Class Ruling

CR 2001/9

Income tax: Approved Early Retirement Scheme - Pasminco Ltd & Subsidiaries

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FOI status:

may be releasedFOI number: I 1024654

Preamble

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law' identified below applies to the defined class of persons, who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax law dealt with in this Ruling is section 27E of the Income Tax Assessment Act 1936.

Class of persons

3. The class of persons to whom this Ruling applies is 'all personnel in the divisions of Pasminco Ltd and its subsidiaries, earmarked for rationalisation' as listed in paragraph 23 of this Ruling and receive a payment under the arrangement described below in paragraphs 10 to 30.

Qualifications

4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

5. The class of persons defined in this Ruling may rely on its contents provided the arrangement described below at paragraphs 10 to 37 is carried out in accordance with the details of the arrangement provided in this Ruling.

6. If the arrangement described in this Ruling is materially different from the arrangement that is actually carried out:

(a)

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

(b)

this Ruling may be withdrawn or modified.

7. A Class Ruling may only be reproduced in its entirety. Extracts may not be reproduced. Because each Class Ruling is subject to copyright, except for any use permitted under the Copyright Act 1968 no Class Ruling may be reproduced by any process without prior written permission from the Commonwealth. Requests and enquiries concerning reproduction and rights should be sent to:

Date of effect

8. This Ruling applies from 9 April 2001. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Withdrawal

9. This Ruling is withdrawn from 9 April 2002. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the Ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

The scheme

10. The following details of the arrangement have been obtained from Pasminco Limited by correspondence dated 14 March 2001.

11. Pasminco Limited and its subsidiary companies request that the proposed Pasminco scheme is an approved early retirement scheme in accordance with section 27E of the Income Tax Assessment Act 1936 (the Act).

12. The Scheme is to be offered to operational personnel such as mining, production and maintenance personnel located at mines and smelters.

13. It has been decided that Pasminco will implement a Business Improvement Plan.

14. The Business Improvement Plan includes many initiatives, some of which are:

-

reducing costs through reduced activity;

-

enhancing production and reliability of performance;

-

lowering ongoing costs;

-

reducing exploration and information technology spending; and

-

staff reductions.

15. It is proposed that the staff reductions would be achieved by the offering of a voluntary redundancy scheme to various levels of staff under an Early Retirement Scheme for which approval is sought for concessional tax treatment under section 27E of the Act.

16. It is the intention of the Group in seeking approval of the Pasminco scheme to provide a mechanism by which to achieve the required reductions in employee numbers while attempting to minimise the forced displacement of employees.

17. To this end, the Group prefers to achieve the necessary reductions in employee numbers by accommodating those people who wish to take voluntary redundancy, provided this is consistent with the operational requirements of the group and does not adversely affect its operational capabilities.

18. Accordingly a process of inviting applications from operational and maintenance staff is proposed. It is proposed that the scheme remains open for a period of 12 months from the date of approval to allow sufficient time to reorganise and rationalise the existing structure.

19. The package does contain a limited right of veto to ensure that it does not result in the retrenchment of all employees in key areas to the detriment of the Group's overall business.

Relevant redundancy policy, awards/agreements

20. The agreed redundancy payment is calculated in accordance with the following:

•

Pasminco Staff Redundancy Policy - for all non award staff across all sites and all entities listed as well as those employees covered by the Australian Workplace Agreement at Century Mine, Qld;

•

Pasminco Broken Hill Mine Agreement - for award staff located at the Pasminco Broken Hill Mine. These staff are employees of Pasminco Broken Hill Mine Pty Ltd;

•

Pasminco Elura Mine Employees Consent Award - for award staff located at the Pasminco Elura Mine. These staff are employees of Pasminco Australia Limited;

•

Pasminco Rosebery (Mining) Agreement - for award staff located at the Pasminco Roseberry Mine. These staff are employees of Pasminco Australia Limited;

•

Pasminco Hobart Smelter Agreement - for award staff located at the Pasminco Hobart Smelter. These staff are employees of Pasminco Australia Limited;

•

Pasminco Cockle Creek Smelter Enterprise Agreement - for award staff located at the Pasminco Cockle Creek Smelter. These staff are employees of Pasminco Cockle Creek Smelter Pty Limited;

•

Pasminco Port Pirie Smelter Enterprise Agreement & BHAS Employees Transitional Award - for award staff located at the Pasminco Port Pirie Smelter. These staff are employees of Pasminco Port Pirie Smelter Pty Limited.

Termination benefits

21. For employees who accept "early retirement", the following termination payments will be made:

(a)

Accrued annual leave;

(b)

Long Service leave (provided greater than 5 years of service);

(c)

Superannuation;

(d)

Ex-gratia payment calculated in accordance with the appropriate awards and/or trust deeds.

22. For the purposes of subsection 27E(5), no part of the payment will be made "in lieu of superannuation benefits to which the taxpayer may have become entitled at the termination time or later time".

