In brief

One of the common questions that we find employers asking is whether an ex-gratia payment made to an employee upon his or her termination will be subject to personal income tax.


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In practice, such a payment is referred to as “severance payment” or “redundancy payment”.

Of course, the personal income tax on any payment made to the employee will generally be a personal liability of the employee. The exception to this is if the employer has agreed to bear the employee’s personal income tax liability, but this is rare. However, because employers are often keen to separate from the departing employee on good terms, we have seen employers try to be helpful in answering the employee’s questions on the tax treatment of an ex-gratia payment, if this is offered to the employee upon termination. That said, employers should refrain from making representations to employees on the nature of the payments and their taxability or otherwise.

A recent decision by the Income Tax Board of Review (ITBR) in the matter of GCT v Comptroller for Income Tax [2020] SGITBR 3 (GCT) sets out a clarification on the taxability of an ex-gratia payment made to an employee upon termination of employment. As seen in GCT, the details and information documented in the employment agreement and separation agreement or any other relevant documents could be indicative of the nature of termination payments made to the employee.

The details

1.    Overview

In GCT, clause 9 of the employee’s employment agreement provided that the employer will make an ex-gratia payment to the employee in the event that the employee’s employment is terminated by the employer, subject to the employee signing a deed of release.

Upon termination of employment however, the employer did not provide the employee with an ex-gratia payment and deed of release. The employer instead provided the employee with a “severance payment” and a separation agreement that extinguished the employee’s rights under the employment agreement.

Under the separation agreement, severance payment totaling S$2,475,000 was to be made to the employee.

The employer filed for tax clearance with the Inland Revenue Authority of Singapore (IRAS) in respect of the final payments to be made to the employee, including the severance payment.

The Comptroller for Income Tax (Comptroller) determined that S$1,350,000 of this severance payment was taxable as it was paid to fulfil an obligation to pay the ex-gratia payment under clause 9 of the employment contract. The remaining part was determined to be a payment to the employee as compensation in connection with the conditions of confidentiality and non-solicitation as provided for in the separation agreement and was therefore non-income in nature and was not taxable.
The employee disagreed with the Comptroller’s assessment of the amount of S$1,350,000 to tax and argued that this payment was for the loss of office and therefore not taxable. The ITBR agreed with the taxpayer.

In coming to its decision, the ITBR outlined several principles, which are summarised below. These principles are useful for employers who wish to make an internal preliminary determination if an ex-gratia payment made to an employee upon termination may be taxable or not in the employee’s hands.

2.    Questions for the ITBR

The questions the ITBR had to answer were:

  1. whether the lump sum payment of $2,475,000 made under the separation agreement was compensation for loss of office; and
  2. whether the Comptroller was correct in bifurcating the amount and assessing $1,350,000 as employment income and determining the remaining S$1,125,000 as capital in nature.

3.    Character of payment to determine taxability

Determining the character of payments is important because employees are required to pay income tax on “gains or profits from employment”. Specifically under the Income Tax Act, this means, among others, “wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance…paid or granted in respect of the employment….”. These categories of “gains or profits” are largely self-explanatory and should be given their ordinary meaning within the employment context. However, the term “wages and salary” can take on a wider meaning and can include payments in respect of past, present or future services rendered or that is obligated to be rendered under a contract of service.

The ITBR was of the view that a strict interpretation should be adopted in construing a taxing statute. For a receipt to fall within “gains or profits from employment”, regardless of the label attached, the receipt must be of a character that falls strictly within any of the nine categories listed. Importantly, “gains or profits from employment” does not mention redundancy payments or compensation for loss of office. On that basis, such payments do not constitute gains or profits from employment and accordingly, are not taxable.

4.    How the nature of the payment is determined

In order to determine whether a payment was made in recognition of services rendered or to be rendered (and is therefore a “gain or profit from employment”), or was made as compensation for loss of office, it is important to look beyond the label of the payment and into the true quality of the payment made to the employee upon termination.

The fact that a payment is specified in the employee’s employment agreement is a factor that might suggest it is a payment for services performed. However, this factor is not conclusive in determining the nature of the payment.

In GCT, the ITBR noted the following:

  • The ex-gratia payment under the employment agreement was payable only upon the termination of employment by the company and not on the employee’s voluntary resignation, even though the services performed by the employee in either case would have been the same. The inference is therefore that the payment was made for the termination of employment and not for services.
  •  No services performed by the employee had been uncompensated and all services of the employee were already compensated. The inference is therefore that the ex-gratia payment could only be for something else other than his services.
  • The deed of release that the employee would have had to execute for the ex-gratia payment under the employment agreement appeared to be in the nature of a restrictive covenant. Accordingly, one could in principle bifurcate the ex-gratia payment as being for compensation for loss of office and a payment for a restrictive covenant – both of which are capital in nature and therefore not taxable.

Accordingly, the ITBR found that:

  1. The employee was terminated from employment and suffered a loss of office.
  2. The separation agreement arose from the termination and the payments made were to compensate for loss of office, and for a non-competition covenant.
  3. The character of the payments (i.e. the “ex-gratia payment” under the employment agreement, and “severance payment” under the separation agreement) remained the same regardless of how one categorises them.

On this basis, the amount of S$1,350,000 was not taxable.

Key takeaways

Whether or not payments made upon termination of employment are taxable will require a factual analysis as seen in GCT. The employer should be mindful that the details and information documented in the employment agreement and any separation agreement and how such relevant agreements are drafted could be indicative of the nature of termination payments made to the employee.

It is always good practice to remind the employee that the taxability of the payment is to be determined by IRAS and that the employee should seek his or her own tax advice. Further, the employer at all times should not represent to the employee regarding the taxability of any payment lest the employee argues that reliance was placed on that advice to his or her detriment, should the tax treatment not be in the employee’s favour.