Tax Directives Explained

Purpose of a Tax Directive

According to Paragraph 19 of the Seventh Schedule A, a tax directive (IRP3) is issued by SARS to instruct the employer/fund administrator on how to deduct employees’ tax from certain payments where the prescribed tax tables do not cater for certain remuneration or other payments.

When and how to apply for a Tax Directive

Tax directives are issued in accordance with paragraph 9(1), 9(3), 10, 11 and 11A of the Fourth Schedule, authorising employers and detailing how to deduct employees’ tax from certain remuneration. Tax directives are always issued in relation to a specific tax year. The directive percentage already considers expense claims and deductions that may be claimed on assessment. Therefore, the tax directive percentage must be applied to remuneration and not balance of remuneration (i.e. before deducting tax deductible amounts from remuneration). Tax according to directives is not “final” and is recalculated taking into consideration total income on assessment.

Download Guide

The following tax directive applications available:

  • IRP3(a) - Severance benefit paid by employer (e.g. Death/retirement/retrenchment. The form must also be used for share options without obligation or other lump sums.
  • IRP3(b) - Employees’ tax to be deducted at a fixed percentage (e.g. commission agents/personal service provider).
  • IRP3(c) - Employees’ Tax to be deducted at a fixed amount (e.g. Paragraph 11 of the Fourth Schedule (hardship)/assessed loss carried forward).
  • IRP3(s) - Employees' tax to be deducted on any amount to be included under section 8A or 8C of the Income Tax Act.
  • IRP3(q) Variation in the deduction/withholding of employees’ tax.
  • Form A & D - Lump sum benefits paid by pension and/or provident funds (e.g. death before retirement/retirement due to ill health/retirement).
  • Form B - Lump sum benefits paid by pension or provident funds on resignation/withdrawal/winding up/transfer or payment as defined in Paragraph (eA) of the definition of gross income/future surplus apportionment/unclaimed benefit/divorce payments).
  • Form C - Lump sum benefits paid by a Retirement Annuity Fund (“RAF”) to a member (e.g. death before retirement/retirement due to ill health/transfer from one RAF to another before retirement).
  • Form E - Lump sum benefits payable after retirement (e.g. death of member/former member after retirement, par. (c) Living Annuity Commutation, Death - Next Generation Annuitant, Next Generation Annuitant Commutation, Gn16: Existing Annuity.

Information to consider when applying for a directive:

  • Normal termination of service - The lump sum paid by an employer to an employee is treated as an annual payment – IRP 5 code 3605 (for example, service bonus) and the applicable formula is used for the calculation of employees’ tax.
  • Any amount paid/payable due to services rendered should not be included in the severance benefit amount on the tax directive application form:
  • For example, amounts in terms of paragraph (c) or (f) of gross income or bonuses or pro-rata bonus.
  • ‘Notice pay’ should also be excluded from the ‘severance benefit’ amount on the tax directive application form.
  • Please note that leave pay is a payment in respect of services rendered and does not form part of a severance benefit. The normal bonus calculation should be used to calculate the tax. The leave payment amount should not be included on the directive since it must be included in the normal income.

Minimum Information Required for completing the directive:

  • Tax Year
  • Taxpayer Surname
  • Taxpayer First names
  • Taxpayer Initials (only applicable to electronic submissions)
  • Taxpayer Date of Birth
  • Taxpayer ID number or other unique number if the person is not a SA citizen
  • Reason for non-registration (Unemployed or ‘Other’ specified) if no reference number entered.
  • NOTE: The Income Tax Reference Number must be provided on the IRP5 certificate.
  • Taxpayer’s physical address and postal code
  • Taxpayer’s postal address and postal code
  • Annual Salary
  • The PAYE number of the Employer.
  • The name of the Employer.
  • The Employer's postal address and postal code.
  • Employer’s email address.
  • One of the amount fields must be completed.
  • Date of accrual.
  • The reason for the directive.