Entities in respect of which this Application is made

23. Entities in respect of which this Application is made:

Pasminco Australia Limited

Pasminco Broken Hill Mine Pty Limited

Pasminco Cockle Creek Smelter Pty Limited

Pasminco Port Pirie Smelter Pty Limited

Pasminco Century Mine Pty Limited

Company retrenchment payment calculations

Pasminco Limited Staff Redundancy Policy, and Australian Workplace Agreement staff at Century Mine, Qld.

24. Pasminco Redundancy Payments (for employees not covered by industrial agreements)

Notice period

25. Unless the employment contract specifies a longer notice period:

Minimum payments (inclusive of notice or pay in lieu of notice)

26. The following minimums apply to the sum of the redundancy formula and notice period.

Superannuation and accrued leave entitlements are in addition to redundancy and notice entitlements.

Accrued Long Service Leave will be paid out on a pro-rata basis for employees with 5 or more year's continuous service.

Pasminco Cockle Creek Smelter Enterprise Agreement, and Pasminco Port Pirie Smelter Enterprise Agreement

27. Pasminco Cockle Creek Smelter Enterprise Agreement, and Pasminco Port Pirie Smelter Enterprise Agreement:

Pasminco Broken Hill Mine Agreement

28. Payments will be either: $12,320 (representing 13 weeks notice) plus an additional amount;

•

ranging from $3,195 for employees with one completed year's service to $28,763 for employees with twenty five or more years of completed service, or

•

a proposed Enterprise Bargaining Agreement currently being negotiated, which if accepted will pay 2 weeks per year of service to a maximum of 52 weeks,

•

or an amount/formula arbitrated by the New South Wales Industrial Commission.

Pasminco Elura Mine Employees Consent Award

29. Pasminco Elura Mine Employees Consent Award:

Plus an additional one week's salary for each additional year of service up to a maximum of 15 weeks payment.

Pasminco Rosebery (Mining) Agreement and Pasminco Hobart Smelter Agreement

30. Pasminco Rosebery (Mining) Agreement and Pasminco Hobart Smelter Agreement:

Payments made under the scheme

31. The following describes the requirements of the type of payments made under the above mentioned scheme that are covered by this Ruling. In order for a payment to qualify as an approved early retirement scheme payment, it must satisfy the following requirements (as set out in subsections 27E(4) and (5) of the Act).

32. The payment must be an eligible termination payment made in relation to the employee in consequence of the termination of employment in accordance with an approved early retirement scheme.

33. The payment is not made from an eligible superannuation fund.

34. The payment must not be made in lieu of superannuation benefits.

35. The employee terminated his or her employment before the earlier of :

•

age 65; or

•

the date on which his or her employment would have necessarily terminated under the terms of employment because of the taxpayer attaining a certain age or completing a certain period of service.

36. If the Commissioner is satisfied that the employer and the taxpayer were not dealing with each other at arm's length in relation to the termination of employment of the taxpayer - the amount of the eligible termination payment is not greater than that could reasonably be expected to have been made if the employer and the taxpayer had been dealing with each other at arm's length in relation to the termination of the employment.

37. At the termination date, there was no agreement between the taxpayer and the employer, or the employer and another person, to re-employ the taxpayer after the date of termination.

Ruling

38. The early Retirement Scheme offered by Pasminco Ltd and Subsidiaries is an approved early retirement scheme for the purposes of section 27E of the Income Tax Assessment Act 1936. Accordingly, so much of the eligible termination payment as exceeds the amount of an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer if the termination of employment had occurred at the termination time, otherwise than in accordance with the approved early retirement scheme, is an approved early retirement scheme payment in relation to the taxpayer.

Explanations

39. Where a scheme satisfies the requirements of section 27E of the Income Tax Assessment Act 1936 (the Act), that scheme will be an 'approved early retirement scheme.'

40. The Commissioner of Taxation ('the Commissioner') has issued Taxation Ruling TR 94/12 titled: 'Income tax: approved early retirement scheme and bona fide redundancy payments' which sets out guidelines on the application of section 27E.

41. Paragraph 14 of Taxation Ruling TR 94/12 states that:

'Three conditions need to be satisfied for a scheme to qualify as an approved early retirement scheme. Those conditions are:

•

the scheme must be offered to all employees within a class identified by the employer (paragraph 27E(1)(a));

•

the scheme must be entered into with a view to rationalising or re-organising the operations of the employer with an identified purpose in mind (paragraph 27E(1)(b)); and

•

the scheme must be approved by the Commissioner prior to its implementation (paragraph 27E(1)(c)).'

1. The scheme must be offered to all employees within a class identified by the employer.

42. In order to satisfy the first condition, the scheme must be offered to all employees within one of the categories specified in subparagraphs 27E(1)(a)(i) to (v).

43. Participation in the scheme is open to:

'all personnel in the divisions earmarked for rationalisation'.

44. The class of employees to whom the scheme is proposed to be offered does not come within any of subparagraphs 27E(1)(a)(i) to (iv). So it must be considered under subparagraph 27E(1)(a)(v), namely, all employees of the employer who constitute a class of employees approved by the Commissioner for the purposes of this paragraph.

45. In approving this special class of employees, the Commissioner has taken into account the nature and purpose of the scheme. The sole eligibility criteria for participation in this scheme is that the participants are employees of the company, working in these specific divisions in specific operational and maintenance roles.

