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  • Tax treatment of invalidity pensions

    On 24 November 2021 the then Government announced they intended to change the tax treatment of invalidity pensions impacted by the Full Federal Court decision in Commissioner of Taxation v. Douglas.

    On 25 July 2022, the new Government released for public consultation a draft Bill and explanatory memorandum. Consultation closed on 5 August 2022. The draft Bill proposes changes that will:

    • amend the tax treatment of the pensions so they continue to be taxed as superannuation income stream benefits rather than superannuation lump sums for all schemes other than invalidity pensions paid from the Military Superannuation and Benefits (MSB) and Defence Force Retirement and Death Benefits (DFRDB) schemes.
    • ensure that all affected recipients continue to receive any preferential tax outcome that resulted from the court's decision.

    The changes will create a new non-refundable tax offset for recipients of invalidity pensions paid from the MSB and DFRDB schemes which started on or after 20 September 2007 and are affected by the court decision.

    The offset will apply retrospectively and ensure that veterans who are better off with their invalidity pension payments taxed as superannuation lump sums in a particular tax year will continue to have the same tax benefit.

    Veterans who have opted into our remediation process for prior income years will retain any tax benefit already received following the court decision. Veterans can still opt into this process (for information on how to opt-in, see link below).

    Once the law has passed veterans will be able to claim the offset, with further details on how to claim provided when available.

    For more information, see

      Last modified: 24 Nov 2022QC 67451