties or disputes with SARS. It is important for taxpayers to understand how tax directives work, as they can significantly impact their cash flow, retirement savings, and overall tax obligations. Consulting a tax professional before making large financial withdrawals or receiving lump sum payments can help ensure optimal tax planning and compliance with SARS regulations.
For help to obtain a tax directive, click here.