46. This group falls within the acceptable categories and is an approved class of employees for the purpose of subparagraph 27E(1)(a)(v).

47. The proposed scheme does not extend to employees dismissed for personal disciplinary or performance reasons.

48. It is noted that the package does contain a limited right of veto to ensure that it does not result in the retrenchment of all employees in key areas to the detriment of the Group's overall business. The limitation of the scheme in this way is acceptable to the Commissioner.

2. The scheme must be entered into with a view to rationalising or re-organising the operations of the employer with an identified purpose in mind

49. The proposed scheme must be implemented with a view to rationalise or re-organise the operations of the employer by means of one or more of the objectives set out in subparagraphs 27E(1)(b)(i) to (vi).

50. The purpose of the scheme is described at paragraph 15 of this ruling.

51. The proposed scheme meets the requirements in subparagraphs 27E(1)(b)(iii) and (iv); accordingly the second condition for approval has been met.

3. The scheme must be approved by the Commissioner prior to its implementation

52. The applicant has requested that the scheme remain open for 12 months with the implementation date of the scheme to be the date the scheme is approved.

53. The approval date of the scheme will be 9 April 2001 and will be implemented by the company immediately after receiving written approval of the scheme. The third condition is therefore satisfied.

54. The Scheme will be in operation for 12 months, which is within the period recommended in paragraph 28 of Taxation Ruling TR 94/12.

Other relevant information

55. Under section 27E, so much of the payment received by a taxpayer under the approved early retirement scheme, that exceeds the amount that would ordinarily have been received on voluntary retirement or resignation is an approved early retirement scheme payment.

56. It should be noted that, in order for a payment to qualify as an approved early retirement scheme payment, it must also satisfy the following requirements (as set out in subsection 27E(4) of the Act):

•

the payment must be an eligible termination payment made in relation to the taxpayer in consequence of the taxpayer's employment being terminated under an approved early retirement scheme;

•

the payment must not be from a superannuation fund;

•

the date of termination was before age 65 or such earlier date on which the taxpayer's employment would necessarily have had to terminate under the terms of employment because of the taxpayer attaining a certain age or completing a certain period of service, whichever occurs first; and

•

there was no agreement at the date of termination between the taxpayer and the employer, or the employer and another person to re-employ the taxpayer after the date of termination.

[The term 'agreement' is defined in subsection 27A(1) as meaning 'any agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.']

57. An approved early retirement scheme payment made on or after 1 July 1994 that falls within the specified limits will be exempt from income tax, and called the "tax-free amount."

58. For the year ending 30 June 2001, the tax-free amount is limited to $5 062 plus $2 531 for each whole year of completed employment service to which the approved early retirement scheme payment relates. Please note that 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation. The $5 062 and $2 531 limits will be indexed to rise in each subsequent year in line with increases in average weekly ordinary time earnings.

59. Furthermore, the tax-free amount will:

•

not be an eligible termination payment (ETP);

•

not be able to be rolled-over;

•

not include any amount from a superannuation fund or paid in lieu of a superannuation benefit; and

•

not count towards the recipient's Reasonable Benefit Limit.

60. Any payment in excess of this limit will be an ordinary ETP and split up into the pre-July 83 and post-June 83 (untaxed element) components. This ETP can be rolled over.

61. It should be noted that the taxable amount of an approved early retirement scheme payment that is over the tax-free amount may be taxed under the provisions of the Superannuation Surcharge legislation, whether it is taken in cash or rolled-over.

62. Payments made by any of the entities listed in paragraph 23:

•

under the Early Retirement Scheme described in paragraphs 10 to 19;

•

calculated in accordance with paragraphs 24 to 30; and

•

provided to the employees of the entities listed in paragraph 23,

qualify as approved early retirement scheme payments and are exempt from tax within the limits described above.

63. A copy of this Ruling must be given to all employees eligible to participate in the approved early retirement scheme.

Detailed contents list

64. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
26 April 2001

Not previously released in draft form

References

ATO references:
NO T2001/6507

Related Rulings/Determinations:

CR 2001/1
TR 92/1
TR 92/20
TR 97/16
TR 94/12
TR 94/12E

Subject References:
Approved Early Retirement Scheme Payments
Eligible Termination Payments

Legislative References:
ITAA 1936 27A(1)
ITAA 1936 27E
ITAA 1936 27E(1)(a)(i)
ITAA 1936 27E(1)(a)(ii)
ITAA 1936 27E(1)(a)(iii)
ITAA 1936 27E(1)(a)(iv)
ITAA 1936 27E(1)(a)(v)
ITAA 1936 27E(1)(a)
ITAA 1936 27E(1)(b)
ITAA 1936 27E(1)(c)
ITAA 1936 27E(1)(a)(v)
ITAA 1936 27E(1)(b)(i)
ITAA 1936 27E(1)(b)(ii)
ITAA 1936 27E(1)(b)(iii)
ITAA 1936 27E(1)(b)(iv)
ITAA 1936 27E(1)(b)(v)
ITAA 1936 27E(1)(b)(vi)
ITAA 1936 27E(4)
ITAA 1936 27E(5)