SARS Faces Surge in Tax Directive Applications Amid Two-Pot System Rollout

In a striking revelation on September 11, 2024, the South African Revenue Service (SARS) announced a substantial uptick in tax directive applications following the implementation of the two-pot system for pension withdrawals. The media release highlighted a staggering total of 161,607 applications received, including those that were subsequently canceled. Of these, 159,853 – an impressive 98.9% – pertain to Savings Withdrawal Benefits, reflecting a daily average of 17,964 applications over the ten-day period from September 1 to 10, 2024.

The total gross amount associated with these applications reaches R4.1 billion, underscoring the scale of financial activity triggered by the new system. SARS Commissioner Edward Kieswetter explained that traditionally, contributions to pension or retirement funds were not taxed at the point of deposit but were instead deferred until retirement and taxed at a reduced rate. However, under the new system, withdrawals are subject to the individual's marginal tax rate.

Kieswetter elaborated on the process, stating, “Applications for tax directives are submitted to SARS by the fund administrator via e-Filing. The directive indicates to the fund how much tax should be withheld by the fund on behalf of SARS before payout.” He also noted that any tax debt owed to SARS will be combined with the tax on the withdrawal unless payment arrangements are already in place. Deferred tax debts will not be deducted.

The SARS Commissioner further emphasized that the turnaround time for processing directive applications, assuming no human intervention is required, is capped at 48 hours. Taxpayers seeking more information on the new system can use the SARS Online Query System on their website or contact the SARS WhatsApp channel at 0800 11 7277, where they can perform simulated tax calculations for their two-pot withdrawals.

The new system is primarily driven by three main reasons for withdrawals: transfers due to divorce, transfers to retirement funds, and personal withdrawals by taxpayers. Given the dynamic nature of the situation, SARS will provide periodic updates on withdrawal statistics.

Implications and Insights The high volume of applications indicates a significant need among South Africans for immediate access to funds, as well as the potential impact on tax recovery. Considering an estimated 16.3 million employed individuals in South Africa, with approximately half contributing to pension schemes, nearly 50% of the workforce appears to be engaging with the two-pot system.

Assuming that around 4.3 million taxpayers have a minimum marginal tax rate of 18% and withdraw the maximum amount of R30,000, the potential tax revenue could amount to R23,220,000.00 within the first two weeks. SARS anticipates a total collection of R5 billion from these tax withdrawals in this tax year highlighting a substantial increase in revenue.

One notable shift is the taxation of withdrawals under the new regime. Unlike the previous system, where lump-sum withdrawals were subject to different rules, the new system taxes income withdrawals at the individual's marginal rate. This means that if a taxpayer's income exceeds R56,000.00 per month, withdrawals could be taxed at 39% or more. This change could significantly impact savings, emphasizing the need for careful financial planning and awareness.

The implementation of the Two-Pot System brings both opportunities and challenges, as it not only reflects a pressing need for liquidity among taxpayers but also represents a major change in how pension withdrawals are taxed. Speak to your financial advisor and tax consultant for advice.