The following is knowledge that has been shared from Rhona van Taak on previous Tax Directives queries

TAX DIRECTIVES

Lump sum codes: validations

The PAYE BRS for the 2023 Tax Year states the following:
Directive number (code 3230):
o Directive number (code 3230) If code 3608/3658, 3614/3664, 3707/3757, 3718/3768, 3901/3951, 3902/3952, 3903/3953, 3904/3954, 3905/3955, 3909, 3915, 3920, 3921, 3922, 3923 and/or 3924 are completed with values, then Directive Number is mandatory and MUST NOT BE zeros;
o If YoA is greater or equal to 2021 and codes 3907/3957, 3908 are completed, then Directive Number is mandatory and MUST NOT BE zeros;
o If year of assessment is 2018 and codes 3719/3769 and/or 3720/3770, 3721/3771 and/or 3723/3773 are completed with a value, then Directive number is mandatory and MAY BE zeros;
o From 2019 year of assessment, if codes 3719/3769 and/or 3720/3770, 3721/3771 and/or 3723/3773 are completed with a value, then Directive number is mandatory and MUST NOT be zeros;
All the above codes listed year, is repeated in code 3232 validation (except for 3902-3905 which is not applicable since 2008/2010).

Directive income source code (code 3232):
o If Directive Type Indicator = “L”, then Directive Income Source Code is mandatory;
o If Directive Type Indicator = “F”, then Directive Income Source Code must not be completed;
• The Directive Income Source code can only be one of the following source codes:
o 3608/3658, 3614/3664,
o 3707/3757, 3718/3768, 3719/3769, 3720/3770, 3721/3771, 3723/3773
o 3901/3951, 3902/3952, 3903/3953, 3904/3954, 3905/3955, 3907/3957, 3908, 3909, 3915, 3920, 3921, 3922, 3923, 3924

Therefore, the directive type indicator can only be L with the following codes:
3608: Arbitration award
3614: Other retirement lump sums
3707: Share options exercised
3718: Vesting of equity instruments
3719: Dividends not exempt ito par(dd) – s10(1)(k)(i)
3720: Dividends not exempt ito par(ii) – s10(1)(k)(i)
3721: Dividends not exempt ito par(jj) – s10(1)(k)(i)
3723: Dividends not exempt ito par(kk) – s10(1)(k)(i)
3901: Gratuities/severance benefits
3902: not applicable from 2010
3903: not applicable from 2008
3904: not applicable from 2010
3905: not applicable from 2008
3907: Other lump sum payments
3908: Exempt policy proceeds
3909: Unclaimed benefits
3915: Retirement/termination of employment lump sum benefits
3920: Lump sum withdrawal benefits
3921: Living annuity and surplus apportionments
3922: Death during employment compensation
3923: Transfer of unclaimed benefits
3924:Transfer on retirement

Simplifying the validation rules
The directive codes are as follow:
• 3230 Directive number
• 3234 Directive type
• 3231 Directive date
• 3232 Directive source code
• 3233 Directive amount

The rules relating to all the above codes are:
• If code 3230 is completed
o Then code 3234, must be completed
• If code 3234 = L
o Then code 3231, 3232 and 3233 must be completed
• If code 3234 = F
o The code 3231, 3232 and 3233 must NOT be completed

Other rules that must be build before the above 3 rules for directives are-
o If code 3608, 3614, 3707, 3718, 3719, 3720, 3721, 3723, 3901, 3902, 3903, 3904, 3905, 3907, 3908, 3909, 3915, 3920, 3921, 3922, 3923, 3924; and
o If code 3658, 3664, 3757, 3768, 3769, 3770, 3771, 3773, 3951, 3952, 3953, 3954, 3955, 3957, is completed,
o Then code 3230 MUST be completed
o and the code 3234 must be L
o and the code forcing this rule must be completed under code 3232
o and code 3231 must be completed
o and code 3233 must be completed

If the code 3230 is completed with code 3234 as a value = F, then no other directive source codes must be completed for that specific transaction relating to the directive completed in code 3230.
It must be noted that an employee may have a F directive as well as a L directive – in this case, there will be 2 code 3230 transactions and the rules will be applied as follows:
o Code 3230 completed with directive number relating to F directive
o Code 3234 completed with value F
o Code 3230 completed with directive number relating to lump sum source code
o Code 3234 completed with value L
o Code 3231 completed with the date of the lump sum directive
o Code 3232 completed with the source code of the lump sum directive
o Code 3233 completed with the amount of the lump sum directive

Severance benefits
In terms of paragraph 9(3) of the Fourth Schedule to the Income Tax Act, the employer has an obligation to ascertain the amount of tax to be deducted against a lump sum due to retirement/retrenchment/death, etc.

