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 (MSB) scheme 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 subsequently introduced into Parliament in November 2022.

The draft legislation:

• Maintains the benefits of the Douglas decision for invalidity benefits and death benefits for beneficiaries of invalidity pensions paid from the DFRDB and MSB 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 MSB 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 MSB scheme affected by the Douglas decision to ensure these beneficiaries are no worse off

The draft legislation confirms the lump sum tax treatment for affected members of the DFRDB and MSB schemes. The Government’s approach means that affected veterans in the DFRDB and MSB 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 draft 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.

The Information on this website will continue to be updated as the legislation is progressed.