Taxation of severance pay upon retirement
The Labour Protection Act was recently amended to entitle retirees to severance pay and set the retirement age.
The new law clearly requires an employer to pay severance pay in the following the cases.
L The company’s retirement age is solely determined by the employer
l The retirement age is agreed upon by both the employer and employee
If the retirement age is not set or set at greater than 60 years, an employee who is 60 years old or older can choose to retire by declaring his intention to the employer
The effective date of this new law is September 1.
Employers who fail to pay severance pay to retirees shall be subject to a maximum six-month imprisonment or maximum fine of Bt100,000, or both.
Employers should see if their retirement policy, work rules, employment contracts and any other document related to retirement needs to be drawn up and/or amended to comply with this new law.
In calculating personal income for a tax return, the taxpayer can exclude severance pay received for an amount not exceeding his total remuneration or salary for the last 300 days of employment, or Bt300,000, whichever is less.
It must be noted that this exclusion does not include severance pay received for the reason of retirement. The retiree shall be taxed on all of his severance pay received as a result of retirement.
The retiree may choose to be taxed separately from other income provided that such payment is a single payment paid for the reason of termination of employment after employment of five years or more.
In calculating personal income separately from other income, a retiree is eligible to take a special deduction.
The retiree may be able to deduct expenses at almost 50 per cent of assessable income and will pay tax at the lower tax rate.
Effective this tax year, if a taxpayer receives over several times severance pay or any single payment as a result of termination of employment, regardless of a single payer or multiple payers, only income that is received in the first tax year of such payments is eligible for the special tax calculation.
A payment made in the following year will be treated as ordinary income to be taxed at the normal personal income tax rate, which may result in higher tax than with the special tax calculation.
An employer should ensure that payment for the reason of termination of employment will be made in the same tax year so that the terminated employee or retiree can make full use of the special tax calculation.
Contributed by BENJAMAS KULLAKATTIMAS is a tax partner at KPMG in Thailand
