TAXATION OF MILITARY SUPERANNUATION BENEFITS

The Full Federal Court decision in December 2020, Commissioner of Taxation v Douglas (Douglas decision) found that military invalidity superannuation pensions payable under the Defence Force Retirement and Death Benefits (DFRDB) scheme and the Military Superannuation and Benefits Scheme (MSBS) commencing on or after 20 September 2007 are to be taxed as superannuation lump sums, rather than superannuation income streams.

The Government announced on 25 July 2022 that it would introduce legislation to ensure that no veteran pays higher income tax because of the Federal Court decision. A draft bill, Treasury Laws Amendment (Measures for a later sitting) Bill 2022: Taxation of military superannuation benefits, and associated draft explanatory material, was released for public consultation between 25 July and 5 August 2022.

The legislation was considered and passed by the Government in June 2023, with the Schedule relating to the Douglas decision coming into effect from 24 June 2023.  

The legislation

  • Maintains the benefits of the Douglas decision for invalidity benefits and death benefits for beneficiaries of invalidity pensions paid from the DFRDB and MSBS schemes that commence on or after 20 September 2007, and otherwise retrospectively and prospectively reverses the effect of the Douglas decision in relation to all other schemes consistent with the intent of the current superannuation tax law.

  • Introduces a non-refundable tax offset to prevent any adverse income tax outcomes for veterans in the DFRDB and MSBS schemes that are affected by the retention of the Douglas decision. This will reverse higher end of year tax liabilities that would have occurred for some of these veterans and enable the ATO and CSC to include the impact of the new offset in determining fortnightly tax withholding, in order to address higher withholding that has occurred due to the Douglas decision.

  • Extends these changes to Spouse and Children’s pensions paid to a spouse or child following the death of a member of a DFRDB or MSBS scheme affected by the Douglas decision to ensure these beneficiaries are no worse off.

The legislation confirms the lump sum tax treatment for affected members of the DFRDB and MSBS schemes. The Government’s approach means that affected veterans in the DFRDB and MSBS schemes will not only retain the income tax benefits of the Douglas decision but also retain the resulting benefits of changes in their taxable income, such as Family Tax Benefit entitlements and the childcare subsidy. 

The legislation reflects the Government’s commitment to ensure veterans are not left worse off due to the Douglas decision and that veterans who benefited from the decision retain these outcomes.

Where to go for assistance

Commonwealth Superannuation Corporation

General information on this issue is available here: www.csc.gov.au/Members/Retirement/Pensioners/Tax-Changes-to-Invalidity-Pensions

For queries on how your pensions is being administered

Phone: 1300 001 877

Email: pensions@contact.csc.gov.au

Australian Taxation Office (ATO)

To be provided with more tailored information to your current year tax situation and options to review previous years, please go to www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Military-invalidity-pensions---Douglas-decision/

Department of Veterans’ Affairs (DVA)

For information about your military invalidity taxation and any impact it may or may not have on your Department of Veterans’ Affairs (DVA) entitlements.

Phone: 1800 VETERAN (1800 383 372)

Services Australia (SA)

For information on any impact this may or may not have on your payments administered by Services Australia

Phone: 13 6150 for Family Tax Benefits and Child Care Subsidy
Phone: 13 1272 for Child Support

