According to the Practical Tax Handbook SARS issues a tax directive (IRP3) to instruct you, as the employer, on how to deduct your employees' tax from certain payments where the prescribed tax tables don't cater for a particular situation.
While a tax directive will grant you relief in cases where the application of the ordinary tax tables will create hardships and enable your business to have cash flow available, there are drawbacks to tax directives.
Six reasons why tax directives can be risky for your business
#1: Tax directives are never 100% accurate as your income and deductible expenses may change throughout the tax year.
So regard the calculations according to a tax directive as a mere estimate. You may still have to pay in substantial amounts or a credit may be due to you once your final liability has been determined on assessment.
#2: Tax deducted from a lump sum payment doesn't represent your final liability – it's only a withholding amount.
#3: You may still have to pay in substantial amounts once the final liability has been determined on assessment.
#4: A low percentage tax directive may result in a huge tax debt on assessment.
#5: You may enjoy the increased cash flow but risk deferring your tax liability to a later date.
#6: You're likely to increase your chances of being audited by SARS if you have a fixed percentage tax directive.
There you have it. Take these reasons into account before requesting a tax directive.
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