Types of Directives and how to apply them:
- 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.
- 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.
- 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
- 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
- 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.