Tax Treatment of Lump Sum Payments

In general, any profit or gain you get via your employment will fall under the “taxable” category. Your earnings or profit will not be taxed only under specific conditions or when they come under an ongoing administrative concession. Lump sum payments are one such kind of an employee remuneration.

So What Do These Lump Sum Payments Include?

Taxable Non Taxable
Salary in place of notice pay/notice is paid by an employer to its employee as compensation for an early termination: Retrenchment payment as a compensation for losing a job
Gratuity for finishing “X” years of employment service will be considered for taxation. An employer will need to report an employee’s gratuity amount in the pertinent year during which he or she finishes the "x" years of service & qualifies for a payment. Workmen compensation/disability or injury payments/death gratuity
Payment to persuade an individual to join an organisation Payment made to an employee in order to get him or her sign an employment contract:
Retirement Benefits:
Will be considered for taxation except when they are derived from the tax exempt funds or pension schemes that are listed below:
  • CPF/nominated funds: For authorised pension/provident funds, the retirement benefits which are accumulated via such funds until 31 December 1992 will be exempted from tax provided the payment is made on the retirement date depending on the prescribed retirement age.
  • A government pension scheme which comes under a written law with respect to pensions in Singapore (inclusive of the Singapore Armed Forces Act, Parliamentary Act, and Pension Act

Let’s Look at Retrenchment Payment in Detail

A severance payment which is made in order to compensate an employment loss will not be considered for a retrenched employee’s taxation purposes since it is a capital receipt.

This will be applicable even if the payment to compensate for employment loss is rendered for in a collective agreement or a service contract or is calculated depending on the number of years of service with the job issuer.

Nevertheless, other payments like ex-gratia, salary in place of notice, and gratuity for services rendered in the past will not be considered as payments in relation to the loss of employment. They will fall under the “taxable” category since they are payments made for services rendered by an employee.

What Kind of Outplacement Support an Employee Can Expect

The kind of outplacement assistance will differ from one organisation to another. In general, outplacement services might include – rendering moral support and counselling sessions to an affected employee. Also, help him or her to find a job.

When outplacement support emerges out of a retrenchment exercise, it will not be considered for taxation when specific criteria are met:

  • The outplacement assistance is rendered as a segment under the retrenchment package to compensate for employment loss and is applicable only to an employee who is retrenched.
  • The sole expense an employer incurred while rendering outplacement assistance was the fees and charges that were paid to an outplacement agent or the cost an employer incurred while rendering other forms of outplacement service, whichever might be the scenario.
  • An employee who qualifies for outplacement assistance but refuses it and is not eligible for any other compensation instead (cash or otherwise).

What Should an Employer do When They Decide to Deploy a Retrenchment Exercise

When an organisation makes a decision to perform a retrenchment exercise, the pertinent employer needs to check how the payments will be taxed with IRAS after finalising the retrenchment package. The employer will also need to provide the required information via the lump sum payment template and send it to IRAS via email ([email protected]).

IRAS will then give confirmation about the taxability of every component. Once an employer receives the confirmation, only the taxable components need to be declared in the “Form IR8A”.

An employer who is not part of the AIS (Auto-Inclusion Scheme) for Employment Income needs to fill in “item d4” of the Form IR8A and provide the retrenchment benefit package’s breakdown, reason, and the basis on which the payment will be calculated.

An employer who is part of the Auto-Inclusion Scheme (AIS) for Employment Income needs to fill in both “item d4(i)” & “item d4(ii)” of the Form IR8E by providing the details for the taxable amount and the compensation amount for loss of employment respectively. The approval date also needs to be stated in case there has been any clarification that was sought with IRAS regarding the taxable components of the retrenchment benefit.

How are the Retirement Benefits Taxed?

A benefit which is paid via authorised funds to an employee when he or she retires will be considered for taxation when he or she receives it. Nevertheless, the accrued amount via such funds until 31 December 1992 will be exempted from tax.

The tax exemption will be applicable when the benefit is paid on the retirement date depending on what the prescribed retirement age is. Any amount which is paid in advance to the retirement will not qualify for tax exemption.

Deduction for Pension or a Provident Fund Contribution

An employer who is holding an approved pension & provident fund will be given a deduction based on the contribution the organisation has made since 1 January 1993.

An existing employee who must under the current rule of the authorised funds make a contribution will be offered a deduction on the same.

What Should an Employer do to Setup an Approved Pension/Provident Fund?

An employer who wants to set up an approved pension/provident fund under Section 5 of ITA can apply to the Comptroller of Income Tax to seek approval along with the information of the funds proposed by the organisation.

How to Calculate Tax Exemption on Retirement Benefits?

For a provident fund, pension, or an approved plan under Section 5/Section 13(1)(x) of ITA, an employer can calculate the amount in relation to tax-exempt retirement benefits accumulated till 31 December 1992 as follows:

  • Where the plan or fund renders for a contribution that is to be done depending on actuarial/other approvable basis to facilitate a section of defined benefits that are to be paid, utilise the salary that was last drawn on the retirement date.
  • Where the plan/fund renders for a contribution which needs to be done to an employee’s individual account, the remaining funds in the account as on 31 December 1992 + interest accumulated at a CPF interest rate till the retirement date.

Change to Pension for Life/Paid Over a Specific Period

An employer will be able to convert the taxable components of the retirement benefits that are due to be paid to an employee under an approved pension or provident fund either into a pension for life or can be paid within a 5-year period.

As an employer it is always important for you to know about the latest tax-related updates when it comes to lump sum payments you make to your employees. This will not only help you with tax savings but it will also help you in retaining your employees by rendering them specific tax privileges from time to time.

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