Termination Payments - How To Determine Its Taxability And Reporting Requirements

Many legal disputes have arisen over whether specific termination payments made to an employee are attributable to salaries tax. It is important for employers when considering making termination payments to consider how to structure the payments so as to maximise the tax saving benefits for their employees and to know what their reporting requirements are.

What constitutes a termination payment?

Termination payments are payments made to an employee on the termination of their employment.

Termination payments which are chargeable to salaries tax

Section 8 of the Inland Revenue Ordinance (Cap112) provides that any income received by an employee on the termination of their employment is chargeable to salaries tax if it was attributable to any office or employment. A payment is chargeable to salaries tax if it is paid to an employee in return for them acting as or being an employee. Termination payments which are chargeable to tax include: