Income tax: early retirement scheme - South Australia Department of Education and Children's Services

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 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 South Australia Department of Education and Children's Services who receive a payment under the scheme described in paragraphs 10 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 10 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

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This Ruling applies from 2 February 2011 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.

The South Australian Department of Education and Children's Services (DECS) intends to implement an early retirement scheme (ERS) to be known as the Career Change Program.

DECS developed 'Teachers' Work' for primary and secondary teachers as a framework encompassing the contemporary work of teachers. Graduating teachers are required to meet minimum standards under this framework in order to be granted registration to teach while existing teachers are expected to meet the minimum standards of the framework for re-registration every three years.

Draft National Professional Standards (NPS) for teachers have also been developed and it is anticipated these standards will be available for use by all States in 2011.

DECS is committed to providing the best possible education outcomes for primary and secondary school students. DECS recognises that some longer-serving primary and secondary teachers' skills do not meet the required standards set out in the 'Teachers' Work' framework and the proposed NPS.

The purpose of the Career Change Program is to rejuvenate the teaching workforce in South Australian Government primary and secondary schools by: • improving the quality of primary and secondary teachers; • providing ongoing opportunities for current high quality teachers; and • providing career opportunities for highly skilled graduate teachers.

The ERS will also improve the overall quality of education in South Australia, provide significant increases in productivity and provide substantial cost savings.

The ERS is open to all DECS employees who: • are permanently employed as a member of the teaching staff in a primary or secondary school across South Australia; • currently appointed to or have a right of return to a permanent teaching position; • have accumulated at least 10 years of continuous teaching service; and • do not possess the level of skills as set out in 'Teachers' Work' and the draft NPS.

DECS will use 'Teachers' Work' and the draft NPS to identify those teachers that do not meet the minimum standards. 'Teachers' Work' is already being used in annual performance reviews of teachers' capabilities. DECS will identify those teachers who fall into this class during term 1 of the 2011 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 early career teachers or graduates that satisfy the minimum standards for registration.

During the 2011 school year DECS will make offers of early retirement to all teachers who indicate they are interested in retiring under the ERS and satisfy the eligibility and selection criteria.

Participation in the Career Change Program is entirely voluntary.

DECS will allow 200 employees to retire under the ERS. In the event the ERS is over subscribed, the ERS will be offered on the basis of the date on which an application is received.

The ERS will be open from 2 February 2011 to 31 December 2011.

Teachers will have two weeks to accept or reject the offer.

Teachers who retire under the ERS: (a) must resign from all employment in the South Australian Public Sector; (b) must not seek re-employment whether or not remunerated or otherwise and whether temporary, casual, contract, ongoing or by appointment in the South Australian public sector for a period of three years; (c) must not apply for, accept, engage in, or remain in any employment whatsoever as an officer of the teaching service in the DECS from the date the employee's resignation takes effect; and (d) must be able to settle any outstanding workers' compensation claim.

All eligible employees under the ERS will be offered a lump sum payment of $50,000 (the Payment). A pro-rata payment will apply to part time teachers. The Payment is in excess of any superannuation and any other benefits to which eligible employees would otherwise be entitled.

The Payments made under the ERS are at arm's-length.

The retirement of employees under the ERS will occur before they turn 65 years of age.

There is no agreement in place between the employee and DECS, or between DECS and another person to employ the employee after retirement.

The early retirement scheme to be implemented by South Australia Department of Education and Children's Services 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 are now 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 paragraph 3 of this Ruling.

The Commissioner considers that this is an appropriate class of persons for the scheme to be offered. 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 11 to 15 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 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 is satisfied.

The scheme is proposed to operate for a period from 2 February 2011 to 31 December 2011. The approval provided by this class ruling has been 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 11 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 the 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 (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 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 31 of the facts 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 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 29 Appendix 1 - Explanation 32 All employees within a class approved by the Commissioner may participate in the scheme 34 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 37 The scheme must be approved by the Commissioner prior to its implementation 39 Other relevant information 41 Appendix 2 - Detailed contents list 50