Taxation of Terminal Payments

INCOME FROM
EMPLOYMENT..
TAXATION OF TERMINAL PAYMENTS
• Payment for redundancy or loss or termination of

employment is taxed as provided for under
section 7(4) of the Act.
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Taxation of Terminal Payments
• Any such payment received in respect of a year of income
which expired earlier than five years prior to the year of
income in which it was received or which the employment
ceased, if earlier
• such payment shall be allocated equally between the years of
income in which it was received or in which the services
ceased and
• the five years immediately preceding such year of income.
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…
• Each portion allocated to any such year of income shall be
deemed to be income of that year of income in addition to
any other income of that year of income.
• Therefore, any terminal payment in respect of a year of
income which is earlier than six years from the year such
payment is received or when services cease, if earlier, shall
be spread back over a period of six years.
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TAXATION OF TERMINAL PAYMENTS…
• In such payments, a sum is normally paid by way of

compensation for loss or surrender of an office or
employment.
• The fact that the payment is made in a lump sum does
not remove the payment from liability to income tax.
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• However for a payment to enjoy the tax treatment under section 7(4)
there must be a genuine, and not merely a sham end of the original
employment or cessation of services.
• To constitute a genuine retirement, the employee must relinquish the
office under such termination without an intention of resuming it.
• However, provided there is a bona fide termination, an employee may
be re-employed by the ex-employer.
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• Example
• An employee is paid by the employer Sh.
30,000,000/= for termination of the employment in the
year 2007 when the employment actually ceased.
• The payment relates to years 2007 to 2018, inclusive
and is allocated by the employer as follows:
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• Sh. 2,000,000 for each of the years 2007 to 2012
• Sh. 2,500,000 for each of the years 2013, and 2014
• Sh. 3,000,000 for each of the years 2015 and 2016.
• Sh. 3,500,000 for each of the years 2017and 2018.
• Allocate the terminal payment for calculating income tax of
the employee.
ALLOCATION ALLOCATION BY TOTAL CHARGEABLE
BY ITA INCOME “000”
EMPLOYER
YEAR OF AMOUNT
INCOME ALLOCATED
2007 2,000 0
2008 2,000 0
2009 2,000 0
2010 2,000 0
2011 2,000 0
2012 2,000 0
ALLOCATIO ALLOCATION BY ITA TOTAL CHARGEABLE
N BY INCOME “000”
EMPLOYER
YEAR OF AMOUNT
INCOME ALLOCATED
2013 2,500 2,000 4,500

2014 2,500 2,000 4,500
2015 3,000 2,000 5,000
2016 3,000 2,000 5,000
2017 3,500 2,000 5,500

2018 3,500 2,000 5,500
Compensation for the termination of contract
• Payments received as compensation for the

termination of any contract of employment or services
rendered,
• whether or not provision is made in such contract for
the payment of such compensation is taxed in
accordance with the provisions of section 7(5) as
follows:
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• If the contract is for a specified term, the amount to

be included in calculating the gains or profit shall
not exceed
• the amount which would have been received in
respect of the unexpired period of such contract and
shall be deemed
• to have accrued evenly in such unexpired period.
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• Example
• An employee who has a contract of employment
for five years from 1/1/2016 to 31/12/2020 is
having the contract terminated on 31/12/2017
and paid Sh. 72,000,000 for the termination of
the contract.
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Contract for a specified term…
• The compensation amount of Sh. 72,000,000 shall be
allocated evenly over the unexpired period of the contract,
i.e.
• 1st January, 2018 to 31st December, 2020, as Sh. 24,000,000
for each of the years 2018, 2019 and 2020.
• None of the amount shall be allocated to the expired period
of the contract.
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Contract is for unspecified term and provides for
compensation on termination thereof,
• such compensation shall be deemed to have
accrued in the period immediately following
such termination
• at a rate equal to the rate per annum, of the
gains from the contract received immediately
prior to such termination.
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CONTRACT FOR UNSPECIFIED TERM THAT PROVIDES
FOR COMPENSATION…
• Salary for year 2016 TZS. 18,000,000

• Compensation payment year 2017 TZS. 18,000,000
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CONTRACT FOR UNSPECIFIED TERM THAT PROVIDES
FOR COMPENSATION…
• The compensation payment will be assessed for

years 2017, 2018 and 2019 at TZS. 18,000,000
for each year.
• The balance of TZS. 4,000,000 will be taxed in
the year 2020.
CONTRACT FOR UNSPECIFIED TERM THAT DOES NOT
PROVIDE FOR COMPENSATION…
• If the contract is for unspecified term and does not

provide for compensation on termination thereof,
any compensation paid on the termination shall be
deemed to have accrued in the period immediately
following such termination
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• at a rate equal to the rate per annum, of the gains from

the contract received immediately prior to such
termination.
• but the amount so included in gains or

profits shall not exceed the amount of three years’
remuneration at such rate.
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PROVIDE FOR COMPENSATION
• An employee had a contract of employment of unspecified

period which did not provide for compensation on its
termination.
• The contract was terminated on 31 st December, 2016.
• During the year 2016 the employee received from the
contracted employment TZS.18,000,000. On 4th January,
2017 the employee received a payment for the compensation
of the contract of TZS. 58,000,000.
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• Salary for year 2016 TZS. 18,000,000

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• The compensation payment will be assessed for

years 2017, 2018 and 2019 at TZS. 18,000,000
for each year.
• The balance of TZS. 4,000,000 will not be taxed
in the year 2020.
Other Lump sum Payments
• Where lump sums are received otherwise than in
connection with the termination of employment
they will be taxable if they are derived from the
employment under the general rules i.e. taxable
on the year of receipt (cash basis).
• ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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Taxation of Terminal Payments

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Taxation of Terminal Payments

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INCOME FROM

• Payment for redundancy or loss or termination of

• In such payments, a sum is normally paid by way of

2013 2,500 2,000 4,500

2017 3,500 2,000 5,500

• Payments received as compensation for the

• If the contract is for a specified term, the amount to

• Salary for year 2016 TZS. 18,000,000

• The compensation payment will be assessed for

• If the contract is for unspecified term and does not

• at a rate equal to the rate per annum, of the gains from

• but the amount so included in gains or

• An employee had a contract of employment of unspecified

• Salary for year 2016 TZS. 18,000,000

• The compensation payment will be assessed for

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