At a glance - Tax treatment of various lump sum payment
| Nature |
Taxable/ Not taxable |
| 1 |
Death gratuities/ injuries or disability payments/ Workmen compensation |
Not taxable
|
| 2 |
Gratuity paid for completing "x" years of service |
Taxable
Report the gratuity in the year which the employee completes the "x" years of service and is eligible for payment |
| 3 |
Payment made to a potential employee to induce him to join the company.
Sum may be a negotiated sum, or based on the notice-in-lieu that he has to pay his existing employer to leave the company without service notice, etc
|
Taxable
|
| 4 |
Retrenchment payment made to compensate for loss of employment |
Not taxable
More information available
|
Retrenchment payment
Q1 Are the severance payments in the retrenchment package 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.
See e-tax guide “Retrenchment pay that constitutes payment for loss of employment is not taxable”
Q2 Are outplacement support provided as part of the retrenchment package taxable?
The type of outplacement support may vary from one company to another. Generally outplacement support may include providing counselling and moral support to affected employees and to assist them in their search for jobs. If the outplacement support arises from a retrenchment exercise, it is not taxable when the following conditions are met:
a) The outplacement support is provided as part of a retrenchment package to compensate for loss of employment and is only available to employees who are retrenched;
b) The only expense incurred by the employer to provide the outplacement support is the fees paid to the outplacement agents or cost incurred to provide other forms of outplacement support, whichever the case may be;
c) Any employee who is eligible for outplacement support but chooses not to accept it is not entitled to any other compensation in lieu, whether in cash or otherwise.
Q3 What should the employer do if the company is undertaking a retrenchment exercise?
If an employer is undertaking a retrenchment exercise, it should check with IRAS on the taxability of the payments once the package has been finalised by sending an email to taxqueries@iras.gov.sg with the details below:
- the circumstances why the staff are leaving the company
- detailed breakdown of the package and state the basis of arriving at each component
- the number of employees affected (breakdown to be given for Singaporeans and Foreigners)
- 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 :
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.
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.
See information on what you should do when the retrenched employees include foreigners.