Environment Protection Authority Victoria - early retirement scheme 2021-2022

This Ruling sets out the tax consequences of an early retirement scheme implemented by the Environment Protection Authority Victoria (EPA).

Full details of this scheme are set out in paragraphs 9 to 29 of this Ruling.

All legislative references in this Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated.

This Ruling applies to you if you are an EPA employee who receives a payment under this scheme.

This Ruling applies from 11 November 2021 to 30 October 2022.

The Environment Protection Authority Early Retirement Scheme 2021-2022 (hereafter referred to as 'the Scheme') is an early retirement scheme for the purposes of section 83-180.

Accordingly, so much of the payment received by an eligible employee that exceeds the amount that could reasonably be expected to be received by the employee in consequence of voluntary termination of their employment at the time of the retirement will be an early retirement scheme payment.

In addition, so much of the Scheme payment as falls within the threshold calculated in accordance with section 83-170 is not assessable income and is not exempt income.

The following description of the Scheme is based on information provided by the applicant. If the Scheme is not carried out as described, this Ruling cannot be relied upon.

The Victorian Government 2021/22 Budget included investments to stimulate the economy, promote economic recovery, create jobs and invest in the implementation of the Victorian Government's reform agenda.

In the context of this changed economic landscape and increased expenditure to fund the health and economic response to the global COVID-19 pandemic, the Victorian Government is taking steps to progressively realign expenditure to target areas of highest priority.

The EPA is facing, and will continue to face in the medium term, significant changes to its operations due to the impact of the COVID-19 pandemic, as well as changes to the Environment Protection Act 2017 (Vic) which came into effect on 1 July 2021, with the associated fundamental change to Victoria's focus for environment protection and human health to a prevention-based approach.

A key aspect of the EPA's plan is to rationalise and reorganise its operations to make a contribution to the initiatives being carried out by the Victorian Government. As such, the EPA has identified a need to reduce operational staffing costs.

The class of employees to whom this Scheme applies are ongoing employees of the EPA who are employed at 31 October 2021 in the functional areas of Corporate Services, Communications and Engagement (Public Affairs), Regional / Divisional Business Support and Business Improvement.

The following employees are specifically excluded from participating in the Scheme: • executive officers • employees with less than 12-months' service • employees engaged on a casual basis • employees engaged on a fixed-term basis • employees on probation • employees on leave without pay.

Following approval of the Scheme, the EPA will offer employees within the class the opportunity to retire early. Employees will have four weeks from the date of invitation to submit an expression of interest.

Employees will be notified of the outcome within four weeks and will have two weeks to accept or decline the offer to participate in the Scheme.

Where the number of employees seeking to participate in the Scheme exceeds the number of packages available (such that the Scheme is oversubscribed), applications will be processed on the basis of length of continuous service, with those employees with a longer period of service to be given priority.

If the number of employees initially willing to participate in the Scheme is less than the number expected by the EPA, the EPA may implement a second expression of interest process during the Scheme period.

Employees who accept the offer will terminate employment and receive a payment on a date mutually agreed between the employee and the EPA but no later than 30 October 2022.

Employees who retire under the Scheme will receive: (a) a lump sum incentive of $15,000 for a full-time employee and pro rata for a part-time employee (b) four weeks' pay (irrespective of the employee's length of service) (c) two weeks' pay per each completed year of continuous service, up to a maximum of 15 years, and (d) an additional four weeks' pay for employees who are over 54 years of age.

For ongoing part-time employees, payments for subparagraphs 21(a) and (b) of this Ruling will be calculated on a pro rata basis. For employees who have a period of part-time employment in the most recent years of continuous service, payment for subparagraph 21(c) of this Ruling will be calculated on a pro rata basis.

Employees will receive payment for any accrued statutory entitlements; however, these payments will not form part of the payment under the Scheme.

The Scheme payment will not be made in lieu of superannuation benefits.

Any employee who terminates employment other than under the proposed Scheme will not be entitled to receive the payment.

Employees who retire under the Scheme and receive the early retirement payment will do so before they reach the pension age (as defined in the Income Tax Assessment Act 1997 by reference to the Social Security Act 1991).

At the time of retirement, there will be no arrangement between the EPA and terminating employees, or between the EPA and any other person, for those employees to be employed after retirement.

An employee that participates in the Scheme will be restricted from working in the Victorian Public Service for a period of twelve months.

There is no association between the eligible employees and the EPA. Accordingly, the employees and the EPA will be at arm's length.

A scheme will be an early retirement scheme if it satisfies the requirements of subsection 83-180(3).

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.

In order to satisfy the first requirement of subsection 83-180(3), the Scheme must be offered to all employees in a class approved by the Commissioner.

The class of employees to whom early retirement will be offered under the Scheme is set out in paragraph 14, subject to paragraph 15, of this Ruling.

The Commissioner considers that, for the purposes of paragraph 83-180(3)(a), 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 reorganisation of the operations of the EPA.

Therefore, the first requirement of subsection 83-180(3) is satisfied.

The proposed Scheme must be implemented by the employer with a view to rationalising or reorganising the operations of the employer, as required by paragraph 83-180(3)(b).

Paragraphs 10 to 13 of this Ruling describe the nature of the rationalisation or reorganisation 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 EPA. It is considered that the Scheme is to be implemented by the EPA with a view to rationalising or reorganising the operations of the EPA for the purposes of paragraph 83-180(3)(b).

Accordingly, the second requirement of subsection 83-180(3) has been met.

The Scheme is proposed to operate for a period from 11 November 2021 to 30 October 2022.

The Scheme will be in operation for a period considered appropriate due to the circumstances of the reorganisation.

As the approval provided by this Ruling was granted prior to implementation, the third requirement of subsection 83-180(3) is satisfied.

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 their 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 reached pension age 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 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 'pension age' has the meaning given by subsection 23(1) of the Social Security Act 1991.

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.

In accordance with section 83-170, 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 2021-22 income year, the tax-free amount is limited to $11,341 (base amount) plus $5,672 (service amount) for each whole year of completed employment service to which the early retirement scheme payment relates. It should be noted that six months, eight months or even 11 months do not count as a whole year for the purposes of this calculation.

For the 2022-23 income year, the base amount and the service amount are yet to be determined at the date of publication of this Ruling. Therefore, employees should check the ATO website for these indexed amounts at the relevant time.

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 21 of this Ruling will be measured against the limit in accordance with the formula mentioned in paragraph 47 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 (ETP), and • able to be rolled-over into a super fund.

Any payment in excess of this limit will be an ETP and will be split into tax-free and taxable components. The tax-free component of an ETP includes the pre-July 83 segment of the payment. The tax-free component is not assessable income and is not exempt income.

The taxable component of the ETP will be taxed at various rates depending on the person's age. It should be noted that the 'whole of income cap' does not apply to any part of the early retirement scheme payment.