Class Ruling

CR 2006/97

Income tax: Approved Early Retirement Scheme: Diocese of Townsville 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 payment 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.

All legislative references in this Ruling are to the ITAA 1936 unless otherwise indicated.

Class of entities

4. The class of entities to which this Ruling applies is those employees of the Diocese of Townsville Catholic Education Office (the Office) who receive a payment under the scheme described in paragraphs 15 to 31 of this Ruling.

Qualifications

5. The Commissioner makes this Ruling 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 31 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

•

this Ruling may be withdrawn or modified.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 from 27 September 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).

Note: The Addendum to this Ruling that issued on 4 July 2007 applies on and from 1 July 2007.

Withdrawal

14. This Ruling will be withdrawn and ceases to have effect after 27 December 2007. 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 a scheme entered into prior to the 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 subject to 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 representatives from the Office; and

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records of telephone conversations with representatives of the Office.

16. The Office is seeking approval for an early retirement scheme (ERS).

17. The purpose of the ERS is to employ graduates to increase the number of staff trained in the latest pedagogical methodologies including information communication technologies.

18. The class of employees to whom the scheme will be open is full-time teachers who:

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are aged between 55 and 65;

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have been paid for at least two years at the highest pay level Band 3 Step 4 of the Teachers Award - Non-Governmental Schools;

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have been in full-time continuous employment by Townsville Catholic Education Office for at least 5 years; and

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have at least ten years full-time teaching experience with initial teaching qualifications that are at least 10 years old.

19. The offer for the class of employees to participate in the ERS will be open for an on-going period until the Office has exhausted the payout funds of $400,000 in a school year. Funds not spent in the first year will be carried forward to use in the second year.

20. Employees will have a limited period of time (to be determined by the Office) in which to accept an offer of an ERS following approval of their application by the Director of the Office.

21. All employees within the class who retire under the ERS will terminate employment and receive payments on a date requested by the employee or changed following negotiation with the Director of the Office as the termination date, but no later than 27 December 2007.

22. Employees who terminate under this scheme will not be eligible to apply for any positions, including casual positions for 12 months from the retirement date.

23. If the available funds limit is reached in a particular month, the oldest applicants will be accepted first to participate in the ERS.

24. The payments to be made under the scheme are as follows:

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a tax-free payment of $6,783 as a lump sum; and

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$1,300 for each completed year of full-time continuous service.

The maximum payout available is $32,783.

Payments made under the scheme

25. For a payment made under the above mentioned scheme to qualify as an early retirement scheme payment, the conditions of paragraphs 26 to 31 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.

26. 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.

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

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

29. 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 have terminated under the terms of the employment because of the taxpayer attaining a certain age or completing a certain period of service.

30. Where the employer and employee are not dealing with each other at arms' 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.

31. 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

32. The early retirement scheme offered by the Diocese of Townsville Catholic Education Office is an approved early retirement scheme for the purposes of section 27E.

33. 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 that in accordance with the approved early retirement scheme, is an approved early retirement scheme payment in relation to the taxpayer.

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

Commissioner of Taxation
27 September 2006

Appendix 1 - Explanation

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

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

37. 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)).

These three conditions are discussed below.

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

38. 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).

39. The scheme will be open to full-time teachers who:

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are aged between 55 and 65;

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have been paid for at least two years at the highest pay level Band 3 Step 4 of the Teachers Award - Non-Governmental Schools;

•

have been in full-time continuous employment by Townsville Catholic Education Office for at least 5 years; and

•

have at least ten years full-time teaching experience with initial teaching qualifications that are at least 10 years old.

40. This class of employees does not come within any of subparagraphs 27E(1)(a)(i) to (iv), therefore 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. 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).

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

41. 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).

42. Paragraph 17 of this Ruling describes the nature of the rationalisation or re-organisation of the Office's operations. In approving the scheme, the Commissioner has had regard to the changes in the operations and nature of the workforce 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).

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

43. The scheme is proposed to operate for a period from 27 September 2006 to 27 December 2007. Approval was granted prior to implementation therefore the third condition is satisfied.

44. The scheme will be in operation for approximately 15 months. Although this is outside the period generally recommended in TR 94/12, the Commissioner considers this period of operation acceptable in view of the Office's rationalisation and reorganisation objectives.

Other relevant information

45. 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.

46. 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)):

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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.

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

48. 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'.

49. 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 six months, eight months or even eleven months do not count as a whole year for the purposes of this calculation. The $6,783 and $3,392 limits will be indexed to rise in each subsequent year in line with increases in average weekly ordinary time earnings.

50. The total of the amount received on the termination of employment calculated in accordance with paragraph 24 of this Ruling qualifies as an approved early retirement scheme payment.

51. The total of the payment in the previous paragraph will be measured against the limit calculated in accordance with paragraph 49 of this Ruling to determine the 'tax-free amount'.

52. The tax-free amount will:

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not 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.

53. 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.

Payments made after 30 June 2007

54. For payments made after 30 June 2007 the requirements in section 83-180 of the Income Tax Assessment Act 1997 (ITAA 1997) for a payment to be an early retirement scheme payment remain essentially the same as set out in paragraphs 46 to 53 of this Ruling.

55. For the year ending 30 June 2008, the tax free amount is limited to $7,020 plus $3,511 for each complete year of service.

56. The tax-free amount of the early retirement scheme payment made after 30 June 2007 that falls within the limit specified in section 83-170 of the ITAA 1997 will not be assessable income and will not be exempt income.

57. Any payment in excess of this limit will be an employment termination payment as defined in section 82-130 of the ITAA 1997, and will be split up into tax free and taxable components. The tax free component of an employment termination payment includes the pre July 83 segment of the payment. The tax free component is not assessable income and is not exempt income.

58. Employment termination payments cannot be rolled-over into a superannuation fund.

Appendix 2 - Detailed contents list

59. The following is a detailed contents list for this Ruling:

Not previously issued as a draft

References

ATO references:
NO 2006/17679

Related Rulings/Determinations:

TR 94/12

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

Legislative References:
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)
ITAA 1997 82-130
ITAA 1997 83-170
ITAA 1997 83-180
Copyright Act 1968
TAA 1953
TAA 1953 Sch 1 357-75(1)