Income tax: early retirement scheme - OneSteel Wire 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.

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 legislative references are to the ITAA 1997 unless otherwise indicated.

The class of entities to which this Ruling applies are those employees of OneSteel Wire Pty Limited (OST Wire) who work in the operations at Newcastle Wiremill who receive a payment under the scheme described in paragraphs 14 to 15 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 23 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.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 the date of the Commissioner's approval to 31 December 2012. The Ruling continues to apply after 31 December 2012 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.

OneSteel Wire Pty Limited (OST Wire) is seeking approval for an early retirement scheme (ERS).

OST Wire is a subsidiary member of a tax consolidated group of which Arrium Limited (Arrium) is the head company.

OST Wire is seeking to offer an early retirement scheme to certain eligible employees. The relevant employees are employed by OST Wire and perform duties within the OST Wire Newcastle Wiremill business.

The Applicants are currently in the process of reorganising the manufacturing operations of its Newcastle Wiremill in order to: • rationalise the OST Wire, Newcastle Wiremill business and enable the employment of a younger workforce that is better suited to meeting the physical demands of working in the steel industry. • improve the operating capabilities of the employees to enable the OST Wire, Newcastle Wiremill to better meet current business and operational needs as well as to improve capacity for expected future increases in demand. • contribute to the revitalisation of the OST Wire, Newcastle Wiremill, and to develop and mentor new leaders of the organisation for the future.

Employees will be eligible to participate in the Scheme if: • they are employed in the Newcastle Wiremill operation of OST Wire; and; • they are 55 years of age and over; and • they do not fall within the classes of employees to whom the Scheme does not apply.

The Scheme will not apply to the following classes of employees: • employees engaged on a short term and/or casual basis or for a specified period; • temporary employees with less than 12 months service; • apprentices whose service would normally be terminated at the conclusion of their apprenticeship or within a short period thereafter; • employees on workers compensation whose claim is based on compensation for termination; • employees who are over 55 years of age and who would otherwise retire before 31 December 2012 because either: • they turn 65 years of age, or • their employment will be terminated upon reaching a particular age under their relevant award or enterprise agreement; • employees subject to termination on the grounds of misconduct and/or unsatisfactory service; or • employees in trades classifications (e.g. anyone who is employed within the OST Wire Maintenance team who are electricians or fitters) or staff employees (eg anyone who is not an award-covered employee including managers, administration, sales, finance, schedulers and customer service personnel etc).

If fewer employees than required accept the offer to retire OST Wire will continue to work with their current workforce and ensure that where any employees resign or retire they are replaced with the younger, more dynamic workforce that is required to achieve management's objectives.

OST Wire will make offers to participate in the scheme to all eligible employees in the order in which Expressions of Interest were received, until either offers have been made to all employees who lodged Expressions of Interest or 10 eligible employees have accepted offers. A maximum number of 10 employees will be able to participate in the Scheme.

A payment under the Scheme will be determined based on the following criteria: • 4 weeks of base pay per year of service with a pro rata payment for each part completed year of service up to a maximum of 52 weeks pay, excluding the notice period will be paid.

Employees will also receive any unused annual leave and/or long service leave entitlements.

A payment made under the Scheme does not include: • any payment made in lieu of superannuation benefits; or • any payment in lieu of other termination benefits to which the staff member may be entitled.

The Scheme will operate from the date of the Commissioner's approval to 31 December 2012.

Employees who retire under the Scheme will terminate employment and receive payment before 31 December 2012.

OST Wire and the relevant employees will be dealing with each other at arm's length under the Scheme and there will be no arrangement between OST Wire and the terminating employees, or between OST Wire and any other person, for those employees to be re-employed after retirement.

The early retirement scheme to be implemented by OneSteel Pty Limited (OST Wire) 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 14 to 15 of this Ruling.

The Commissioner considers that this is an appropriate class of persons to whom the scheme will 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).

Paragraph 13 of this Ruling describes 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 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 the date of the Commissioner's approval to 31 December 2012. 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 three 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 approved 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 approved 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'.

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 each income year.

The amount in excess of what is received on ordinary termination of employment qualifies as an early retirement scheme payment.

The total of the payments in paragraph 18 will be measured against the limit calculated in accordance with formula mentioned in paragraph 40 to determine the 'tax-free' amount of the early retirement scheme payment.

The 'tax-free' amount will not be an employment termination payment. 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 24 Appendix 1 - Explanation 27 All employees within a class approved by the Commissioner may participate in the scheme 29 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 32 The scheme must be approved by the Commissioner prior to its implementation 34 Other relevant information 36 Appendix 2 - Detailed contents list 44