Processing a Retrenchment Package:
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Schemes of retrenchment need prior approval from the Ministry of Labour. Submit the retrenchment proposal to the Ministry of Labour and when approval is given use the Belina 'Retrenchment Calculator' utility to calculate the tax on the retrenchment amounts being paid to employees.
See this link for more information about how to download, and use, the Retrenchment Calculator.
Submit the results produced by the Retrenchment Calculator to ZIMRA for verification and approval. ZIMRA issue a tax directive for the retrenchment. This procedure should be followed despite the fact that the retrenchment calculation is gazetted each year after the annual budget is announced.
Tax Concessions
Tax concessions apply to retrenchment amounts received. To check that the retrenchment tax parameters have been setup correctly go to the 'Setup', 'Tax', then 'Existing' menu options. The setup of retrenchment is found on the default 'Tax Table' tab.
Labour Law, Grounds for Retrenchment and Inclusions in the Retrenchment
It is advisable to seek professional assistance with any retrenchment.
Retrenchments are covered in the Labour Act (Chapter 28.01) Section 12C. Procedures to follow are: 1. The employer should first identify the grounds for retrenchment, the employees to be retrenched, and the proposed terms and conditions of the retrenchment. 2. Written notice of the retrenchment should then be given to the organization’s Works Council, NEC, or Retrenchment Board (Section 12C (1) (a)) 3. The written notice should state the details of every employee whom the employer wishes to retrench and the reasons for the proposed retrenchment (3. Section 12C (1) (b)) 4. The Works Council or NEC should attempt to reach an agreement between the employer and employees as to whether or not the employees should be retrenched and, if they are to be retrenched, the terms and conditions on which they may be retrenched taking into account the continuance of operations of the organization and the mitigation of consequences of retrenchment on the employees. 5. Negotiations must be concluded within one month. If no agreement has been reached the matter should be referred, in writing together with supporting documentation, to the Retrenchment Board. 6. The Retrenchment Board shall consider the matter and make a recommendation to the Minister on whether to permit the retrenchment and the terms and conditions that should apply within two weeks. 7. If the Retrenchment Board fails to decide the documentation regarding the case will be forwarded, within two weeks, to the Minister for a decision on whether to allow or disallow the retrenchment. 8. If the Minister fails to decide within the time frames provided then the scheme of retrenchment will be deemed to have been approved. 9. When an agreement is reached LRR2 form is submitted 10. Final approval granted by Ministry
Acceptable grounds for retrenchment - Liquidation, - Restructuring, - Mergers, and - Overstaffing.
A retrenchment package could include: - 3 Months’ Notice Pay - Severance Package - Service Allowance - Relocation Allowance - Medical Aid for 3 - 6 Months - Purchase of assets at book value |
Retrenchment processing with a Tax Directive
The first step in a retrenchment exercise is to approach ZIMRA and present the retrenchment proposal to them. ZIMRA will then issue a tax directive which specifies the amount of tax that should be deducted from each employee involved in the retrenchment.
Procedure with ZIMRA - Retrenchment Calculator Recently clients have been going to ZIMRA with a Belina retrenchment calculation printout which ZIMRA approve for processing. To obtain this printout use the Belina Retrenchment Calculator (utility) which is found on the Belina website which is found as follows: - go to the Belina website www.belinapayroll.com - navigate to the 'Resources' tab - Go to the 'Statutory Documents' section - Click on the 'Retrenchment Calcuator 'yyyy'' (yyyy = current tax year) to download the calculator.
It is then possible to enter the details of each person receiving a retrenchment and the amounts, print this out and take it to ZIMRA. Once ZIMRA has approved the calculations for each employee the amount of the Retrenchment can be processed on the payroll as well as the PAYE on the retrenchment using a separate Transaction Code which could be name 'PAYE - Retrenchment', or similar.
Use the following steps to process a retrenchment using a tax directive:
Step 1 - Run the payroll for the current period without any Retrenchment amounts. Run the Calculation Routine, check the results and then print out the PAYE report.
Step 2 - put affected employees onto Tax Directive. •Go to the 'Edit' then 'Employee Master' menu options •Select the first employee to be processed •Go to the 'Tax' Tab •Tick the 'Tax Directive' checkbox, notice two fields display, a '%' and an 'Amount' field. •Enter either the percentage or the amount of the ZIMRA tax directive as an amount including Aids Levy.
•When complete press 'OK' to save the changes to the employee master record
Follow the above procedure through for all the employees receiving the retrenchment package.
Step 3 - Setup a Transaction Code to use for the retrenchment. To do this: •Go to the 'Edit' then 'Transaction Codes' menu options •Look to see whether there is a Retrenchment Code already setup, if not then •Create a Retrenchment Code by pressing 'Insert' •Select the 'Earnings - Retrenchment' earning category •Enter a suitable 'Description' for the retrenchment payment. The Transaction Code description will come through onto the employee's payslip. •Select 'Manual Edit' to enable the input of the directive amount for each employee. •Press 'OK' to save changes
Step 4 - Process the Retrenchment to each employee In this manual we are using Payslip Input as the method of processing. Use Bulk Input if the amounts are the same for groups of employees, or Speed Input as alternative methods.
To process the retrenchment using Payslip Input: •Go to the 'Process' then 'Payslip Input' menu options •Select the employee to receive a retrenchment amount •The 'Payslip Input' screen displays, •Click 'Insert' •Select the Retrenchment Transaction Code •Enter the retrenchment amount in the 'Employee Amount' field •Click 'OK' to process the amount •Repeat this process for all the employees receiving a retrenchment amount.
Step 5 - Manually re-process the PAYE amounts for those on retrenchment by adding the PAYE on the Retenchment with the amount of PAYE that was payable on normal earnings, calculated in Step 1 above. |
Retrenchment without a tax directive
Check the latest Finance Act giving retrenchment tax rates. In the past a portion of the retrenchment is exempt and is calculated as follows:
The Finance (No.3) Amendment Act, 2009 at Section 17 set the retrenchment parameters as:
The greater of $5 000.00 or 1/3 of the retrenchment package, up to a maximum of $45 000.00, is exempt (i.e. it is tax free) where: A Factor = 1/3 B $5 000 C $ 45 000
Example Mr X has been retrenched after working for his company for some time. His company pays him $8 000.00 in a retrenchment scheme approved by the Ministry of Labour.
Answer 1/3 of the retrenchment package is $2 667.00. Comparing 1/3 of the package (i.e. $2667.00 and $5 000.00) you will notice that the greater of the two is $5 000.00. Therefore, $5 000.00 from a retrenchment package of $8 000.00 is exempt from Income Tax. The tax free amount is higher amount of the retrenchment amount (A) divided by 3 and a specified amount (B) as long the result does not exceed a specified amount (C) The greater of $5 000.00 or 1/3 of the retrenchment package, up to a maximum of $45 000.00, is exempt (i.e. it is tax free) where: Example Answer 1/3 of the retrenchment package is $2 667.00. Comparing 1/3 of the package (i.e. $2667.00 and $5 000.00) you will notice that the greater of the two is $5 000.00. Therefore, $5 000.00 from a retrenchment package of $8 000.00 is exempt from Income Tax. To setup the retrenchment tax parameters •Go tothe 'Setup', 'Tax' and 'Existing' menu options •Enter the retrenchment parameters in the bottom right hand corner of the screen
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