Types of Directives and how to apply them:

  1. Shares Incentive Schemes:
  • Gains made in respect of Rights to Acquire Marketable Securities – (Paragraph 11A of the Fourth Schedule Section 8A)
  • An employer must apply for a directive on the gain made from the exercise, cession or release of any right to acquire any marketable security according to section 8A. The rights in terms of this section would have been acquired before 26 October 2004.
  • The difference between the amount paid and the market value at date of exercise, cession or release is the gain that must be taxed. Process the gain against IRP5 code 3707 and process the tax according to the directive against IRP5 code 4102.

 

  • Taxation of Broad-Based Employee Share Plans - (Paragraph 11A of the Fourth Schedule Section 8B)
  • An employer must deduct normal tax on the gain made from the disposal of any qualifying equity share, or any right or interest in a qualifying equity share according to section 8B.
  • Process the gain against IRP5 code 3717. The gain must be taxed as an annual/periodic earning. Where the employee is not in employment of the employer, tax of 25% must be deducted.
  • Vesting of Equity Instruments - (Paragraph 11A of the Fourth Schedule Section 8C).
  • An employer must apply for a directive on the gain made from the vesting of any equity instrument or any accrual or receipt of a return of capital, according to section 8C. These equity instruments would have been acquired on or after 26 October 2004.
  • The gain/return of capital must be processed against IRP5 code 3718, and the tax according to the directive against IRP5 code 4102.

 

  1. Arbitration Awards

(Paragraphs (c), (d) and (f) of the definition of gross income in section 1 Paragraph 9(3) of the Fourth Schedule):

  • Arbitration awards are generally awarded due to unfair dismissal, termination of the employment contract prior to the expiry date or due to unfair labour practices. Amounts paid due to unfair dismissal and early termination of the contract are remuneration and taxable through the payroll. Amounts paid due to unfair labour practice might be included in remuneration.
  • Apply for a directive on arbitration awards using application form IRP3(a). The taxable portion of the award must be taxed as a periodic/annual earning and reported against IRP5 code 3608. The non-taxable portion of the award must be processed against IRP5 code 3602.
  • In practice, these directives might be issued indicating the PAYE amount to be withheld from the arbitration award. In this case, reflect the lump sum against code 3907 and the PAYE against code 4102.

 

  1. Severance Benefit Lump Sums - Gratuities due to Retrenchment, Retirement or Death

Employer paid gratuities due to the retrenchment, retirement or death of an employee are taxed according to the same rules as retirement fund lump sums.  Retirement fund lump sum benefits and severance benefits are subject to an exemption of R500 000.  Employers are required to apply for a directive, the gratuity must be paid out against IRP5 code 3901, and the tax according to the directive against IRP5 code 4115.

 

  • Lump Sum Compensation for Occupational Death (Section 10(1)(gB)(iii))

Compensation paid in respect of the death of any person where that death arises out of and in the course of the employment, will be exempt from income tax if it:

  • was paid in addition to any compensation in terms of the Compensation for occupational Injuries and Diseases Act,
  • does not exceed an amount of R300 000, and
  • was paid by the employer of that person.

An IRP3(a) directive application form must be submitted to SARS irrespective of the amount that will be paid.  The tax portion according to the directive must be reflected against IRP5 code 4115 and the lump sum payment is reflected against IRP5 code 3922.

 

  • Severance Benefit – Retirement (Age of 55 or older):
  • This is a lump sum paid as a direct result of termination of employment due to retirement, the person must be 55 years of age or older on the date of accrual.
  • If the person is younger than 55 the directive will be declined.
  • The payment must be treated as normal income and the reason is to be selected – Severance benefit – Retirement (IRP3(a) application form).
  • The source code to be used after 01/03/2011 for the gross amount is 3901 and PAYE to be withheld on source code 4115.

