Class Ruling

CR 2006/65

Income tax: Approved Early Retirement Scheme - the Diocese of Toowoomba Catholic Education Office

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FOI status:

What this Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

2. This Ruling approves the particular early retirement scheme and acknowledges the availability of tax concessions for entities receiving payments under the scheme. There are many conditions attached to this Ruling and readers should be careful to ensure that these conditions are met before relying on this Ruling.

Relevant provision(s)

3. The relevant provisions dealt with in this Ruling are:

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section 27A of the Income Tax Assessment Act 1936 (ITAA 1936);

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section 27CB of the ITAA 1936; and

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section 27E of the ITAA 1936.

Class of entities

4. The class of entities to which this Ruling applies is employees of the Diocese of Toowoomba Catholic Education Office (the Office) who receive a payment under the scheme described in paragraphs 15 to 34 of this Ruling.

Qualifications

5. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

6. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 15 to 34 of this Ruling.

7. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:

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

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this Ruling may be withdrawn or modified.

8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Attorney General's Department

Robert Garran Offices

National Circuit

Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

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

Date of effect

10. This Ruling applies after 19 July 2006. 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. Furthermore, the Ruling only applies to the extent that:

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it is not later withdrawn by notice in the Gazette; or

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the relevant provisions are not amended.

11. If this Class Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)).

12. If this Class Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Class Ruling is made, the following two conditions are met:

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the income year or other period to which the rulings relate has not begun; and

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the scheme to which the rulings relate has not begun to be carried out.

13. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA).

Withdrawal

14. This Ruling is withdrawn and ceases to have effect after 31 December 2006. The Ruling continues to apply, in respect of the relevant provisions ruled upon, to all entities within the specified class who enter into the specified scheme during the term of the Ruling. Thus, the Ruling continues to apply to those entities, even following its withdrawal, for schemes entered into prior to withdrawal of the Ruling. This is subject to there being no change in the scheme or in the entities' involvement in the scheme.

Scheme

15. The scheme that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the scheme are:

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correspondence from the Diocese of Toowoomba Catholic Education Office (the Office); and

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records of telephone conversations with representatives of the Office.

16. The Office is seeking the Commissioner's approval to implement a voluntary early retirement scheme.

17. The class of employees to be offered the scheme will be all professional officers, teaching and non-teaching staff with a minimum of ten years continuous service in Diocesan owned schools within the Diocese of Toowoomba and who are currently 55 years and under the age of 65 when the payment is made.

18. The purpose of the scheme is to facilitate the reorganisation of the workforce in a manner necessary to enable effective implementation of Information Communications Technologies (ICT) within the curriculum pedagogy and administration.

19. Many teachers have basic skills in ICT but lack the high levels of proficiency required to competently integrate ICT in the classroom. Teachers need to have the pedagogical skills in the use of ICT in the classroom.

20. The administration of the school requires school support staff to have the increased skill in ICT's. Support staff are required to utilise software packages for all student database and financial reporting, submit payroll information electronically and search and access all central policy and resource documents through a web based portal. In addition, support staff are required to identify and problem solve level one ICT support issues.

21. Some teachers who are aged 55 years and under 65 years are finding it difficult to cope with the stress of the classroom, technological developments and the latest pedagogic methodologies.

22. The number of employees the employer will allow to retire under the scheme will be limited.

23. In the case that the number of employees seeking access to the scheme exceeds the number of packages available, the offer will be made to those employees with the longest continuous service.

24. It is proposed the scheme will be implemented after 19 July 2006 to 31 December 2006.

25. Eligible employees will have 30 working days to accept the offer.

26. All employees who accept the offer to retire under the scheme will receive the payment and terminate employment before 31 December 2006. The actual date of termination will be negotiated between the employer and the employee.

27. The payment to be made under the scheme is:

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1.5 weeks payment for every year of service to a maximum of $30,000.

Payments made under the Scheme

28. For a payment made under the above mentioned scheme to qualify as an approved early retirement scheme payment, the conditions set out in paragraphs 29 to 34 of this Ruling must be met. Please note, any payment made under the scheme that does not satisfy these requirements is not covered by this Ruling.

29. The payment must be an eligible termination payment (ETP) made in relation to the employee in consequence of his or her employment being terminated under the approved early retirement scheme.

30. The payment must not be made from an eligible superannuation fund.

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

32. The employee must terminate his or her employment before the earlier of:

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age 65; or

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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.

33. Where the employee and the employer are not dealing with each other at arm's length (for example, because they are related in some way), the payment does not exceed what would have been paid to the employee had they been dealing at arm's length.

34. At the termination time, there is no agreement in force between the employee and the employer or the employer and another person, to employ the employee after the date of termination.

Ruling

35. The early retirement scheme offered by the Office is an approved early retirement scheme for the purposes of section 27E of the ITAA 1936.

