Income tax: early retirement scheme - Ambulance Victoria

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.

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 otherwise indicated.

The class of entities to which this Ruling applies is those employees of Ambulance Victoria who receive a payment under the scheme described in paragraphs 10 and 29 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 10 to 29 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.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 25 August 2010 to 31 December 2011. The Ruling continues to apply after 31 December 2011 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.

Ambulance Victoria has lodged an application seeking approval for an early retirement scheme (ERS).

The ERS is known as the Ambulance Victoria Voluntary Departure Package (VDP).

Ambulance Victoria has five regional 'Operational Call Centres' (Opcens) across the State of Victoria as follows: • Wangaratta - Hume Region • Morwell - Gippsland Region • Bendigo - Lodden Mallee Region • Geelong - Barwon South West Region • Ballarat - Grampians Region

In May 2009 the Victorian Government announced that over the next two years the five regional Opcens would be amalgamated into one centre at Ballarat under the Emergency Services Telecommunications Authority (ESTA).

The objectives of the VDP are to: • facilitate the consolidation of emergency telecommunications to ensure the most effective response to the Victorian community; and • contribute to the transition of Ambulance Victoria's communications to Emergency Services Telecommunications Authority as announced by the Victorian Government in May 2009.

The Victorian Government has stated there will be no redundancies as a result of the Opcens transitions.

The VDP will be in operation from the date of the Commissioner's approval until 31 December 2011.

The class of employees who are to be offered encompass the following classifications: Classification Number Communications Call-taker 32 Communications Officer 44 Senior Communications Officer 5

The employees are located at the Opcens as follows: OPCEN Employees Wangaratta 14 Morwell 16 Bendigo 17 Geelong 17 Ballarat 17

Within the class of employees, there is no staff member who Ambulance Victoria will prevent from accepting an offer in the VDP.

The number of staff who can be released under the VDP will be a maximum of 81.

The minimum number of staff Ambulance Victoria needs to retire within the class to fully implement the rationalisation and reorganisation is 20.

If sufficient staff do not apply for the VDP then Ambulance Victoria will rely on natural attrition. Any relevant staff member, who chooses not to participate in the VDP, will be offered redeployment within the organisation.

Employees will have four weeks after the Commissioner's approval to formally express their interest in the VDP. Then an offer will be made as soon as possible after the expression of interest.

The date of termination will be negotiated to correspond with the closure times of the relevant Opcen, and that will be from the date of the Commissioner's approval until 31 December 2011.

Employee work conditions are regulated under the Public Sector Industrial Relations [Victoria] Policy Manual 2010 and Ambulance Victoria Enterprise Agreement 2009.

The scheme is at arm's length and there is no arrangement in force between the employee and the employer and another person to employ any of the retirees after the date of termination. Any VDP recipient cannot be reemployed by any public sector employer for a minimum of three years from the date of their termination.

Staff members who retire under the proposed scheme will be offered payment as follows: Length of continuous service VDP benefit pay At Least but less than 1 years 2 years 2 weeks 2 years 3 years 4 weeks 3 years 4 years 6 weeks 4 years 5 years 8 weeks 5 years 6 years 10 weeks 6 years 7 years 12 weeks 7 years 8 years 14 weeks 8 years 9 years 16 weeks 9 years 10 years 18 weeks 10 years 11 years 20 weeks 11 years 12 years 22 weeks 12 years 13 years 24 weeks 13 years 14 years 26 weeks 14 years 15 years 28 weeks 15 years or more 30 weeks Four weeks pay in lieu of notice plus a voluntary departure incentive of up to $10,000. This payment is calculated on the basis of $2,000 for each year worked up to the maximum of $10,000. Part-time employees will receive a payment on a pro-rata basis. The incentive payment is conditional upon the employee continuing to work at the Opcen for up to four weeks after the closure.

The payment made under the proposed VDP does not include any payment in lieu of superannuation benefits.

The VDP payments will not include any payment in lieu of other normal termination benefits to which the staff member is entitled. All employees will receive any unused annual leave and long service leave entitlements on termination of employment whether it be under an ordinary termination of employment or termination under the VDP.

The early retirement scheme to be implemented by Ambulance Victoria 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 section 83-180 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 will now be considered.

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 in paragraphs 17 and 18 of this Ruling.

The Commissioner considers that this 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 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 13 and 14 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 fact that the re-organisation is being implemented with a view to a restructuring of the work force or operations 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). Accordingly, the second condition for approval has been met.

The scheme is proposed to operate for a period from 25 August 2010 to 31 December 2011. Approval was granted prior to implementation therefore, for the purposes of paragraph 83-180(3)(c), the third condition is satisfied.

The scheme will be in operation for approximately 16 months. This is considered to be appropriate in this case due to the circumstances of the restructure and for those employees that will be given the option of early retirement under the scheme.

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; • 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 arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings'.

From 1 July 2007, an early retirement scheme payment 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 2010-11 income year, the tax-free amount is limited to $8,126 (base amount) plus $4,064 (service amount) for each whole year of completed employment service to which the early retirement scheme payment relates. It should be noted that, 6 months, 8 months or even 11 months do not count as a whole year for the purposes of this calculation. In accordance with section 960-285, the base limit and service amount limits will be indexed in line with average weekly ordinary time earnings each income year.

The total of the amount received on the termination of employment calculated in accordance with paragraph 27 of this Ruling may qualify as an early retirement scheme payment.

The total of the payments made, as outlined in paragraph 48, will be measured against the limit calculated in accordance with formula mentioned above 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.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 8 Scheme 9 Ruling 30 Appendix 1 - Explanation 33 All employees within a class approved by the Commissioner may participate in the scheme 36 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 39 The scheme must be approved by the Commissioner prior to its implementation 41 Other relevant information 43 Appendix 2 - Detailed contents list 52