The tax treatment of ex-gratia payments to a Singapore employee

The tax clearance obligation for employees

In the event of a termination of an employment contract with a non-Singapore Citizen employee, the employer must proceed to a tax clearance by filling the Form IR21 one month before:

  • The employee ceases to work for you in Singapore;
  • The employee starts an overseas posting; or
  • The employee leaves Singapore for any period exceeding three months.

In the Form IR21, the employer has to indicate all incomes received upon the termination such as gross salary, bonus or director fees and other types of incomes such as ex-gratia payment, allowances compensation for loss of office etc. The Form has to be submitted to the Inland Revenue Authority of Singapore (‘IRAS”) which will then determine the amount of Income tax that needs to be paid.

What is an ex-gratia payment?

The Section 10 (2) (a) of the Income Tax Act of Singapore (‘ITA’) provides a list of income’s categories that are considered as gains or profits from any employment and thus, subject to income tax.

Please note : Any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance (other than a subsistence, travelling, conveyance or entertainment allowance which is proved to the satisfaction of the Comptroller to have been expended for purposes other than those in respect of which no deduction is allowed under section 15) paid or granted in respect of the employment whether in money or otherwise

However, it has been observed that it might be difficult to determine the taxability of certain incomes received by the employee e.g., ex-gratia payment.

Indeed, as a consequence of a termination of a labor contract, it is common for an employer to grant his employee an ex-grata payment to reward him for his work done.
An ex-gratia payment is a payment made by an employer to his employee without any contractual obligation to do so. Indeed, the Latin translation of “ex-gratia” means by favor. Thus, it refers to a gesture of goodwill from the employer.

Frequently, when an employer pays a sum of money to an employee it can be confusing to identify the nature of this sum of money.  An ex-gratia payment can be identified as a severance payment that is different. Indeed, a severance payment constitutes a compensation for loss of office and is not taxable because it is considered as capital receipts.

To compare severance payment to ex-gratia payment, an ex-gratia payment is made for past services done by the employee and not made for loss of office. As ex-gratia payment is made for services rendered to the company, which therefore is identified as gain or profit from employment thus, taxable.

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The identification of an ex-gratia payment: Decision GCT v Comptroller for Income tax from The Income Tax Board of Review

As explained earlier, when an employee receives an ex-gratia payment, he has to pay tax on this income. However, it can be hard to determine the nature of a payment.

The Singapore Income Tax Board of Review (ITBR) with his decision GCT v Comptroller for Income tax (‘GCT v CIT’) dated on 21 May 2020 has brought clarification to determine the taxability of an ex-gratia payment given to an employee upon termination of employment contract.

The decision GCT v CIT, point out the importance to strictly interpret the Section 10(2) (a) of the ITA in order to determinate if a payment falls into one of the nine categories list out in this section.

This means that only income referring to one these nine categories are taxable. The Section does not mention compensation for loss of office or redundancy payment that are thus not taxable.

Moreover, GCT v CIT provides that an ex-gratia payment does not constitute a gain or profits from an employment but constitute a payment for loss of office if the payment is:

  • Subordinates to the termination of the employment contract;
  • Not related to any services rendered to the company by the employee; and
  • Subordinates to the execution of a deed which appears to be a restrictive covenant for which payment are generally capital in nature.

In this case, the payment is made for loss of office and is not taxable.

GCT v CIT specifies also that an ex-gratia payment is made to compensate past, present, or future services and is not supposed to be contractual.

To conclude, the taxability of an income should be base on its nature, characteristic rather than the form. The employer should clarify what kind of payment he wants to grant his employee. The employer should be careful with the documents or information he gives to justify the taxability of an income.

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