Class Ruling

CR 2002/80

Income tax: Approved Early Retirement Scheme - Epixtech Pty Ltd

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FOI status:

may be released

Preamble

What this Class Ruling is about

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

2. Broadly, this Ruling approves the particular early retirement scheme and acknowledges the availability of tax concessions for persons 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.

Tax law(s)

3. The tax laws dealt with in this Ruling are sections 27E and 27CB of the Income Tax Assessment Act 1936 ('ITAA 1936').

Class of persons

4. The class of persons to which this Ruling applies is all employees of the employer who have reached the age of 55 years and who are skilled in the Dynix computer systems who receive a payment under the arrangement described below in paragraphs 12 to 28 of this Ruling.

Qualifications

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

6. The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out is carried out in accordance with the arrangement described below at paragraphs 12 to 21 of this Ruling.

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

(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this Ruling may be withdrawn or modified.

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

Intellectual Property Branch

Department of Communications, Information Technology and the Arts

GPO Box 2154

CANBERRA ACT 2601

or by e-mail: commonwealth.copyright@dcita.gov.au.

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 from 1 November 2002 unless and until it is withdrawn (see paragraph 11 of this Ruling). However, this 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 this Ruling (see paragraphs 21 to 22 of Taxation Ruling TR 92/20). Furthermore this Ruling applies to the extent that the relevant tax laws are not amended.

Withdrawal

11. This Ruling is withdrawn and ceases to have effect after 31 July 2003. 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

12. The arrangement that is the subject of the 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 arrangement are:

•

correspondence from a representative of Epixtech Pty Ltd;

•

email from a representative of Epixtech Pty Ltd.

13. Epixtech Pty Ltd is seeking approval for an early retirement scheme.

14. Some employees of Epixtech Pty Ltd no longer have the skills necessary to operate new products used by the company. The company wishes to replace these employees with new employees who possess the relevant skills to operate the new products.

15. Epixtech Pty Ltd is proposing an early retirement scheme to be offered to all employees over the age of 55 years.

16. Epixtech Pty Ltd retains a limited right of veto so that the operations of the employer will not be adversely affected.

17. The payment under the scheme is as follows:

•

four weeks payment in lieu of notice;

•

two weeks pay for each year of completed service;

•

a lump sum gratuitous payment of up to $10,000 calculated in accordance with the formula provided to the Commissioner.

18. The employees will also receive the following payments but these do not form part of the approved early retirement scheme payment:

•

accrued annual leave; and

•

accrued long service leave, consistent with the Long Service Leave Act 1987 (SA) or the applicable law in the relevant country, State or Territory.

19. Any employee who is receiving income maintenance pursuant to the Workers Rehabilitation and Compensation Act 1986 (SA) at the time of the proposed voluntary entitlement shall not be eligible to receive benefits pursuant to the scheme.

20. No employee shall receive a Benefit payment which exceeds the amount of salary which would have been payable had the employee continued to be employed until the age of 65.

21. Salary for the purposes of calculating the Benefit should be based on gross ordinary time earning for the 12 months immediately prior to voluntary separation and any other allowances or commissions consistent with each individual eligible employee's contract of employment.

Payments made under the Scheme

22. For a payment made under the above mentioned scheme to qualify as an approved early retirement scheme payment, the conditions set out in paragraphs 22 to 28 must be met. Please note that any payment made under the scheme that does not satisfy these requirements is not covered by this Ruling.

23. 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.

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

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

26. The employee must terminate 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.

27. 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.

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

Ruling

29. The early retirement scheme offered by Epixtech Pty Ltd is an approved early retirement scheme for the purposes of section 27E of the ITAA 1936.

30. 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.

31. 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.

Explanations

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

33. 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.

34. Paragraph 14 of 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:

(i)

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

(ii)

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

(iii)

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

35. 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).

36. The class of employees to which the scheme is proposed to be offered is:

•

all employees of Epixtech Pty Ltd who have attained the age of 55 years who are skilled in the Dynix computer systems.

37. This class of employees comes within subparagraphs 27E(1)(a)(ii) and 27E(1)(a)(iii), all employees of the employer who have attained a particular age and have a particular occupational skill. It is therefore considered by the Commissioner that these employees meet the requirements of an approved class of employees for the purposes of subparagraphs 27E(1)(a)(ii) and 27E(1)(a)(iii).

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

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

39. The purpose of this scheme is set out in paragraph 14 of this ruling. The objectives of this scheme appears to be for the purpose of rationalising and re-organising the employer's operations because of change in its processes and systems which carries with it a need for employees with a different skill to operate these new systems and processes. This is in line with subparagraphs 27E(1)(b)(i) and 27E(1)(b)(v). 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 for the purposes of subparagraphs 27E(1)(b)(i) and 27E(1)(b)(v).

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

40. The scheme is to operate from 1 November 2002 to 31 July 2003. Therefore, the Commissioner is satisfied that the employer has satisfied paragraph 27E(1)(c) in applying for a ruling prior to the implementation of the scheme.

41. The scheme will be in operation for approximately nine months which is within the period recommended in paragraph 28 of Taxation Ruling TR 94/12.

Other relevant information

42. 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 resignation or retirement is an approved early retirement scheme payment.

43. 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):

•

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;

•

the payment must not be from an eligible superannuation fund;

•

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

•

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;

•

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.

44. 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.'

45. 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'.

46. For the year ending 30 June 2003, the tax-free amount is limited to $5,623 plus $2,812 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.

47. The following payment qualifies as an approved early retirement scheme payment:

•

the amount received on termination calculated in accordance with paragraph 17 of this Ruling.

48. To determine the 'tax free' amount the total of the payments described in paragraph 47 will be measured against the limit calculated in accordance with paragraph 46 of this Ruling.

49. The tax-free amount will:

•

not be an 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.

50. Any payment in excess of this limit will be an ordinary ETP and split up into the pre-July 1983 and post-June 1983 (untaxed element) components. This ETP can be rolled-over.

51. It should be noted that the amount of an approved early retirement scheme payment that is over the tax-free amount may be subject to the provisions of the superannuation surcharge legislation, whether it is taken in cash or rolled-over.

Detailed contents list

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

Commissioner of Taxation
13 November 2002

References

ATO references:
NO 2002/017869

Related Rulings/Determinations:

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

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

Legislative References:
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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