Tax impact of Retrenchment cost if you terminate employee during MCO

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Tax treatment on retrenchment cost

Today’s topic is whether the payment on retrenchment benefit is eligible for a tax deduction :

Closure of the business

The retrenchment payment is not incurred to generate income but is going out of business. Therefore the payment for retrenchment benefit is not tax-deductible in the event of the Company closes the business.

Redundancy

The retrenchment payment is considered as a part to cut costs to continue running the business. Therefore the retrenchment expenses incurred are eligible for a tax deduction.

Tax case study

We can refer to Ampat Tin Dredging Ltd V Director General of Inland Revenue tax case. This is an appeal case against Special Commissioners of Income Tax.

In this case, the taxpayer who was about to liquidate the Company claimed deduction on the payment of retrenchment benefit. The appeal was dismissed by the high court on the ground that the retrenchment benefit is provided to the employee due to closure of the business, and it has nothing to do with the production of income.

Therefore the retrenchment benefits expenses are not tax-deductible.

As a conclusion, any tax deduction claimed to have to comply with the section 33(1) Income Tax Act 1967 which states that for outgoings and expenses to be allowed as deductions they must be wholly and exclusively incurred in the production of gross income.

We had prepared a short video for your easier understanding.

Is Retrenchment payment deductible?

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