Simplifying South African tax directives for expats: what they are and why they matter

If you receive a substantial or usual payment (such as a retrenchment package payout, post-emigration retirement withdrawal payout) or you are subject to double taxation or your earnings as a commission-based worker varies from month to month, obtaining a tax directive from the South African Revenue Service (SARS) can prevent you from overpaying on taxes. Before you can receive such a lump sum payment, SARS wants their cut. Accordingly, a tax directive is an instruction from SARS that ensures that your employer, fund administrator or insurance provider deducts the amount SARS is owed, before paying you out.

Here’s what you need to know as an expat about tax directives in South Africa, double tax relief and retirement funds.

What is a tax directive in South Africa used for by expats?

Scenario 1 – After retirement or death: provident or pension fund lump sum payment tax directive

This tax directive applies when an individual taxpayer withdraws a lump sum from a provident or pension fund, after the fund holder has died or retired – whether due to age or ill health, or deemed retirement in the case of a provident fund.

Scenario 2 – Before retirement or death: provident or pension fund lump sum payment tax directive

Here, a tax directive applies when a lump sum must be paid out by a provident or pension fund in the following scenarios (applicable to expats):

• Divorce (where the spouse is a member) or
• Divorce (where the spouse is not a member)
• Emigration withdrawal
• Retrenchment or resignation
• As security of mortgage bond order or housing loan
• Transfer of an unclaimed benefit
• Withdrawal
• Visa expiry withdrawal

Scenario 3 – Retirement annuity fund lump sum payment tax directive

When a retirement annuity fund needs to pay out a member, a tax directive is used in the following circumstances:

• Where the member died before retirement
• Retirement (including retirement due to ill health)
• On transfer pursuant to retrenchment
• Where the member has discontinued contributions
• Divorce (where the spouse is a member) or
• Divorce (where the spouse is not a member)
• Emigration withdrawal
• Visa expiry withdrawal

Scenario 4 – Annuity commutations (post-retirement) tax directive

The commutation of annuity savings involves giving up part of or all of the funds payable from retirement in the future in exchange for an immediate lump sum payout.

Here, a tax directive is necessary for the commutation of annuities or other post-retirement events, such as a transfer of funds, or in the case of a GN16 existing annuity whereby not more than one-third of the amount of an individual’s annuity may be commuted for a single payment as long as two-thirds of the total value is not more than R50 000.

Other uses for a tax directive arise upon the death of a member after retirement, or the death of the next-in-line annuitant.

Scenario 5 – Tax directives for expats: relief from double tax

Under South Africa’s domestic law, Section 6quat allows relief for tax residents from double taxation. When your foreign employment income earned for services rendered outside of South Africa is subject to tax in both South Africa and a foreign country, a tax relief credit can be claimed on your income tax return during assessment, if certain requirements are met.

Employers have the option, under paragraph 10 of the Fourth Schedule, to request a tax directive from SARS to consider the potential section 6quat credit on a monthly basis when determining their employees’ tax liability.

Who qualifies for a tax directive?

Because a tax directive is an instruction from SARS on how to deduct tax before a lump sum is paid out, only the employer, fund administrator or insurance provider responsible for that payout can request a tax directive from SARS. This is usually done via eFiling.

How to calculate tax directive percentage

• The tax calculations based on the tax directive are only an approximation based on the information available on the SARS tax directive system.
• It is possible that some individuals may still owe more tax or be entitled to a credit (based on the accrual date) once the final liability is determined at assessment.

How to get a tax directive: how to apply on eFiling

• Specific application forms are provided for each type of tax directive and it is the responsibility of the employer, fund administrator, or insurer to use the appropriate application form.
• The applicable tax directive form will vary according to the reason for exit from the fund or from employment, as well as due to the nature of the payment that must be made to the individual taxpayer.

Please see the information regarding how to get a tax directive on the SARS website.

How long does a tax directive take?

You can generally expect to wait two business days for a tax directive to be processed and issued by SARS. Where for some reason a tax directive must be processed manually by SARS it can take a minimum of 21 business days to be issued.

Why would a tax directive be declined?

• If data provided is incorrect or missing or does not match the information that SARS has on record, this can result in the tax directive application being declined.
• Without a valid TCS (Tax Compliance Status) PIN in the case of a withdrawal from retirement funds due to emigration, a tax directive can be declined if a policy provider needs proof to pay proceeds into a non-resident bank account.
• Expats who have become non tax residents also now require a SARS Non-Resident Tax Status Confirmation Letter to ensure tax directives for policy withdrawal are not declined.

FinGlobal: tax specialists for South Africans abroad

Whether you need tax assistance along with the encashment of your retirement annuities, or you’re looking for help in the form of relief from double taxation, FinGlobal is ready to assist with advice on tax directives, tax refunds and tax clearance.

If you’d like us to give you a call back to explain tax directives further, please leave your contact details and we’ll be in touch shortly.