Common FAQs

1Why are Military Invalidity benefits taxed? Shouldn’t they be tax free?
  • In relation to the current taxation arrangements for veteran’s incapacity benefits, it is a longstanding feature of the Australian system that military pensioners are subject to taxation on their superannuation income streams. The taxation treatment of a military disability benefit paid from a superannuation fund is equal to the taxation treatment of any other disability superannuation benefits.
  • The taxation treatment of disability benefits, including from military superannuation funds, is concessional for some taxpayers compared to non-disability benefits. People under their preservation age receive a 15 per cent offset (from their marginal tax rate) if the income stream has been financed from a taxed element. The tax-free component of disability lump sums is increased based on how many years the recipient was forced to retire early due to their disability.
  • The highest tax rate faced by military disability benefits is the recipient’s full marginal tax rate (with no offset). This occurs when the recipient is under 60 years of age and the benefit is provided as an income stream and financed from an untaxed element.
2Some military invalidity pensions are taxed as lump sums, due to a Federal Court decision (known as the Douglas decision). When will the Government introduce legislation to ensure veterans aren’t worse off because of this decision? When will the legislation take effect?
  • On 25 July 2022 the Government announced that it would introduce legislation to ensure that no veteran pays higher income tax because of the Douglas decision. A draft bill, Treasury Laws Amendment (Measures for a later sitting) Bill 2022: Taxation of military superannuation benefits, and associated draft explanatory material, was released for public consultation between 25 July and 5 August 2022.
  • The legislation, Treasury Laws Amendment (2022 Measures No.4) Act 2023, was considered and passed by the Government in June 2023, with the Schedule relating to the Douglas decision coming into effect from 24 June 2023.
  • The Government’s approach means that affected veterans in the DFRDB and MSBS schemes will not only retain the income tax benefits of the Douglas decision but also retain the resulting benefits of changes in their taxable income, such as Family Tax Benefit entitlements and the childcare subsidy. The legislation included the introduction of a new non-refundable tax offset available to eligible veterans.
  • The new Veterans' Superannuation (invalidity pension) Tax Offset (VSTO) will be available for eligible veterans to ensure they do not pay more tax because of the Douglas decision. The Australian Taxation Office (ATO) will determine if veterans are entitled to the offset when a tax return is lodged and assessed.
  • For more information on the VSTO and other important information about how the Douglas decision might impact you, visit Military invalidity pensions – Douglas decision | Australian Taxation Office (ato.gov.au)
3Why are only veterans in the MSBS and DFRDB Schemes being compensated through the new offset from the legislation relating to the Douglas decision?
  • The Douglas decision was concerned with the direct income tax treatment of the invalidity pension benefits from the DFRDB and MSBS schemes. As such, the Australian Government’s commitment is related to that direct income tax change caused by that decision.
  • The introduction of the recent legislation maintains the benefits of the Douglas decision for invalidity benefits and death benefits for beneficiaries of invalidity pensions paid from the DFRDB and MSBS schemes that commence on or after 20 September 2007, and otherwise retrospectively and prospectively reverses the effect of the Douglas decision in relation to all other schemes consistent with the intent of the current superannuation tax law. This will ensure that payments in all other schemes that may have been within the wider scope of the Court’s decision will continue to be taxed as superannuation income stream benefits, which is consistent with the intent of the current superannuation tax law.
4Are there impacts for payments or superannuation for veterans from the Australian Government’s actions?
  • While the veteran community has broadly welcomed the Douglas decision, and many veterans have benefited from the decision, the Government is concerned that a number of veterans are facing higher end of year tax liabilities.
  • The new legislation reflects the Government’s commitment to ensure veterans are not left worse off due to the Douglas decision and that veterans who benefited from the decision retain these outcomes. This also extends to Spouse and Children’s pensions paid to a spouse or child following the death of a member of a DFRDB or MSBS scheme affected by the Douglas decision to ensure these beneficiaries are no worse off.

Additional Support

  • If you are a veteran and this matter is causing you distress contact Open Arms for support on 1800 011 046
  • The Department of Veterans’ Affairs (DVA) provides a range of benefits to support an injured veteran financially after discharge from the ADF. Additionally, there is a broad range of programs in place to facilitate a veteran’s wellness, recovery and rehabilitation after their service
  • For serving members, you can contact your local Garrison Health Centre, the All Hours ADF support line on 1800 628 036 or the Defence Family Helpline on 1800 624 608
  • Lifeline is available for any Australian experiencing emotional distress on 13 11 14

Financial Assistance

  • The ADF Financial Services Consumer Centre helps ADF members and their families achieve greater financial security by providing independent, professional financial education (not advice) to ADF members throughout their careers
  • The Financial Information Service (FIS) through Services Australia provides free, independent and confidential information, tools and resources to help customers make informed decisions about their current and future financial needs. FIS doesn’t provide financial advice, counselling, or advocate or promote particular products or providers
  • Moneysmart offers financial guidance for all Australians, including tools, tips and calculators to help people of all ages, backgrounds and incomes to build a better life
  • Commonwealth Superannuation Corporation (CSC) offers ‘fee for service’ financial planning services, including access to certified financial planners for fund members