Income tax: early retirement scheme - Coca-Cola Amatil (Aust) Pty Ltd

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 Coca-Cola Amatil (Aust) Pty Ltd who receive a payment under the scheme described in paragraphs 10 to 27 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 27 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because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: Commonwealth Copyright Administration Copyright and Classification Policy Branch Attorney-General's Department 3-5 National Circuit Barton ACT 2600 or posted at: http://www.ag.gov.au/cca

This Ruling applies from 22 May 2013 to 31 March 2014. The Ruling continues to apply after 31 March 2014 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.

Coca-Cola Amatil (Aust) Pty Ltd (CCA) is seeking approval for an early retirement scheme.

CCA is a manufacturer of beverages in Australia. CCA has a number of manufacturing facilities within Australia and operates in every state. There are two main production facilities in NSW. They are located at Northmead and Smithfield. The Smithfield site is primarily used to manufacture beverages packaged in glass bottles.

The purpose of the NSW Manufacturing Employees Voluntary Early Retirement Scheme (the Scheme) is to assist the company with rationalising and reorganising its NSW operations' workforce.

To improve manufacturing efficiencies, the manufacture of product in glass bottles has been transferred to another state resulting in the company closing the glass manufacturing line at CCA's Smithfield site.

The manufacturing employees currently located at Smithfield are required to move to the Northmead production facility. In addition, new production technology has recently been introduced into the Northmead facility. The introduction of the new technology, in combination with changes in customer demands has changed the requirements for employee labour at the site. The new production technology is more automated, operates at higher speed and requires employee manufacturing workers to demonstrate a higher level of technical aptitude and skills flexibility. CCA wishes to provide employees with the option of early retirement in the event that they are unable or prefer not to participate in this change.

The class of employees to whom this Scheme applies is employees of CCA who meet all the following criteria: • manufacturing employees currently employed at Northmead or Smithfield sites and under the Coca-Cola Amatil (Aust) Pty Ltd NSW Operations Enterprise Agreement Northmead / Smithfield 2010 ; • have been employed by CCA or an associated company on a continuing basis for at least 5 years; • who reside permanently in Australia; and • who are currently able to retire and over the age of 55 but less than 65 years of age at the time of acceptance of the offer.

Eligible employees will be required to express their interest in taking up an offer under the early retirement scheme.

The number of packages available for retiring employees under the Scheme is limited.

Where the number of applicants seeking access to the Scheme exceeds the number of packages available, then in determining who will be entitled to an offer CCA will give priority to employees with the greater or greatest age.

If there are still too many expressions of interest then those employees with the greater or greatest tenure will be given priority.

CCA intends to call for expressions of interest from 3 June 2013 to 1 July 2013. CCA's acceptance of such offers and determination of eligible applicants will be finalised by 31 July 2013.

Employees will be offered a Scheme payment equivalent to six months' pay at the time of acceptance.

Employees will also be paid any accrued entitlements including annual leave and long service leave entitlements. These amounts do not form part of the early retirement scheme payment.

The Scheme will operate from the date of the Commissioner's approval to 31 March 2014.

The actual date of termination will be negotiated with CCA based on the operation requirements of the employer. All eligible employees will terminate employment and receive payments under the scheme no later than 31 March 2014.

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

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

The payment made under the Scheme is an arm's length arrangement.

The early retirement scheme to be implemented by Coca-Cola Amatil (Aust) 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 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 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).

Paragraphs 12-14 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 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 March 2014. 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 10 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'.

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 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 payment calculated in accordance with paragraph 45 of this ruling will be measured against the limit calculated in accordance with the formula mentioned in paragraph 44 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 8 Scheme 9 Ruling 28 Appendix 1 - Explanation 31 All employees within a class approved by the Commissioner may participate in the scheme 33 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 49