Class Ruling

CR 2007/106

Income tax: early retirement scheme - University of Western Sydney

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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:

•

section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997); and

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section 83-180 of the ITAA 1997.

All subsequent legislative references are to the ITAA 1997 unless stated otherwise.

Class of entities

4. The class of entities to which this Ruling applies is those employees of the University of Western Sydney who receive a payment under the scheme described in paragraphs 15 to 32 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 32 of this Ruling.

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

•

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this Ruling may be withdrawn or modified.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 early retirement scheme.

Date of effect

10. This Ruling applies from 14 November 2007 to 14 November 2008. However, the Ruling continues to apply after this date to all entities within the specified class who entered into the specified scheme during the term of the Ruling.

11. 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:

•

it is not later withdrawn by notice in the Gazette; or

•

the relevant provisions are not amended.

12. If this 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)).

13. If this Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the 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.

14. 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).

Scheme

15. The following description of the scheme is based on information provided by the applicant.

16. The University of Western Sydney (UWS) is seeking approval to implement an early retirement scheme.

17. The Department of Education, Science and Training recently introduced the Research Quality Framework (RQF). The RQF measures the quality and impact of a university's research output which will be used to determine the allocation of research funding.

18. Preparation for the RQF indicates that the UWS has a relatively low level of research, a result of having too few active research staff. The UWS will be offering retirement under the scheme to staff that are not researching at a high level and will replace them with research productive staff.

19. As older academic staff are less likely to commence undertaking high levels of research, early retirement will be offered to older staff to enable recruitment of staff who are performing higher levels of research.

20. The class of employees who will be offered the scheme will be all permanent academic staff of the UWS who will be aged at least 54 at 31 December 2007 but less than 65 at the proposed date of retirement, excluding:

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academic staff who are highly research productive; and

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all Deputy Vice-Chancellors, Pro Vice-Chancellors, Executive Deans, Heads of School, Directors of Research Centres and Heads of Research Concentrations/Groups.

21. Highly research productive is defined as:

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a minimum of $100,000 of research income generation across the 2004-2006 triennium; or

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a minimum of five peer reviewed publications across the 2004-2006 triennium.

22. Early retirement will be offered to eligible employees within one week of the scheme being approved by the Tax Office. Employees will have six weeks to accept an offer under the scheme. Employees who accept an offer under the scheme will retire no later than three months after offers are made under the scheme.

23. If more employees accept an offer than the UWS will allow to retire under the scheme, approval will be given to those employees who have been at the top of their academic level for the longest period of paid service.

24. If the scheme is not fully subscribed then UWS may make further offers of early retirement under the scheme to eligible employees, however all employees participating in the scheme will retire within 12 months of its implementation.

25. Employees participating in the scheme will receive a payment of two weeks salary for each completed year of service, up to a maximum of 52 weeks. Employees that retire under the scheme before 31 January 2008 will receive a bonus payment of $10,000.

Payments made under the Scheme

26. For a payment made under the above mentioned scheme to qualify as an approved early retirement scheme payment, the conditions set out in paragraphs 27 to 32 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.

27. The payment must be received by an employee because of their retirement under an early retirement scheme. The early retirement scheme payment will be so much of the payment that exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the retirement.

28. The payment must not be a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

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

30. 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 taxpayer had they been dealing at arm's length.

31. The employee must retire before the earlier of:

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age 65; or

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the date on which the taxpayer's employment would have terminated under the terms of employment because of the taxpayer attaining a certain age or completing a certain period of service (as the case may be).

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

Ruling

33. The early retirement scheme to be implemented by the University of Western Sydney is an early retirement scheme for the purposes of section 83-180.

34. Accordingly, so much of the payment received by an employee as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the retirement will be an early retirement scheme payment in relation to the taxpayer.

35. In addition, so much of the payment as falls within the threshold calculated in accordance with section 83-170 is not assessable income and is not exempt income.

Commissioner of Taxation
14 November 2007

Appendix 1 - Explanation

36. 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 the former section 27E of the Income Tax Assessment Act 1936, which section 83-180 replaced.

