Earning commissions or bonuses is good news since you’ll have extra money to boost your income. However, if you apply the marginal tax rate on these payments, expect to take home a lower amount than previously anticipated.
To make taxes fairer and more amicable to employees, the South African Revenue Service (SARS) can give tax directives to lower tax obligations.
A tax directive is an official instruction coming from the SARS telling your employer or fund manager to use a different tax percentage on a portion of your earnings. This is often applied to bonuses, commissions, retirement fund pay-outs, and similar lump-sum payments to ensure you’ll get a bigger take-home amount compared to when the marginal tax rate is imposed.
Types of Tax Directives
Varying purposes and source of funding call for different types of tax directives.
- Gratuities tax directive – IRP3(a)
This is a form of tax directive applied to payments given to an employee or their dependents in case of death, retirement, retrenchment, or early retirement due to severe health conditions.
- Fixed percentage directive – IRP3(b)
This is given to those who earn commissions, have personal service companies, and run trusts. The tax is set at a pre-determined rate each month, regardless of the amount earned for that period. This is greatly advantageous, especially when monthly earnings vary throughout the year.
- Fixed amount directive – IRP3(c)
This is given to sole proprietors who are having trouble keeping their business afloat and to individual taxpayers who are experiencing financial trouble due to uncontrolled circumstances like medical emergencies.
According to SARS, those who are unable to meet minimum living standards due to circumstances beyond their control can be given a fixed-amount tax directive. Filing taxpayers are assessed by SARS to determine if their situation meets the set criteria.
- Deemed remuneration directive – IRP3(d)
Under this tax directive, a set of instructions on how to calculate the remuneration amount is given to companies to determine the tax liability of qualified individuals. Those who are deemed to be undergoing financial hardships can be covered by this directive.
- Form AD tax directive on pension lump-sum withdrawal
This is issued to the taxpayer when they withdraw from their pension fund due to death, retirement, or early retirement caused by health conditions.
- Form B tax directive on pension lump-sum payment
This is issued to the taxpayer when a lump sum payment is needed to be given by a pension or provident fund provider. This applies to situations such as resignation, retrenchment, winding up, divorce settlement, fund transfer, future surplus, housing loan, or changing of the pension provider.
- Form C tax directive on lump-sum payments from Retirement Annuity Fund
Form C tax directive applies to the payment made from the Retirement Fund. The directive is valid for instance such as death before retirement, early retirement due to health issues, fund transfer from one annuity provider to another, discontinued contributions, divorce transfer, divorce settlement, emigration, and unclaimed benefits.
When applying for a tax directive, prepare the following documents and information:
- Personal information, including individual tax number
- Reason for requesting a tax directive
- Annual income
- Name of employer or fund administrator
For situations where there’s no employer or retirement fund involved to apply for a tax directive, you can directly lodge a request to SARS. But if the payment will come from a fund or an employer, the fund provider or the company shall be responsible for filing the request on your behalf.
When in doubt on whether you qualify for a tax reduction, seek the guidelines provided by the SARS.