Any contract comes to an end and an employment contract is no exception. When a contract ends everyone must be paid their due. In the payroll it may come to a situation where when retrenchment occurs (Involuntarily, Voluntarily or Mutual Agreement) that money needs to be processed for the employee though a package that is set aside for the employee.
The calculation of a package shall therefore be part of irregular income which on payment needs to be taxed as according to the tax bands in place from the tax tables, however considering the stipulated amount which may be subject to a tax exemption. How retrenchment is calculated is also subject to law with different interpretations. As according to the amendment of 2015 of the labour act the calculations shall be based on the following minimum terms of calculation.
1.1 Processing in the Payroll
When the retrenchment has been agreed such as the following calculation
Minimum Retrenchment Package=One Months Salary *(Number of years of Employment/2
)
Assuming the employee had salary of $1,000 and has worked for ten years then the Minimum Package to be processed will be as follows
Package =$1000*(10/2)
=$1000*5
=$5000
Now though we have calculated the retrenchment package there is the small big factor of non-taxable income that we have learned previously. The Income Tax regulations notes the revenue that is not subject to tax and Zimra provides the provisions.
An article from Zimra provides some input
Source Zimra
“Q: Could you please assist by providing information on how to tax retrenchment packages? If possible can you include examples?
A: Please be advised that the greater of $5 000.00 or 1/3 of the retrenchment package, up to a maximum of $45 000.00, is exempt (i.e. it is tax free).
Example
Mr X has been retrenched after working for his company for some time. His company pays him $8 000.00 in a retrenchment scheme approved by the Ministry of Labour.
Answer
1/3 of the retrenchment package is $2 667.00. Comparing 1/3 of the package (i.e. $2667.00 and $5 000.00) you will notice that the greater of the two is $5 000.00. Therefore, $5 000.00 from a retrenchment package of $8 000.00 is exempt from Income Tax.”
Where the minimum amount exempt from tax has been stated this takes precedence of any percentage calculated as shown in the example above.
Article by Zimra:
| “Taxation of retrenchment packages |
| Did you know that retrenchment packages form part of gross income and are subject to income tax like all other income?
Definitions A retrenchment package is a pay off by an employer to an employee who has been laid off due to restructuring that has rendered the employee’s position redundant. It constitutes pecuniary payment or the offer of material benefits. A retrenchment package may include any or all of the following, severance pay (cash), gratuity (cash) and other material benefits like motor vehicles, vehicles, computers, furniture and immovable property (houses and buildings). Legal Provision Section 8 (1) of the Income Tax Act (Chapter 23:06) defines what constitutes “gross income” and retrenchment packages are brought into taxation under this section. Section 73 of the same Act provides for the payment of employees tax (including tax on retrenchment packages) withheld by employers. Exemptions Section 14 of the Income Tax At (Chapter 23:06) as read with paragraph 4 (p) of the Third Schedule to the same Act exempts the greater of US$5,000 or one third of up to US$45,000 of the amount of any severance pay, gratuity or similar benefit received on cessation of employment due to retrenchment, under a scheme approved by the Minister responsible for labour. The amount determined as legislated will thus not be liable to tax or in other words, will be excluded from the taxable income. Application of a Tax Deduction Directive On termination of employment an employer determines the respective retrenchment package and applies to ZIMRA for a tax deduction directive in form NP4. The following information, in respect of the employee receiving the retrenchment package, should be carefully and accurately filled by the employer onto the application form:
The application form should be signed by both the employer or his representative and the employee. Where the employee is unable to sign the application form, the employer should indicate this to ZIMRA and may sign on behalf of the employee. The completed application form should then be submitted to ZIMRA for processing. On receipt of the application from the employer, ZIMRA will check the correctness and accuracy of the information on the form and its accompanying attachments before issuing the directive.
Computation Of Tax On Retrenchment Package Below is an example of the computation in respect of taxation of retrenchment packages: Total package xxxxxx Less relocation allowance (xxxx) Less exempt portion (xxxx) Add annual salary at date of withdrawal xxxxxx Taxable income xxxxxx
Tax thereon at normal rates xxxxxx Less tax on salary at normal rates (xxxx) Add 3% Aids levy xxxxxx Tax applicable on retrenchment package xxxxxx Payment due dates Once a directive has been issued, the employer should remit the employees tax within the period stipulated in the 13thSchedule of the Income Tax Act. Failure to withhold and late remittances/payments of employees’ tax constitutes an offence and attracts penalties and interest. |
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The tax computation is therefore subject to the amount, which is eligible for tax exemption.
It is important to note that the adjustment to income tax are made on a more regular basis as they go hand in hand with government measures or budget provisions.