Taxation of retrenchment packages

Retrenchment packages form part of gross income and are subject to Income Tax like all other incomes.

Definitions
A retrenchment package is a pay off by an employer to an employee who has been laid off due to restructuring, making 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, 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 Section 8(1) (b). Section 73 of the same Act provides for the payment of employee’s tax (including tax on retrenchment packages) withheld by employers.

Exemptions
Section 14 of the Income Tax Act as read with paragraph 4 (p) of the Third Schedule to the same Act exempts the first US$10,000 or one-third of the first US$60,000, whichever is the greater 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 for 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 in by the employer onto the application form:

First name and surname

National identity number (which acts as the taxpayer identification number, TIN)

Tax year (the period in which the retrenchment accrued or is paid)

Nature of benefit

Amount of benefit (based on the open market value of the benefit or property offered as retrenchment)

Salary and allowance per annum
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.

Payment Due dates
Once a directive has been issued, the employer should remit the Employee’s Tax on the 10th of the following month. Failure to withhold and late remittances/payments of Employees’ Tax constitutes an offence and attracts penalties and interest. Our valued clients are informed that no fee is charged for the issuance of tax directives and are encouraged to report to the Police any incidents of people purporting to be Zimra officers and charging any fees and involved in such corrupt practices.

Disclaimer
This article was compiled by the Zimbabwe Revenue Authority for information purposes only. Zimra shall not accept responsibility for loss or damage arising from use of material in this article and no liability will attach to the Zimbabwe Revenue Authority.

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