 

  • Severance benefit – Involuntary retrenchment/Voluntary retrenchment

The reason ‘Severance Benefit – Voluntary Retrenched’ must only be used where a lump sum is paid as a result of restructuring or other termination of employment;

  • This tax directive reason can be used if a retrenchment lump sum is payable but not in terms of the requirements of section 1(1) “severance benefit” paragraph (c) of the Act.
  • The reason is to be selected and the amount field to be completed.

 

Due to an employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was employed or appointed:

  • Severance benefit – Involuntary retrenchment for the gross amount is 3901 and PAYE is to be withheld on source code 4115.
  • Severance benefit – Voluntary retrenchment for the gross amount is 3907 and PAYE to be withheld is on source code 4102

 

  1. Hardship due to Illness or Other Circumstances (Paragraph 11 of the Fourth Schedule)
  • In order to alleviate hardship to that employee due to circumstances outside the control of the employee.
  • In case of remuneration constituting commission.
  • SARS will decide whether zero PAYE should be withheld, a specific rate or scale.
  • Use form IRP3(b) for Commission payments
  • Use form IRP3(c) for personal service providers

 

  1. Dividends in respect of Employee-Based Share Schemes

(Paragraph (g) definition of “remuneration” of the Fourth Schedule Section 10(1)(k)(i): proviso (dd), (ii), (jj) and (kk), section 31(3)(b)(i). 

This is effective from 1 March 2017 (2018 year of assessment).  Where any dividend is received or accrued to a person by way of a dividend contemplated in the following provisos, these amounts must be included in remuneration and employees’ tax MUST be deducted:

  • Paragraph (dd) of the proviso to section 10(1)(k)(i)

Dividends received or accrued i.r.o. of services rendered or be rendered or i.r.o. or by virtue of employment or the holding of any office are taxable as ordinary revenue, unless the:

  • Dividend is received i.r.o. restricted equity instruments as defined in S8C;
  • Share is held by the employee;
  • Restricted equity instrument constitutes an interest in a trust.

This must be reflected under code 3719. Code 3769 must ONLY be used for local dividends linked to foreign services.

  • Paragraph (ii) of the proviso to section 10(1)(k)(i)

The exemption in S10(1)(k)(i) will not apply to any dividend received by or accrued to a person i.r.o. services rendered or to be rendered i.r.o. of or by virtue of employment or the holding of any office, other than a dividend received or accrued i.r.o. a restricted equity instrument as defined in S8C held by that person or in respect of a share held by that person. 

  • Reflect under code 3720. Code 3770 must ONLY be used for local dividends linked to foreign services.
  • Paragraph (jj) of the proviso to section 10(1)(k)(i)

Dividends i.r.o. of restricted equity instruments will not be exempt if the value of the underlying shares is liquidated in full or in part by means of a distribution before the restrictions on the shares are lifted.  The exemption will NOT apply where the dividend is derived directly or indirectly from, or constitutes:

  • An amount transferred/applied by a company as consideration for the acquisition or redemption of any share in that company;
  • An amount received/accrued in anticipation of, or in course of winding up, liquidation, deregistration or final termination of a company; or
  • An equity instrument that is not a restricted equity instrument as defined in S8C, that will, on vesting, be subject to that section.
  • This must be reflected under code 3721. Code 3771 must ONLY be used for local dividends linked to foreign services.
  • Paragraph (kk) of the proviso to section 10(1)(k)(i) (1 March 2017)

The exemption shall not apply to any amount received as a dividend as defined in section 8C, that was acquired in circumstances contemplated in section 8C(1) if that dividend is derived directly or indirectly from –

  • An amount transferred or applied by a company as a consideration for the acquisition or redemption of any share in that company;
  • An amount received or accrued in anticipation or in the course of the winding up, liquidation, deregistration or final termination of a company.
  • This must reflect under code 3723. Code 3773 must ONLY be used for local dividends linked to foreign services.


If you found this information helpful, contact us now for help with your specific needs

Select Your Region
Reading Time: < 1 minute