What Is Retrenchment?
It is a strategy adopted by companies or corporations to reduce the overall size of its operations. This strategy is often used to cut expenses with the goal of becoming more financially stable. Typically, the strategy involves withdrawing from certain markets or reducing manpower as part of a cost restructuring plan. In a retrenchment exercise, companies can lay off workers due to cost, business or operational factors.
What Happens When You Get Retrenched?
As an employee, your right to a termination benefit upon retrenchment depends on whether or not you are covered by the Employment Act (EA).
In general, an employee is only covered by the EA if their wages do not exceed RM2,000 a month, or if their occupation is a manual one, irrespective of how much they earn.
According to Wikipedia (2018), manual labour or manual work is physical work done by people, most especially in contrast to that done by machines, and to that done by working animals. It is most literally work done with the hands.
If an employee falls within the scope of the EA, he/she is entitled to termination benefits if he has been employed for at least 12 months. The termination benefits payable are as follows (or the amount in the employment contract if it is higher):
a. 10 days’ wages for every year of employment if he has been employed for less than two years.
b. 15 days’ wages for every year of employment if he has been employed for two years or more but less than five years.
b. 15 days’ wages for every year of employment if he has been employed for two years or more but less than five years.
c. 20 days’ wages for every year of employment if he has been employed for five years or more.
Meanwhile, an employee who is not covered by the EA is only entitled to termination benefits if it is provided in the employment contract. If it is not stipulated in the contract, then it is up to the employer’s discretion on how much termination benefits to pay, or whether or not to pay.
According to the Inland Revenue Board Malaysia (LHDN), when an employment ceases, the employer may make a lump sum payment to the employee. The lump sum payment may be described by the employer as compensation for loss of employment, ex-gratia, contractual payment, retrenchment payments or gratuity, etc. However, one should note that gratuity is not the same as “loss of employment” in this context.
Gratuity is normally referred to as a fixed amount that is presented in recognition of an employee’s services. As such, gratuity is normally paid upon an employee’s resignation or retirement after serving for a long period of time. It is to recognise the past services rendered by an employee.
Meanwhile, retrenchment is linked to a loss of employment as the employee is being laid off prior to the end of the contract of service. Under Malaysia’s taxation system, gratuity would be taxed under s13(1)(a) while the loss of employment would be taxed under s13(1)(e) of the Income Tax Act 1967. Both come with different types of tax exemption.
The amount paid on the termination of an employment may consist of the following two elements: (a) it is attributable to the loss of employment such as redundancy (compensation); and (b) it is attributable to the past services of the employee (gratuity).
The purpose of the lump sum payment has to be established in order to determine the tax treatment of the payment received by the employee. However, it is important to note that some employers may carry out termination disguised as retrenchment as a way of dismissing unwanted employees. If you feel that you have been unfairly retrenched, you can bring a claim against the employer by making a complaint or claim to the Department of Industrial Relations Malaysia, Industrial Court, Civil Courts or Labour Court.
Meanwhile, employers who are carrying out retrenchment due to serious financial difficulties may be excused from paying retrenchment benefits.
How to File Your Taxes When You Get Retrenched?
This compensation is exempted from tax if compensation received is due to ill health, and the other cases:
a. Termination on or after July 1, 2008 – exemption of RM10,000 for every completed year of service with the same employer or with companies in the same group.
Example:
Adam was working in his previous oil-and-gas company for five years, and was recently retrenched. He received RM60,000 in compensation in 2015. Under local tax laws, he is entitled to RM10,000 exemption for each completed year of service. So if he serviced the company for five completed years, RM50,000 out of the RM60,000 he received is entitled for tax exemption (RM10,000 x 5).
However, compensation received by a director (not service director) of a Control Company is fully taxable.
You are advised to collect ALL the documents that you can get your hands on to prove that the lump sum payment you receive is a compensation for loss of employment. For example, you will be required to show a letter of dismissal, contract, or even the description of the payment voucher, then discuss the matter with LHDN.
Furthermore, you will be required to present your pay slip and EA form to prove that you have completed your said tenure of services to the LHDN.
Read more:
1. Boost App - The Malaysian Leading eWallet
2. Difference Between Retrenchment, VSS & MSS
3. AirAsia BigPay - Sign Up Today To Get RM 10 Free Credit !
Read more:
1. Boost App - The Malaysian Leading eWallet
2. Difference Between Retrenchment, VSS & MSS
3. AirAsia BigPay - Sign Up Today To Get RM 10 Free Credit !
Edited by: 浪子
Bibliography
Fiona Ho. (2016). How-to: Tax Filing For Retrenched Employees In Malaysia. Retrieved from https://www.imoney.my/articles/how-to-tax-filing-for-retrenched-employees-in-malaysia
Wikipedia. (2018). Manual Labour. Retrieved from https://en.wikipedia.org/wiki/Manual_labour
Tax Filing for Retrenched Employees in Malaysia
Reviewed by 浪子
on
November 27, 2018
Rating:
Reviewed by 浪子
on
November 27, 2018
Rating:
