Superannuation, retirement and employment termination: interpretation of the term 'years of service'

For the purposes of subsection 27A(19) of the Income Tax Assessment Act 1936 (ITAA 1936), how are 'years of service' calculated where an employee has taken periods of leave without pay?

For the purposes of subsection 27A(19) of the ITAA 1936, 'years of service' are the number of whole years in the eligible service period (ESP) of the eligible termination payment (ETP).

This approach can be summarised as a three step calculation. Step 1: calculate the ESP of the ETP; Step 2: divide the answer in Step 1 by 365; and Step 3: where the result of Step 2 is not a whole number, round the result down to the nearest whole number.

The employee commenced employment on 1 April 1993.

The employee took leave without pay at the following intervals: 1 December 1996 to 30 June 1997; 1 October 1999 to 31 March 2000; and 1 February 2001 to 31 July 2001.

The employee was made redundant on 1 December 2001.

The definition of 'years of service' in subsection 27A(19) states: '"Years of service" means the number of whole years in the period, or the aggregate of the periods, of the employment to which the payment relates...'

This definition can be truncated to refer to 'the number of whole years in the aggregate of the periods'. Consequently, the periods of paid employment are aggregated first. The number of whole years within that aggregation determines the 'years of service.'

From the earlier facts, the employee's eligible service period is: 1 April 1993 to 30 November 1996 - (1340 days) 1 July 1997 to 30 September 1999 - (822 days) 1 April 2000 to 31 January 2001 - (306 days) 1 August 2001 to 1 December 2001 - (123 days)

The combined period of service is 2591 days, or approximately 7.1 years, meaning 7 'years of service' for the purposes of subsection 27A(19) of the ITAA 1936.

Any alternative interpretations of the definition would have unintended results, and could easily discriminate against employees who have taken periods of leave without pay.

For example, an alternative method applied to the above facts is to calculate the number of whole years within each period of employment. This would result in 5 'years of service' (being 3 + 2 + 0 + 0), which would disadvantage an employee. As this is not the intention of the legislation, this method is not adopted by the ATO.