Where an employer has not applied for a directive from SARS on this severance amount, in order to correct the situation, the employer should now apply for a directive.

The amount indicated on the directive as PAYE deductible from the severance amount, should then be recovered from the employee, before an IRP5 may be issued to the employee which reflect this amount of PAYE. Should the amount not be recoverable from the employee, it will be deemed to be a penalty in terms of paragraph 5(5) of the Fourth Schedule and should not be included on the IRP5, but should be included in the EMP501 under the field “deemed penalty”.

The amount should then be paid by the employer to SARS to cover the PAYE indicated on the directive.

A severance benefit is defined in section 1 of the Income Tax Act as any amount (other than a lump sum benefit or an amount contemplated in paragraph (d)(ii) or (iii) of the definition of ‘gross income’) received by or accrued to a person by way of a lump sum from or by arrangement with the person’s employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment to any office or employment, if such person has attained the age of 55 years.
If the retirement package complies with the severance benefit definition above, the employer should apply for a tax directive at SARS to ensure that the retirement lump sum package is correctly taxed.
Due to the fact that the employee will not comply with the no-value provisions of paragraph 12A(5) of the Seventh Schedule, the contribution that the employer pay towards to the retirement fund will be fully taxable in terms of the provisions in paragraph 12A of the said Schedule and need to be recorded on the IRP5 under the relevant code for this taxable benefit.
12A (5) No value shall be placed in terms of this paragraph on the taxable benefit derived from an employer by—
(a) a person who by reason of superannuation, ill-health or other infirmity retired from the employ of such employer

In terms of the definition of “normal retirement age” in section 1 of the Income Tax Act, “normal retirement age” means –
(a) in the case of a member of a pension fund or provident fund, the date on which the member becomes entitled to retire from employment for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body;
(b) in the case of a member of a retirement annuity fund, a pension preservation fund or a provident preservation fund, the date on which the member attains 55 years of age; or
(c) in the case of a member of any fund contemplated in this definition, the date on which that member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body

Fixed percentage directive
SARS is issuing a fixed percentage tax directive indicating that the directive percentage must be applied on the “Gross remuneration/commission/income” amount paid to the employee.

This wording is specifically indicated in order to prevent employers from applying the percentage on the “balance of remuneration” (after the deduction of allowance deductions, such as, pension fund contributions, RAF, etc.).

The reasoning behind this wording is the calculation method applied in the SARS Tax directive system to determine the applicable percentage.

On the second page of the IRP3b tax directive application form, the employee should completed the following information:
• Gross Income (according to definition in section 1 of the IT Act)
• Estimated admissible expenditure (all deduction that will be allowed when the income tax assessment is processed/finalised)
• Estimated taxable income
• Tax payable (on the estimated taxable income)
• Tax payable as a percentage of gross income (sect 1 definition)

In order to make a connection between Gross income and Remuneration (called gross remuneration in the wording of the directive), the following example is illustrated:

When deduction the percentage (indicated on the tax directive) on the “balance of remuneration”, the employer will deduct far too less tax to cover the annual tax liability for the year of assessment. Remember the medical tax credit must still be deducted from this amount as well as in calculation indicated in the paragraph below.

However, when deducting the percentage on the gross income (remuneration before deductions), the tax will more or less equal the annual tax liability. IT IS FOR THIS REASON THAT SARS TAX DIRECTIVE INDICATES THE WORDING “GROSS REMUNERATION”. The wording cannot indicate “gross income” as the employer would not know about any other income the employee might receive from another party (e.g. interest, rental, etc.).