Tax on Severance

[On My Way Out]

Looks like I'm about to be sacked. Does anyone know what the tax rates are on severance payments in Singapore?

[None?]

You have no entitlement to a severance payment other than your contractual notice. If your employer exceeds this, then I believe it is not taxable if it is an ex-gratia payment, although I tried to get some advice on this point and failed miserably. Notice is pay so is taxed as such.

If you work for an MNC and can get them to pay you the ex-gratia bit offshore then as I understand the situation, it would not be related to employment in Singapore (because it is ex-gratia) and so provided you dont remit it here, it wouldnt be taxed here. Shouldnt be taxed in jurisdiction it is paid either as not effectively connected with employment there. Eg, I work for an English MNC, and am made redundant. Paid 1 months notice in Singapore, and GBP25,000 in UK ex-gratia. GBP25K would not taxed. Not sure what the position would be if the 25K had exceeded 30K tax free threshold in the UK but think it would still be non-taxable, or at least would be reduced by personal allowances, service averaging provisions etc (eg if worked in Singapore for half the time and UK for half the time only half the excess would be taxed)

I Think it really depends how your employer will report it. if they report it to IRAS as income, you will be expected to pay tax on it. if not, you wont.

Sorry to be so vague but hope it is a bit helpful.

[OMWO]

Yes, very helpful!

[KathyC]

It all depends on the wording of your notice letter. If your company is willing to use certain wordings you can receive the majority tax-free. Otherwise, only your ex-gratia payment and severance payment will be tax free.

Accoridng to IRAS: retrenchment benefits are made up of two components:
1) payment made for the loss of right to earn future income. Usually paid out as lump sum when contract of service is terminated by employer before the contract ie due. This lump sum is for the loss of office and not taxable.

2)payment made in recognition of past or present services. This payment is considered as gains or profits from employment and will therefore be fully taxable.

We went through this excercise last year. Our company was not willing to rephrase the notice so we ended up paying taxes over the pay-in-lieu of notice amount, which in our case was 3 months of salary and benefits like housing, car etc.

So approach your HR dept and see if they are willing to accomadate you in the phrasing. It can make a lot of differenc.

[KathyC]

Found out something very interesting yesterday. My hubby's department was the second last to go. This month the last dept will be closed and the company will cease all operations in Sin. The last ones to leave will receive all payments tax free. We still keep intouch with a few and they were also surprised that they received everything tax free. HR told them that the requirement to receive pay out tax free lies whether the company will totally stop its existence or one person remains.

So it pays off to be last one to go.

[On My Way Out]

Kathy C, that is interesting! There must be some benefit to the company in wording it one way vs. the other, else wouldn't they want you to receive your severance in the most tax-efficient way possible?

[KathyC]

Apperently not. If the wording of the notice is such that the company will make the pay out to you tax free, then they will have to bear the tax on the pay-out.

So if they already decided to cease operations, why fork out an extra dollar! as in their eyes the pay out is already generous (?). It all depends how willing your company is to adjust the wording such it will benefit the receiver most, since they are actually the ones who decided to wind up business.

Hope you can convince your bosses and HR. Good luck.