37. Where a scheme satisfies the requirements of subsection 83-180(3) that scheme will be an 'early retirement scheme'.

38. Subsection 83-180(3) states that:

A scheme is an early retirement scheme if:

(a)

all the employer's employees who comprise such a class of employees as the Commissioner approves may participate in the scheme; and

(b)

the employer's purpose in implementing the scheme is to rationalise or re-organise the employer's operations by making any change to the employer's operations, or the nature of the work force, that the Commissioner approves; and

(c)

before the scheme is implemented, the Commissioner, by written instrument, approves the scheme as an early retirement scheme for the purposes of this section.

These three conditions are discussed below.

All employees within a class approved by the Commissioner may participate in the scheme

39. In order to satisfy the first condition, the scheme must be offered to all employees in a class approved by the Commissioner under paragraph 83-180(3)(a).

40. The class of employees to whom early retirement will be offered is set out at paragraph 20 of this Ruling.

41. The Commissioner considers that this is an appropriate class of employees for the scheme to be offered to. In approving this class of employees the Commissioner has considered the nature of the rationalisation or re-organisation of the operations of the employer. These employees meet the requirements of an approved class of employees for the purpose of paragraph 83-180(3)(a).

The employer's purpose in implementing the scheme is to rationalise or re-organise the employer's operations in a way approved by the Commissioner

42. The proposed scheme must be implemented by the employer with a view to rationalising or re-organising the operations of the employer as described in paragraph 83-180(3)(b).

43. Paragraphs 17 to 19 of this Ruling describe the nature of the rationalisation or re-organisation of the employer'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 purpose of paragraph 83-180(3)(b).

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

44. The scheme is proposed to operate from 14 November 2007 to 14 November 2008. Approval was granted prior to implementation therefore the third condition is satisfied.

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

Other relevant information

46. Under subsection 83-180(1), so much of the payment received by an employee because the employee retires under an early retirement scheme as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of termination is an early retirement scheme payment.

47. It should be noted that, in order for a payment to qualify as an early retirement scheme payment, it must also satisfy the following requirements (as set out in subsections 83-180(2), 83-180(5) and 83-180(6)):

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the retirement occurred before the employee turned age 65 or such earlier date on which the employee's employment would have terminated under the terms of employment because of the employee attaining a certain age or completing a particular period of service (as the case may be);

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if 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 the amount that could reasonably be expected to be made if the retirement was made at arm's length;

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at the time of retirement there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the retirement;

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

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it is not a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

48. The term 'arrangement' is defined in subsection 995-1(1) as meaning 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings'.

49. An early retirement scheme payment made on or after 1 July 2007 that falls within the specified limit is referred to as the 'tax-free' amount and will not be assessable income and will not be exempt income.

50. For the 2007-08 income year, this amount is limited to $7,020 (base amount) plus $3,511 (service amount) for each whole year of completed employment service to which the 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 base amount and service amount will be indexed to rise in each subsequent year in line with increases in average weekly ordinary time earnings.

51. The total of the amount received on the termination of employment calculated in accordance with paragraph 25 of this Ruling may qualify as an early retirement scheme payment.

52. The total of the payments in the previous paragraph will be measured against the limit calculated in accordance with paragraph 50 of this Ruling to determine the 'tax-free' amount of the early retirement scheme payment.

53. The 'tax-free' amount will:

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not be an employment termination payment; and

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not be able to be rolled-over into a superannuation fund.

54. Any payment in excess of this limit will be an employment termination payment and 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.

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

Appendix 2 - Detailed contents list

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

Not previously issued as a draft

References

ATO references:
NO 2007/19207

Related Rulings/Determinations:

TR 94/12

Subject References:
early retirement scheme payment
employment termination payment

Legislative References:
ITAA 1936 27E
ITAA 1997 82-135
ITAA 1997 82-135(e)
ITAA 1997 83-170
ITAA 1997 83-180
ITAA 1997 83-180(1)
ITAA 1997 83-180(2)
ITAA 1997 83-180(3)
ITAA 1997 83-180(3)(a)
ITAA 1997 83-180(3)(b)
ITAA 1997 83-180(3)(c)
ITAA 1997 83-180(5)
ITAA 1997 83-180(6)
ITAA 1997 995-1(1)
TAA 1953
TAA 1953 Sch 1 357-75(1)
Copyright Act 1968