Incorrect information on tax directive applications for savings withdrawal benefits could lead to SARS levying penalties
By William Donachie, Legal and Technical Specialist
In its 2025 Budget Review, National Treasury noted that revenue collected from savings withdrawals benefits surpassed its initial estimate of R5 billion for 2024/2025. The tax collected as at the end of February 2025 amounted to R11.6 billion. In a media statement released by SARS on 31 January 2025, the SARS Commissioner expressed his concern that 213 654 taxpayers have been identified who understated their taxable income with a view to having a more favourable tax rate applied to their savings withdrawal benefits. “If a taxpayer understates their income, they are intentionally involved in evading their tax obligation,” the Commissioner said. He added that “taxpayers should refrain from this unbecoming conduct that borders on criminality”. This begs the question, what is tax evasion?
Distinction between tax avoidance and tax evasion
In simple terms, tax avoidance can be described as a situation where the taxpayer arranged their affairs in such a legal manner that they have either reduced their income or have no income on which tax is payable. However, this will only be acceptable if there is nothing in tax legislation that prevents the specific avoidance or the reduction in the final tax liability. The best pronouncement in this regard can be found in the case of Duke of Westminster v IRC (1936) AC 1 where the court stated that:
“Every man is entitled if he can to order his affairs so, that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow-taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
By contrast, tax evasion refers to activities deliberately undertaken by a taxpayer to escape a tax burden – for example, making incorrect statements in income tax returns, such as not disclosing all income or inflating expenditure claimed as a deduction, and sham or disguised transactions.
Requirements for making a savings withdrawal
Members who want to take a savings withdrawal benefit, have to be registered for tax. Since contributions to retirement funds are not taxed, tax is deducted from the amount withdrawn at the rate applicable to the specific member (their marginal tax rate). Depending on the member’s income this rate can vary between 18% and 45%. In addition, the member should not have any outstanding tax returns. An unpaid tax debt will not prevent a member from making a withdrawal, but the debt will first be deducted from the savings withdrawal benefit before any payout can be made.
Determining the final tax rate to be applied to the savings withdrawal benefit requires the fund administrator to apply for a tax directive from SARS, indicating to the fund how much tax to deduct from the withdrawal. According to the SARS Guide, where the reason for the directive is a savings withdrawal benefit, a nil amount will be accepted. Although no explanation was provided for this, it can be inferred that the intention may have been to cater for members who did not have any employment income during the tax year at the time of applying for a savings withdrawal benefit or, for example, members who were in receipt of a disability income only. Disability income is tax exempt, but if the member was in receipt of say rental income in addition to the disability income, the rental income should have been declared to determine the taxpayer’s taxable income and the rate to be applied.
Most members making a withdrawal would have been in employment and, as a result, they should have declared their remuneration on the directive application. Failing to declare such remuneration may lead to tax penalties imposed by SARS on assessment, potentially causing financial hardship for the employee.
Tax evasion in the context of savings withdrawal benefits
Members who have been identified as underreporting their annual remuneration would have received a letter from SARS notifying them of this. In terms of the Tax Administration Act, underreporting of income inter alia means any prejudice to SARS or the fiscus as a result of submitting false information to SARS – including any statement made to SARS or in a document submitted to SARS that is not true. Underreporting of a taxpayer’s remuneration on the tax directive application falls within this category and may therefore be punishable. If committed with the intention of obtaining a tax benefit, this behaviour will be seen as tax evasion. Members will then have to explain to SARS why an understatement penalty should not be levied.
Conclusion
When applying for a savings withdrawal benefit, members of retirement funds must make sure that the directive application is completed accurately and truthfully, as any misrepresentation may be deemed as tax evasion even if their actions were unintentional. A lack of tax knowledge is not a defence. Members should take note that when submitting the directive application they acknowledge that the information provided to SARS is true and correct in every respect. Any false information causing prejudice to SARS may result in the imposition of understatement penalties potentially leading to further financial hardship for the member.
19 August 2025