36. Accordingly, so much of the ETP as exceeds the amount of an ETP 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.

37. In addition, so much of the approved early retirement scheme payment as falls within the threshold calculated in accordance with subsection 27A(19) of the ITAA 1936 is non-assessable and is ignored in working out whether a capital gain has been made via the operation of section 27CB of the ITAA 1936.

Commissioner of Taxation
19 July 2006

Appendix 1 - Explanation

38. Where a scheme satisfies the requirements of section 27E of the ITAA 1936 that scheme will be an 'approved early retirement scheme'.

39. The Commissioner has issued Taxation Ruling TR 94/12 Income tax: approved early retirement scheme and bona fide redundancy payments, which sets out guidelines on the application of section 27E of the ITAA 1936.

40. Paragraph 14 of TR 94/12 states that:

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

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

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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

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

These three conditions are discussed in paragraphs 41 to 48 of this Ruling.

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

41. 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) of the ITAA 1936.

42. The class of employees to whom early retirement will be offered is set out in paragraph 17 of this Ruling.

43. This class of employees does not come within any of subparagraphs 27E(1)(a)(i) to (iv) of the ITAA 1936, therefore it must be considered under subparagraph 27E(1)(a)(v) of the ITAA 1936, namely, all employees of the employer who constitute a class of employees approved by the Commissioner for the purposes of this paragraph. In approving this class of employees the Commissioner has considered the nature of the rationalisation or re-organisation of the operations of the employer. It is therefore considered that these employees meet the requirements of an approved class of employees for the purposes of subparagraph 27E(1)(a)(v) of the ITAA 1936.

44. It is noted, however, that the Office retains a limited right of veto to be applied as set out in paragraphs 22 and 23 of this Ruling. The limitation of the scheme in this way is acceptable to the Commissioner.

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

45. The proposed scheme must be implemented by the employer 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) of the ITAA 1936.

46. Paragraphs 18 to 21 of this Ruling describe the nature of the rationalisation or re-organising the employer's operations. In approving the objectives of the scheme, although the nature of the rationalisation or re-organisation of the employer's operations does not fit within one of the specific objectives identified in subparagraphs 27E(1)(b)(i) to (v) of the ITAA 1936, the Commissioner has had regard to the fact that the re-organisation is being implemented with a view to a restructuring of the work force or operations of the employer. It is therefore considered that the scheme is to be implemented by the employer with a view to rationalising or re-organising the operations of the employer for the purposes of subparagraph 27E(1)(b)(vi) of the ITAA 1936. Accordingly, the second condition for approval has been met.

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

47. The scheme is proposed to operate for a period after 19 July 2006 to 31 December 2006. Approval was granted prior to implementation therefore the third condition in paragraph 27E(1)(c) of the ITAA 1936 is satisfied.

48. The scheme will be in operation for approximately 6 months which is within the period recommended in TR 94/12.

Other relevant information

49. Under section 27E of the ITAA 1936, 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 resignation or retirement is an approved early retirement scheme payment.

50. 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 subsections 27E(4) and (5)) of the ITAA 1936:

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

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the payment must not be from an eligible superannuation fund;

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the payment must not be made in lieu of superannuation benefits;

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if the taxpayer and the employer are not dealing with each other at arm's length (for example, because they are related in some way) the payment does not exceed what would have been paid to the taxpayer had they been dealing at arm's length;

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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

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

51. The term 'agreement' is defined in subsection 27A(1) of the ITAA 1936 as meaning 'any agreement, scheme or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings'.

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

53. For the year ending 30 June 2007, the tax-free amount is limited to $6,783 plus $3,392 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.

54. The total of the amount received on the termination of employment calculated in accordance with paragraph 27 of this Ruling qualifies as an approved early retirement scheme payment.

55. The total of the payments in the previous paragraph will be measured against the limit calculated in accordance with paragraph 53 of this Ruling to determine the 'tax-free amount'.

56. The tax-free amount will:

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not be an ETP;

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not be able to be rolled-over;

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

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not count towards the recipient's reasonable benefit limit.

57. 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.

Appendix 2 - Detailed contents list

58. Below is a detailed contents list for this Ruling:

Not previously issued as a draft

References

ATO references:
NO 2006/11577

Related Rulings/Determinations:

TR 94/12

Subject References:
approved early retirement scheme payments
eligible termination payments
eligible termination components

Legislative References:
TAA 1953
TAA 1953 Sch 1 357-75(1)
ITAA 1936 27A
ITAA 1936 27A(1)
ITAA 1936 27A(19)
ITAA 1936 27CB
ITAA 1936 27E
ITAA 1936 27E(1)(a)
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)(b)
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(1)(c)
ITAA 1936 27E(4)
ITAA 1936 27E(5)
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