Income tax: Approved Early Retirement Scheme - Education Queensland

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.

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.

The relevant provisions dealt with in this Ruling are: • section 27A of the Income Tax Assessment Act 1936 (ITAA 1936); • section 27E of the ITAA 1936; • section 27CB of the ITAA 1936; • section 83-170 of the Income Tax Assessment Act 1997 (ITAA 1997); and • section 83-180 of the ITAA 1997. All subsequent legislative references are to the ITAA 1936 unless stated otherwise.

The class of entities to which this Ruling applies is those employees of Education Queensland who receive a payment under the scheme described in paragraphs 15 to 35 of this Ruling.

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

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 35 of this Ruling.

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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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

This Ruling applies from 30 May 2007 to 14 December 2007. 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, subject to there being no change in the scheme or in the entities involved in the scheme.

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 Furthermore, the Ruling only applies to the extent that: • it is not later withdrawn by notice in the Gazette ; or • the relevant provisions are not amended.

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)).

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: • the income year or other period to which the rulings relate has not begun; and • the scheme to which the rulings relate has not begun to be carried out.

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).

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

Education Queensland is seeking approval for an early retirement scheme known as the Career Change Program.

Education Queensland developed Professional Standards for Teachers (PST) as a framework encompassing the contemporary work of teachers. Graduating teachers are now required to meet minimum standards in the PST to be granted registration to teach. Beginning in the 2008 school year existing teachers will also be required to meet minimum standards in the PST for re-registration every five years.

Education Queensland is committed to students gaining the best possible educational outcomes. Education Queensland recognises that some longer serving teachers' skills are not of a standard required to deliver quality teaching and that these teachers may no longer be interested in or motivated to update their skills.

Education Queensland will give all permanent primary teachers with more than ten years teaching experience that do not have contemporary teaching skills the opportunity to participate in the scheme.

The Professional Standards Education Queensland - Queensland Teachers Union Taskforce has agreed for the PST to be used to assist in identifying those teachers that do not meet the minimum standards of contemporary teaching skills. Education Queensland will identify these teachers during term 2 of the 2007 school year.

Teachers that are identified as not meeting the minimum standards will be able to indicate if they are interested in receiving offers of early retirement under the Career Change Program. Teachers that retire under the Career Change Program will be replaced by recent graduates that satisfy the minimum standards for registration.

In term 2 of the 2007 school year Education Queensland will make offers of early retirement to all teachers who indicated they were interested in retiring under the scheme. The number of teachers who can retire under the scheme is limited and if it is oversubscribed the teachers who can retire under the scheme will be those with the longest service.

If the scheme is not fully subscribed in term 2 then Education Queensland may make further offers of early retirement under the Career Change Program to the teachers identified in term 2 as not meeting the minimum standards.

Teachers identified as not meeting the minimum standards who do not retire under the scheme will undergo professional development and training in order to improve their skills.

Teachers who retire under the scheme will receive a lump sum payment of $50,000 (a pro-rata payment applies for part-time teachers).

Teachers who retire under the scheme: • must be able to settle any outstanding workers' compensation claim; • must be committed to taking up a new career; • must undertake not to seek further employment with Education Queensland as a teacher or in a school; and • cannot seek or accept employment in the Queensland Public Service for 12 months.

All teachers who retire under the scheme will receive the lump sum payment and terminate employment by no later than 14 December 2007.

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 35 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.

For a payment made before 1 July 2007 it must be an eligible termination payment (ETP) and for a payment made after 30 June 2007 it must not be a payment mentioned in section 82-135 of the ITAA 1997 (apart from paragraph 82-135(e)).

The payment must be made 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.

Where 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 taxpayer must terminate his or her employment before the earlier of: • age 65; or • the date on which the taxpayer's 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 (whichever occurs first).

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

The early retirement scheme to be implemented by Education Queensland is an approved early retirement scheme for the purposes of section 27E.

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.

In addition, for a payment made before 1 July 2007, 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.

For an early retirement scheme payment that is made after 30 June 2007, so much of the payment as falls within the threshold calculated in accordance with section 83-170 of the ITAA 1997 is not assessable income and is not exempt income.

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

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.

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.

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).

The class of employees to whom early retirement will be offered is set out at paragraph 19 of this Ruling.

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 purpose 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 purpose of subparagraph 27E(1)(a)(v).

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).

Paragraphs 17, 18, 20 and 21 of this Ruling describe the nature of the rationalisation or re-organisation of 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 subparagraph 27E(1)(b)(vi).

The scheme is proposed to operate from 30 May 2007 to 14 December 2007. Approval was granted prior to implementation therefore the third condition is satisfied.

The scheme will be in operation for approximately 7 months which is within the period recommended in TR 94/12.

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.

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)): • 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 employ the taxpayer after the date of termination.

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'.

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'.

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. The $6,783 plus $3,392 limits will be indexed to rise in each subsequent year in line with increases in average weekly ordinary time earnings.

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

The total of the payment in the previous paragraph will be measured against the limit calculated in accordance with paragraph 54 of this Ruling to determine the 'tax-free amount'.

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.

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.

For payments made after 30 June 2007 the requirements in section 83-180 of the ITAA 1997 for a payment to be an early retirement scheme payment remain essentially the same as set out in paragraphs 52 to 59 of this Ruling.

The tax free amount of the early retirement scheme payment made after 30 June 2007 determined in accordance with paragraph 56 of this Ruling 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.

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.

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

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 3 Class of entities 4 Qualifications 5 Date of effect 10 Scheme 15 Payments made under the scheme 28 Ruling 36 Appendix 1 - Explanation 40 The scheme must be offered to all employees within a class identified by the employer 43 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 46 The scheme must be approved by the Commissioner prior to its implementation 48 Other relevant information 50 Payments made after 30 June 2007 59 Appendix 2 - Detailed contents list 63