RAS has received a number of enquiries from both employers and individuals, seeking clarification on the tax treatment of severance payments received by an employee who is retrenched. We would like to provide the following clarification and information to our members for the purpose of reporting the income of the retrenched staff to IRAS.
1. Severance Pay that constitutes payment for loss of employment is not taxable
Severance payments that are made to compensate for the loss of employment are not taxable to the retrenched employee because they are capital receipts. However, other payments such as salary in-lieu of notice, ex-gratia and gratuity for past services are not payments for loss of office. They are payments for services and are therefore taxable.
2. How to determine if the payments in the retrenchment package are taxable
Members/Employers can refer to the IRAS Practice Note found at their website: http://www.iras.gov.sg/irasHome/uploadedFiles/Quick_Links/e-Tax_Guides/2002it11.pdf .
If an employer is undertaking a retrenchment exercise, it should specifically check with IRAS on the taxability of the payments once the package has been finalised by sending an email to firstname.lastname@example.org with the details below:
a) the circumstances why the staff are leaving the company
b) detailed breakdown of the package and state the basis of arriving at each component
c) the number of employees affected (breakdown to be given for Singaporeans and Foreigners)
d) the name and contact number of the person administering the payout
IRAS will confirm the taxability of each component. With this confirmation, the employer needs to declare only the taxable items in the annual Form IR8A:
i)Employers who are not participating in the Auto-Inclusion Scheme for Employment Income
Please complete ‘item d4’ of the Form IR8A by providing the breakdown of the retrenchment benefit package, reason and basis of arriving at the payment.
ii)Employers who are participating in the Auto-Inclusion Scheme for Employment Income
Please complete ‘item d4’ of the Form IR8E by providing the breakdown of the taxable items. State the date of approval if clarification has been sought from IRAS on the taxability of the retrenchment benefit components.
3. How to seek tax clearance for foreign employees who are retrenched
For faster tax clearance (within 7 working days), members are encouraged to e-file the Form IR21 via internet at http://www.iras.gov.sg/irasHome/page04.aspx?id=5376#Employers . There are exceptions where tax clearance is not required. Please click here http://www.iras.gov.sg/irasHome/page04.aspx?id=544 for the exceptions.
Members are reminded not to seek tax clearance for such exceptions.
In completing the Form IR21, employers should only report the taxable items of income. They are not required to complete Section F 'item 4e' of the Form IR21 relating to the Compensation for Loss of Office which is not taxable.
For clarifications, you may call IRAS hotline at 1800-3568655 or email them at email@example.com.
For advice on managing the excess manpower, please call your designated SNEF consultant or email us at firstname.lastname@example.org.