Income tax: early retirement scheme - Geofabrics Australasia Pty Limited

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 legislative references are to the ITAA 1997 unless otherwise indicated.

The class of entities to which this Ruling applies is those employees of Geofabrics Australasia Pty Limited covered by the Albury enterprise bargaining agreement aged 55 years and above.

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 10 to 26 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies from 14 January 2009 to 30 June 2009. The Ruling continues to apply after 30 June 2009 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

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

The early retirement scheme (the Scheme) is for employees of Geofabrics Australasia Pty Ltd (the Company).

The Scheme is open to all employees of the Company covered by the Albury enterprise bargaining agreement aged 55 years and above.

The Albury site is responsible for the operation of the manufacture of the Company's geotextiles and drainage products. It is also the primary warehousing facility for the group's imported products.

The Company has just completed an upgrade to its plant and computerised significantly more of its processes.

As part of the upgrade of the plant at the Albury site, the plant's throughput increased by 40%. In the upgrade a new high tech extruder, dryer and screen changer were added into the process.

The all manual operating system was upgraded to a fully integrated computerised operating system. As a result more of the equipment is now run from central consoles than at the machines.

The applicant has stated that the division has an aging workforce and requires younger and fitter staff who are more capable of undertaking the physical requirements of operating the plant efficiently and cost effectively.

The desired skills of new employees are greater computer literacy and greater technical aptitude than those of current employees being offered early retirement.

The Company is also wanting to develop a culture where staff are willing to be accountable for safety requirements and are continually seeking improvements to safe work practices within the organisation.

These employees are covered by the Textile Industry Award 2000 and the normal retirement age is 65.

Under the Scheme the employees will receive 2 weeks pay for each year of service for the first ten years of service and 3 weeks pay for each year of service in excess of 10 years.

A minimum of 10 weeks pay and a maximum of 55 weeks pay will be paid.

The employees must terminate their employment before age 65.

The employer has no right of veto.

The Scheme will remain open until 30 June 2009.

There is no agreement in force between the employees and the Company or any other person to employ any of the employees after the date of termination.

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

Accordingly, so much of the payment received by an employee 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 will be an early retirement scheme payment.

In addition, so much of the early retirement scheme 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'.

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 which the scheme is proposed to be offered is employees of Geofabrics Australasia Pty Ltd (the Company) covered by the Albury Enterprise bargaining agreement aged 55 years and above.

The Commissioner considers that this class is an appropriate class of persons 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. It is therefore considered that these employees meet the requirements of an approved class of employees for the purposes of paragraph 83-180(3)(a).

The Company has no right of veto.

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 11 to 19 of this Ruling describe the nature of the rationalisation or re-organisation of the Company'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 paragraph 83-180(3)(b).

The scheme is proposed to operate for a period from 14 January 2009 to 30 June 2009. Approval will be granted prior to implementation therefore the third condition is satisfied.

The scheme will be in operation for approximately 6 months, which is within the period considered appropriate by the Commissioner.

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 retirement 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 in subsections 83-180(2), 83-180(5) and 83-180(6): • the retirement occurs before the employee turns age 65 or such earlier date on which the employee's employment would have terminated under the terms of employment because of the employee reaching a certain age or completing a particular period of service (whichever occurs first); • if the retirement is not at arm's length 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; • except for the tax-free part of an early retirement scheme payment, it is not a payment excluded from being an employment termination payment by section 82-135.

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 limit specified in section 83-170, is referred to as the 'tax free component' and will be neither assessable income nor exempt income of the recipient.

For the 2008-09 income year, 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 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 21 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 section 83-170, 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 neither assessable income nor 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 9 Scheme 10 Ruling 27 Appendix 1 - Explanation 30 All employees within a class approved by the Commissioner may participate in the scheme 32 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 36 The scheme must be approved by the Commissioner prior to its implementation 38 Other relevant information 40 Appendix 2 - Detailed contents list 50