Legislative changes to tax directive process

Transferring between retirement funds:

Where a taxpayer has reached retirement age and is 55 years or older, they are now allowed to transfer their retirement benefit from a pension preservation or provident preservation fund to another preservation fund or a retirement annuity fund without having a tax effect at the point of transfer. 

Form A&D (this directive application form is used for retirement exit events or for death before retirement) would need to be completed by the fund making the transfer on behalf of their member – giving the reason of it being a Transfer before Retirement (in terms of par 2(1)(c) of the Second Schedule to the Income Tax Act).

Options when withdrawing from a retirement fund:

With effect from 1 March 2022, a taxpayer now has a choice as to how they want their two thirds retirement benefit to be utilised once they have reached retirement age.

The taxpayer can use two thirds or more of the retirement benefit in the fund, the taxpayer can purchase a living annuity and / or a guaranteed annuity; or

Alternatively the taxpayer can retain a portion of the retirement benefit in the fund which will provide regular pension / annuity income and use another portion to purchase a living annuity and / or a guaranteed annuity from an Insurer.

The above choice is, however, restricted, and only available to taxpayers where the value of each annuity to be purchased (living, guaranteed and / or remaining in the fund) is R165 000 or more.

Severance Benefits paid by foreign employers:

Where a taxpayer receives a severance benefit from an employer, such a benefit would be taxed in terms of the withdrawal lump sum tables and the taxpayer would potentially pay a reduced amount of tax on such a payment, based on the historical lump sums received by that taxpayer.

For this, a directive needs to be applied for with SARS, where the employer would need to be registered with SARS.

Where a South African employee is employed by a foreign employer, who is not obligated to be registered as an employer with SARS, there was previously no way for the severance benefit paid to the employee to be correctly treated as a severance benefit, as no directive could be applied for.

SARS have now amended their procedures to allow for the above situation:

Where a foreign company is not registered for Pay As You Earn and it makes a severance benefit to a South African tax resident who has rendered services within South Africa, an IRP3(a) directive can be applied for by a tax practitioner or SARS, where the reason for the directive can be selected as a “Severance benefit – Paid by a non-resident Employer”.

A new field will be added to the ITR12 annual tax return for the recipient of the severance benefit to cater for such payments being made by foreign entities when the taxpayer or tax practitioner completes the annual return.

Answering “yes” to the relevant question on the income tax return, where a directive was applied for, a new container on the income tax return will be generated (under source code 3925). The amount of the severance benefit and tax directive number are then to be completed here.

Find a copy of the updated SARS guide on how to complete directive forms here.

13/05/2022