Taxability of retrenchment benefits
|S/N||Types of retrenchment benefits||Is it taxable?|
|1||Compensation for loss of employment|
Loss of employment means that the job is no longer available due to reasons such as company downsizing, restructuring, etc.
It is capital in nature.
|2||Payment for restrictive covenants|
A restrictive covenant is an agreement which restricts what someone can do (e.g. the employee is not to compete with his/her employer).
It is capital in nature.
Generally, it may include providing counselling and moral support to affected employees and to assist them in their search for jobs.
|Not taxable when the following conditions are met:|
|4||· Payment in lieu of notice|
These payments are made to recognise the past services provided, not payments for loss of employment.
Example 1: Tax treatment of retrenchment benefits given to an employee
Mr Tan was retrenched by ABC Pte Ltd. He was given a retrenchment package which was paid to him the following year. The retrenchment package consists of the following components:
- Payment in lieu of notice
- Compensation for loss of employment
a. How will Mr Tan be taxed on his retrenchment package?
|· Payment in lieu of notice|
These payments are for past services, not payments for loss of employment.
|· Compensation for loss of employment||Not taxable|
It is a payment to compensate Mr Tan for the loss of employment and hence capital in nature.
b. When will Mr Tan be taxed on his retrenchment package?
The taxable components (i.e. payment in lieu of notice and gratuity) will be taxed in the Year of Assessment Mr Tan was retrenched and not when he was given the package (i.e. not taxed in the following year).
Reporting retrenchment benefits
|Company not participating in the Auto-Inclusion Scheme (AIS) for Employment Income||Company participating in the AIS|
|You must declare the taxable retrenchment benefits under 'Employment - Others' in your Income Tax Return and email us the following:|
· Amount and breakdown of the retrenchment benefits;
· A copy of your employment contract; and
· A copy of the relevant documents relating to this lump sum payment.
|You do not need to report the retrenchment benefits in your Income Tax Return as your employer will submit the information to IRAS electronically.|
I have been retrenched and received retrenchment benefits from my employer. How do I know the breakdown of the retrenchment package and how the payout amount is derived?
I have been retrenched and received retrenchment benefits from my employer. When will I be taxed on these benefits?
Payments for retrenchment benefits are taxed in the year that the employee is legally entitled to the retrenchment benefits and not based on the date of payment. It is usually taxed in the year the employee is retrenched.
For example, you were retrenched in 2021 but only received the retrenchment benefits in 2022. The retrenchment benefits received in 2022 will be taxed in the Year of Assessment 2022 (i.e. income for 2021).
Help and support
For financial assistance
If you are experiencing difficulties in paying your tax, you may:
- Apply for a monthly instalment plan;
- If you are already on a monthly instalment plan with IRAS, you may request for an extended instalment plan. Please note that IRAS will review your request on a case-by-case basis.
For other assistance
If you require other forms of assistance specific to your circumstances, you may wish to approach the following agencies:
For employment assistance
For social assistance