Income tax: Department of Planning and Community Development including Growth Areas Authority (Victoria) Voluntary Departure Program 2012-13 Early Retirement Scheme

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 legislative references are to the ITAA 1997 unless otherwise indicated.

The class of entities to which this Ruling applies is those employees of the Victorian Department of Planning and Community Development including Growth Areas Authority, shown at paragraph 18, who receive a payment under the scheme described in paragraphs 9 to 43 of 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 9 to 43 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.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 5 September 2012 to 31 December 2013. The Ruling continues to apply after 31 December 2013 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 Victorian Department of Planning and Community Development (DPCD) including the Victorian Growth Areas Authority (GAA) is seeking the Commissioner's approval to implement an early retirement scheme in accordance with section 83-180.

The scheme will be titled the 'Department of Planning and Community Development including Growth Areas Authority (Victoria) Voluntary Departure Program 2012-13', referred to as the Scheme.

As part of the 2011-12 Victorian Budget Update, the Victorian Government introduced efficiency and revenue measures to begin addressing the high growth in expenses and improve the operating result to restore a fiscal buffer against future economic downturns.

These measures target the systemic problems of high growth in expenses and a more moderate revenue outlook. The aim of the measure is to moderate growth in the size of the government and reduce it as a share of the economy, more consistent with its long-term average.

The efficiency measures are referred to as the Sustainable Government Initiative.

Reductions will not be sought in key frontline service delivery areas for example, there will be no impact on teachers, police, nurses and child protection workers.

DPCD including GAA is required to reduce their employee numbers as part of their contribution to the 2011-12 Victorian Budget Update efficiency measures. The employee reductions must be completed by 31 December 2013.

DPCD is currently organised by five major divisions with work centres across Victoria, but predominantly in the central business district (CBD) of Melbourne. GAA is located in the CBD of Melbourne.

The purpose in implementing the Scheme is to rationalise and re-organise the employer's operations and will assist the DPCD and GAA in employment reductions in areas such as head office administrative functions and other back-office positions across the bureaucracy.

The class of employees to whom the Scheme applies is all ongoing staff employed by DPCD from Classification VPS1 to VPS6 and all ongoing staff employed by the GAA are eligible to apply.

Participation in the Scheme is entirely voluntary.

All eligible employees under the Scheme will be offered a lump sum payment as follows: (a) Four weeks' pay in lieu of notice on cessation; (b) A lump sum voluntary departure incentive of up to $10,000 (for a full-time employee); and (c) Two weeks' pay per completed year of continuous service in the Victorian Public Sector up to a maximum of 15 years.

For part-time employees, payments (a) and (b) will be calculated at the part-time rate. For employees who have a period of part-time employment in the most recent years of continuous service, payment (c) will be a pro-rata payment.

Where an employee who is offered a voluntary departure package (VDP) has less than one year's service, they will receive a corresponding fraction of the VDP they would have been paid at one year.

All employees terminated under the Scheme will receive their accrued annual leave and unused long service leave entitlements in accordance with the relevant enterprise agreement. However, they do not form part of the payment made under the Scheme.

The maximum number of VDPs available under the Scheme program for the DPCD and GAA is limited.

Where the number of employees seeking access to the Scheme exceeds the number of packages available for each business group, the offer will be made to those eligible employees who have the longest period of service with the Victorian Public Sector.

The following categories of staff within the DPCD and GAA will not be eligible to participate in the Scheme. They are: • Fixed term staff and staff employed under an Executive Contract in DPCD or GAA; • DPCD staff classified as Senior Technical Specialist (VPS7). • Senior Regulatory Analysts; • Principal Scientists; • Casual employees; • Staff on probation; • Participants in the Graduate Recruitment and Development Scheme within the first 12 months of their employment; and • Staff receiving WorkCover salary payments.

Following approval of the Scheme, all eligible employees will be invited to express an interest in the Scheme and will have 30 calendar days from the announcement of the Scheme to express an interest in the Scheme.

Expressions of interest will not be accepted after 30 calendar days from the announcement of the Scheme.

Once an eligible employee has expressed an interest and they are within the maximum number of allocations for the division, a formal offer will be made within 14 calendar days of the closing date of the offer period.

Employees will be provided with 21 calendar days to accept or reject the offer of a VDP.

After accepting an offer, employees will generally terminate employment within 14 calendar days of accepting the offer.

An alternative exit date may be determined by mutual agreement between the employer and agreed with the employee due to operational needs but no longer than 60 calendar days after acceptance of the offer (or in extreme cases up to 180 calendar days after acceptance of the offer).

In the event that some divisions are oversubscribed with expressions of interest, the department may reallocate undersubscribed VDP allocations in other divisions to the oversubscribed groups until the maximum number of packages have been exhausted.

All eligible employees who accept an offer will receive the package and terminate employment no later than 31 December 2013.

It is proposed the Scheme will be implemented from the date after the Commissioner's approval to 31 December 2013.

The VDP program will operate concurrently with other employment reduction strategies such as attrition, not renewing some fixed term contracts and a freeze on external employment.

The payments made under the Scheme do not include any payment in lieu of superannuation benefits.

The payments made under the Scheme will be at arm's-length.

Recipients of the Scheme are required to agree not to seek or accept re-employment or any other fee for service: • from any Victorian Public Service employer, Film Victoria, the Growth Areas Authority, Public Transport Victoria, or VicRoads, for a minimum period of three calendar years from the date of their separation; and • from any Victorian Public Sector employer, other than those identified above, for a minimum period of one calendar year from the date of their separation.

However, recipients of the Scheme can seek re-employment at any time in the following roles which are outside of the restrictions: • police officer; • protective services officer; • fire-fighter; or • project fire-fighter.

The retirement of employees who receive a payment under the Scheme will occur before they turn 65 years of age.

Staff aged 65 and older will be eligible to participate in the Scheme, however for payments made to eligible employees who have reached age 65 and older the payments will not be an early retirement scheme payment and will not be eligible for the tax free base limits under the Scheme. These payments will be concessionally taxed as employment termination payments.

All eligible employees are employed under the Victorian Public Service Workplace Determination 2012 or the Growth Areas Authority Enterprise Agreement 2009.

The early retirement scheme to be implemented by the Victorian Department of Planning and Community Development including Growth Areas Authority 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 be reasonably be expected to be received by the employee in consequence of 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 whom early retirement will be offered is set out in paragraph 18 of this Ruling subject to the exclusions set out in paragraph 26.

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).

The facts at paragraphs 9 to 17 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).

The Scheme is proposed to operate for a period from 5 September 2012 to 31 December 2013. The approval provided by this class ruling has been granted prior to implementation therefore for the purposes of paragraph 83-180(3)(c), this condition is satisfied.

The Scheme will be in operation for approximately 16 months. This is considered appropriate due to the circumstances of the restructure and the 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 83-130(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'.

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 2012-13 income year, the tax free amount is limited to $8,806 (base amount) plus $4,404 (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 for each income year.

The total of the amount received on the termination of employment calculated in accordance with paragraphs 20 to 22 of this ruling may qualify as an early retirement scheme payment.

The total payment calculated in accordance with paragraph 61 of this ruling will be measured against the limit calculated in accordance with the formula mentioned in paragraph 60 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.

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 7 Scheme 8 Ruling 44 Appendix 1 - Explanation 47 All employees within a class approved by the Commissioner may participate in the scheme 49 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 52 The scheme must be approved by the Commissioner prior to its implementation 54 Other relevant information 56 Appendix 2 - Detailed contents list 65