“Bachelors should be more heavily taxed. It is not fair that some men/women should be happier than others!”
In an effort to render the Mauritius tax system better understood by the taxpayer, we endeavour to present select case studies where rulings have been passed, thus providing our interpretation of such sections of the relevant taxation law of the land.
Under section 159 of the Income Tax Act, any person who derives or may derive any income, may apply to the Director General for a ruling as to the application of the Act to that income.
Case Study 21: Taxation on Severance Allowance
Facts
An employee was paid severance allowance on termination of his employment as from 1 July 2005. The severance allowance was computed on the basis of current monthly remuneration receivable by him at the time of termination of employment and included the following benefits:
a. overseas passage
b. car expenses
c. telephone rental
d. medical benefits contribution
Tax was withheld from the severance allowance after taking into consideration the first Rs 1,400,000, which is exempt from income tax under Part II of the Second Schedule of the Income Tax Act 1995.
Point of Issue
Whether the benefits included in the monthly remuneration used as basis for the computation of the severance allowance should not be excluded in the calculation of the tax liability of the employee on the grounds that overseas passage is not taxable by virtue of Section 10 (1) (a) (i) of the Act, and benefits under items (ii) to (iv) are expenditure wholly, exclusively and necessarily incurred in performing the duties of employment.
Ruling
Only the first 1,400,000 rupees of the sum received by way of severance allowance determined in accordance with the Labour Act is exempt from tax as provided under item 4 of Part II of the Second Schedule to the Income Tax Act.
The fact that non-assessable benefits have been included in the monthly remuneration used as the basis for the computation of severance allowance payable has no incidence on the amount of severance allowance provided as exempt under the Income Tax Act.
Severance allowance is pay and benefits employees receive when they leave employment at a company unwilfully.
In Mauritius, it is provided in law that an employer who terminates an employee’s contract when the employee has been in continuous employment for a minimum period of 12 months must pay a severance allowance unless the employer can show that there were valid reasons to justify the dismissal.
Severance allowance is calculated as follows:
• the equivalent of 3 months’ remuneration for every period of 12 months of continuous employment.
• For any additional period of less than 12 months, a sum equal to one-twelfth of the sum calculated in the point above, multiplied by the number of months during which the employee has been in employment.
However, if the employee was employed for less than 12 months, he will not be entitled to any severance payment.
