The Lagos State Internal Revenue Service (LIRS) has issued a public notice with respect to the exemption of compensation for loss of employment.
The notice clarifies payments that qualify for tax exemption as ‘compensation for loss of employment’ under Paragraph 26 of the Third Schedule to Personal Income Tax Act (PITA).
The notice states that compensation for loss of office is either a termination benefit or a terminal benefit.
The LIRS defines termination benefit as payment made to an employee who is made redundant or to an individual whose fixed term contract is ended early, while terminal benefit is lump sum payment made to an employee who retires.
The notice further provides guidance on the components of compensation for loss of employment that qualify for tax relief.
It said tax relief would only be granted for pay-as-you-earn (PAYE) tax purposes if the amount paid was not pre-agreed prior to the commencement of the disengagement process.
However, capital gains tax (CGT) is applicable in line with Section 6(1)(a) of the Capital Gains Tax Act.
“Pre-agreed amounts would be subject to PAYE tax as they are an outcome of employment,” the notice explained, adding that gratuity payments made under an approved pension scheme are tax deductible for PAYE purposes.
On the other hand, gratuity payments made outside the Pension Reform Act (PRA) become taxable where the conditions set out under Paragraph 18 of the Third Schedule of PITA are triggered, where the period of service is not up to 10 years; total gratuity payable exceeds ₦100,000; where the period of service does not amount to five years or an aggregate of 63 months.
Employers are required to show each pay component of the compensation for loss of employment and the corresponding payments in their tax returns to enable LIRS determine the correct tax treatment.