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Ruling
Subject: Early retirement scheme payment
Question
Does the proposed payment satisfy the early retirement scheme payment conditions under section 83-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
This ruling applies for the following periods:
The year ending 30 June 2015.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
An employer (the Employer) has recently restructured and rationalised its organisation to find efficiencies and savings. Staff numbers have been identified as an area where some reductions can be made.
The Employer is not considering forced redundancies but has implemented a Program to enable people to retire early or change career path.
Under the Program, all packages will be offered at the sole discretion of the CEO.
The Employer is offering a severance payment of two weeks per year of service capped at 26 weeks. This is more than the amount that would have been paid if these employees voluntarily resigned or retired in other circumstances.
Several employees, some of which are aged between 60 and 65 years, have expressed interest in the Program.
The Employer is seeking to have the severance payments made to the employees aged between 60 and 65 years classified as early retirement scheme payments because these employees are not likely to seek further employment in the future.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 83-180
Income Tax Assessment Act 1997 Subsection 83-180(1)
Income Tax Assessment Act 1997 Subsection 83-180(2)
Income Tax Assessment Act 1997 Subsection 83-180(3)
Income Tax Assessment Act 1997 Subsection 83-180(3)(a)
Income Tax Assessment Act 1997 Subsection 83-180(3)(b)
Income Tax Assessment Act 1997 Subsection 83-180(3)(c)
Income Tax Assessment Act 1997 Subsection 83-180(4)
Reasons for decision
Summary
Severance payments proposed by the Employer are not considered to be early retirement scheme payments for the purposes of section 83-180 of the ITAA 1997 because the relevant employees are not retiring under an early retirement scheme as defined in subsections 83-183(3) or (4) of the ITAA 1997.
Detailed reasoning
Subsection 83-180(1) of the ITAA 1997 defines an early retirement scheme payment as:
An early retirement scheme payment is so much of a 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 the retirement.
Where a scheme satisfies all of the requirements of subsection 83-180(3) of the ITAA 1997, that scheme will be an early retirement scheme.
Subsection 83-180(3) of the ITAA 1997 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.
In accordance with subsection 83-180(4) of the ITAA 1997, a scheme is also an early retirement scheme if:
(a) paragraph (3)(a) or (b) does not apply; and
(b) the Commissioner is satisfied that special circumstances exist in relation to the scheme that make it reasonable to approve the scheme; 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.
In the present case, the proposed payment is to be made from a Program coordinated by the Employer. Whilst the intention of the Program is to rationalise and re-organise the Employer's operations, the Program has not been approved by the Commissioner by written instrument as an early retirement scheme. Therefore, the Program is not an early retirement scheme in accordance with subsections 83-180(3) or (4) of the ITAA 1997.
As the severance payment intended to be made to the employees aged between 60 and 65 years is not as a result of an approved early retirement scheme, the payment cannot be classified as an early retirement scheme payment in accordance with subsection 83--180(1) of the ITAA 1997.