Tax Information : About Termination Payments
	About Termination Payments
		Payment in lieu of notice
		Payment in lieu of leave
		Employees' Compensation arising from injury
		Severance payment/long service payment
		Reporting termination payments by employer on I.R. 56F / I.R. 56G
		FAQ

1.	Payment in lieu of notice paid in accordance with the terms of the employment contract or the provisions of the Employment Ordinance by the employer to the employee is not income relating to service provided by the employee and is not taxable. See "A Concise Guide to the Employment Ordinance" under the website of Labour Department for details of the provisons of the Employment Ordinance.
2.	As it is not taxable, the employer need not report it on I.R. 56F / I.R. 56G and the employee need not report on his / her tax return (B.I.R. 60).
3.	However, exemption will not be extended to the case of where after giving notice of termination the employee is required to work during the notice period. In this event, salaries are the normal reward for service rendered during the notice period and should therefore be taxed as the employee's income.
4.	An analysis of some common situations is provided below :
	Where the employee terminates employment Tax liabilities After working for 7 days 7 days' salaries income is taxable. After working for 1 month Salaries for 1 month are taxable. The 7 days' payment in lieu of notice is exempt. - was paid 1 month salary and 7 days' salaries in lieu of notice (i.e., the employee did not have to work during the notice period) After working for 1 month and 7 days Salaries for 1 month and 7 days are all taxable. - was paid salaries for 1 month and 7 days (i.e., employee continued to work during the notice period) After working for 15 months Salaries for 15 months are taxable. The payment in lieu of notice is exempt. - was paid salaries for 15 months and 1 month's salaries in lieu of notice (i.e.,employee did not work during the notice period) After working for 21 years and 3 months The 6 months' salaries in lieu of notice are exempt from tax and there is no need for the employer to report them on I.R. 56F / I.R. 56G. - was paid, apart from the normal monthly salaries due, 6 months' salaries in lieu of notice in accordance with the employee's terms of employment

On the other hand, the salary as substitute of the payment in lieu of notice by the employee to the employer is still regarded as assessable income of the employee. As such, the employer is required to include that salary as income of the employee.

 

Payment in lieu of leave
1.	Payment of salaries to the employee whilst he is on holidays constitutes part of his normal income and is taxable. We call this "leave pay".
2.	Where an employment is terminated and there is "earned but untaken leave" at the termination of employment, the employer may wish to make a cash payment in lieu of leave so as to instantly wipe out the accumulated leave balance. Cash in lieu of leave is by nature similar to the salaries paid when the employee takes leave. Hence it is taxable. The employer must report it on I.R. 56F / I.R. 56G and the employee must report it on B.I.R. 60.
3.	Furthermore, an employee is entitled to annual leave upon completion of one year's service. Sometimes for business reasons he may have to defer his annual leave entitlement. On termination of employment, he may take his entitlement leave before leaving. If, the employer asks the employee to forego his option to take leave and tops up the payment for his earned but untaken leave with a cash element as compensation, the topped-up element is in nature similar to leave pay and should be reported by the employer and the employee as taxable income.

Employees' compensation arising from injury

1.	If an employee suffered personal injury by accident arising out of and in the course of employment, the payments received by him/her under the Employees' Compensation Ordinance (Cap. 282) are not income even the payments were calculated by reference to his/her salary/wages.
2.	As compensation for injury is not taxable, there is no need for the employer to report it on the I.R. 56B / I.R. 56F / I.R. 56G and the employee to report it on B.I.R. 60.

Severance payment / long service payment

1.	Severance payments / long service payments that are required to be paid under the Employment Ordinance are not assessable to Salaries Tax. There is no need for the employer to report the sums on I.R. 56F / I.R. 56G and the employee to report the sums on B.I.R. 60.
2.	To find out the employee's entitlement to severance payment / long service payment under the Employment Ordinance, see "A Concise Guide to the Employment Ordinance " under the website of the Labour Department.
3.	Severance payment / long service payment to be reduced by amount of Mandatory Provident Fund Scheme benefit, Occupational Retirement Scheme benefit or Gratuity
	(a)	Under section 31I and 31Y of the Employment Ordinance, if an employee becomes entitled to severance payment or long service payment and :
			gratuitues based on length of service or occupational retirement scheme benefits (excluding any part attributable to employee's contributions) have been paid to the employee; or
			accrued benefit (excluding any part attributable to employee's contributions) is being held in a mandatory provident fund scheme in respect of the employee, or has been paid to the employee,
		the severance payment / long service payment is to be reduced by the aforementioned amount of gratuities and benefits to the extent that they relate to the employee's years of service for which the severance payment / long service payment is payable.
	(b)	In this circumstance, the severance payment / long service payment payable in accordance with the Employment Ordinance is the amount as reduced by the amount of gratuities and retirement benefits.
	(c)	The employer and the employee need not report the reduced amount as mentioned in (b) above.  However, exemption will not be extended to that part of gratuities and retirement benefits used to offset the severance payment / long service payment. The whole amount of gratuities and retirement benefits paid to the employee should be reported in the usual manner.
		Example 1
		An employee was made redundant. His employer paid him $100,000, of which $80,000 was severance payment. His tax position is as follows: Severance payment $80,000 (This part is not assessable.) Extra award $20,000 (This part is assessable.) Total amount received $100,000
		Where an employee is entitled to severance payment or long service payment under the Employment Ordinance and at the same time entitled to gratuity based on length of service or occupational retirement scheme benefits, it is possible that the employer would set off the severance payment / long service payment against the gratuity or retirement scheme benefits. While severance payment / long service payment paid according to the Employment Ordinance is non-taxable, the balance representing gratuity is taxable. However, the employee may apply for relate-back, see Back pay,contract gratuities, deferred pay and arrears of pay (including relate-back).
		Example 2
		An employee was made redundant. He was entitled to a gratuity of $100,000 and severance payment of $200,000. His employer offset the severance payment by the gratuity and paid him $200,000 in total. The employee's tax position is as follows: Severance payment $100,000 (This part is not assessable.) Gratuity $100,000 (This part is assessable.) Total amount received $200,000   The employee may apply for related back in respect of the gratuity. See Back pay,contract gratuities, deferred pay and arrears of pay (including relate-back).
4.	The employer and the employee should report sums paid in excess of the employee's entitlement under the Employment Ordinance.

Reporting termination payments by employer on I.R. 56F / I.R. 56G