Income tax: early retirement scheme - Alcoa of Australia Ltd

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 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 1997 unless stated otherwise.

The class of entities to which this Ruling applies is those employees of Alcoa of Australia Ltd who receive a payment under the scheme described in paragraphs 15 to 28 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 28 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.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 25 June 2008 to 24 June 2009. However, the Ruling continues to apply after 24 June 2009 to all entities within the specified class who entered into the specified scheme during the term of the Ruling.

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 Furthermore, the Ruling only applies to the extent that: • it is not later withdrawn by notice in the Gazette ; or • the relevant provisions are not amended.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

Alcoa of Australia Ltd is seeking approval for an early retirement scheme.

The scheme will be open to all employees who held positions at the date of the announcement (28 April 2005) of the move from the Corporate Head Office in Booragoon to Pinjarra where: • the position occupied by the employee will be moved to Pinjarra; and • the employee's daily commuting distance is substantially increased; or • if the move has had an untenable impact on the employee's work and travel arrangements due to a medical condition of the employee, medical condition of member of employee's immediate family or employee commitments to family care.

Between December 2004 and April 2005 a review of Alcoa of Australia Ltd's Australian corporate office and support service functions was conducted to examine options for the location and structure of these functions. The corporate head office is located in Booragoon south of the Perth CBD.

The key outcomes of the review established that Alcoa of Australia Ltd is increasing its commitment to the Peel region with construction of a new office in Pinjarra by early 2008 for staff from WA Operations leadership, Environment and some sections of Regional Services for IT, HR, Procurement and Finance. This includes staff from the Booragoon office. This will strengthen Alcoa of Australia Ltd's investment in the communities in which it operates and will demonstrate its commitment to a positive future for the region.

As a retention strategy Alcoa of Australia Ltd wants to offer employees affected by the relocation of their position time to consider whether to terminate employment and receive a termination payment. Employees will be able to trial travelling to and working from the new location for a period of up to eight months.

After the trial period employees will be required to give notice to Alcoa of Australia Ltd if they are to accept the offer of early retirement.

Alcoa of Australia Ltd will maintain a metropolitan office at Booragoon for staff from Marketing, and sections of IT, Finance, HR, Procurement and Strategic Materials.

All employees who retire under the scheme will terminate employment and receive the payment on a date determined by the employer based on their operational requirements but no later than 24 June 2009.

The payment to be made under the scheme is as follows: (a) four weeks pay for employees with less than 15 years service or five weeks pay for employees with 15 years or more service; and (b) a payment based on the following formula: First 5 years of continuous service: 2.5 weeks pay for each completed year and pro rata payment for any part thereof. Sixth to tenth year of continuous service: 3 weeks pay for each completed year and pro rata payment for any part thereof. Eleventh and subsequent years of continuous service: 3.5 weeks pay for each completed year and pro rata payment for any part thereof. OR (c) For employees with at least 5 years continuous service, a payment equating to 20 weeks pay. The payment will comprise (a) plus the greater of item (b) or (c).

The payment in paragraph 24 of this Ruling will not qualify as an early retirement scheme payment if the payment is in lieu of superannuation benefits as provided for in clause 6.2 Alcoa of Australia Ltd's Redundancy and Separation Policy.

It is noted that Alcoa of Australia Ltd has not retained any right of veto in respect of the operation of the scheme.

The early retirement scheme payments are amounts in excess of any payment that an employee receives in consequence of a voluntary termination of employment.

There is no arrangement in force between the participating employees and Alcoa Australia Pty Ltd and any other person to employ the participating employees after the termination of employment.

The early retirement scheme to be implemented by Alcoa of Australia Ltd is an early retirement scheme for the purposes of section 83-180.

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.

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.

Where a scheme satisfies the requirements of subsection 83-180(3) that scheme will be an '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 the former section 27E of the Income Tax Assessment Act 1936 , which section 83-180 of the ITAA 1997 replaced.

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.

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).

The class of employees to whom early retirement will be offered is set out at paragraph 17 of this Ruling.

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 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).

Paragraphs 18 to 20 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 is proposed to operate from 25 June 2008 to 24 June 2009. Approval was granted prior to implementation therefore the third condition is satisfied.

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

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.

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)): • 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); • 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; • 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; • the payment must not be made in lieu of superannuation benefits; and • it is not a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

The term 'arrangement' is defined in subsection 995-1(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 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.

For the year ending 30 June 2008, 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. For the year ending 30 June 2009, this amount is limited to $7,350 (base amount) plus $3,676 (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.

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

The total of the payments in the previous paragraph will be measured against the limit calculated in accordance with paragraph 46 of this Ruling to determine the 'tax-free' amount of the early retirement scheme payment.

The 'tax-free' amount will: • not be an employment termination payment; and • not be able to be rolled-over into a superannuation fund.

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.

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 Ruling 29 Appendix 1 - Explanation 32 All employees within a class approved by the Commissioner may participate in the scheme 35 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 38 The scheme must be approved by the Commissioner prior to its implementation 40 Other relevant information 42 Appendix 2 - Detailed contents list 52