Show download pdf controls
  • Individuals receiving military invalidity benefits – impact of court decision

    Work out if you are affected by the Court decision, Commissioner of Taxation v Douglas [2020] FCAFC 220.

    On this page

    New government announcement

    The government has announced they will introduce legislation to ensure that no veteran is worse off from the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220. The draft bill Taxation of military superannuation benefitsExternal Link and associated draft explanatory material were released for public consultationExternal Link which is now closed.

    Veterans receiving invalidity benefits

    If you received an invalidity pension provided under either the Defence Force Retirement and Death Benefits (DFRDB) Scheme or the Military Superannuation and Benefits (MSB) Scheme on or after 20 September 2007, you may be affected by the Court decision.

    The content below will help you determine if you are affected.

    Work out if you are affected

    You will need the following information:

    • your date of discharge
    • your invalidity benefit start date.

    Note: If you stopped receiving payments for a period of time, that may have resulted in a new start date for your invalidity benefit. Find out when your invalidity pension started.

    Follow the steps below to work out if you are affected by the Court decision.

    Step 1

    • Were you discharged on or after 20 September 2007?
    • If Yes, you are affected.
    • If No, go to step 2.

    Step 2

    • Did your invalidity pension start on or after 20 September 2007?
    • If Yes, you are affected.
    • If No, you are not affected. Your invalidity benefits were correctly taxed as superannuation income stream benefits.

    When your invalidity pension started

    The date your invalidity pension started is used to determine if you are affected by the Court decision. The date your invalidity pension started will be stated on documentation provided to you by the Commonwealth Superannuation Corporation (CSC).

    This will generally align with when you were classified as Class A or B.

    Example 1: Invalidity pension started before 20 September 2007

    Sandra was discharged on 2 July 2007. On 24 July 2007, she was determined by CSC as having a Class B incapacity and started receiving invalidity pension payments. The classification has remained the same since.

    As Sandra's invalidity pension started before 20 September 2007, she is not affected, and her invalidity payments were correctly taxed as superannuation income stream benefits.

    End of example

    There may have been some time between when you were discharged and when your invalidity pension started. Whether you are affected will depend on when your invalidity pension started, rather than the date of discharge.

    However, the date of discharge will always be earlier than the date the invalidity pension starts. If your date of discharge was on or after 20 September 2007, then any invalidity pension that started will always start on or after 20 September 2007.

    Example 2: Invalidity pension started on or after 20 September 2007

    David was discharged on 15 September 2007. On 19 November 2007, he started receiving invalidity pension payments in accordance with being determined by CSC as having a Class A incapacity – the classification has remained the same since.

    Even though David was discharged before 20 September 2007, his invalidity pension started after 20 September 2007. As such, he is affected by the court decision and his invalidity payments are taxed as superannuation lump sums.

    End of example

    Reclassification

    Reclassification may mean your invalidity pension payments were stopped. If the decision was overturned and you received a payment of arrears that is backdated to when your payments stopped, then your pension is treated as never having ceased.

    If your invalidity pension payments recommenced without a payment of arrears, or an arrears that does not cover the full period to when the payment previously stopped, then the date your payments were restarted will be your new commencement date.

    Impact of backdating

    A classification (or reclassification) with a retrospective effective date does not change the date that the invalidity pension started.

    Example 3: Classification to Class A with backdated effect

    Roger was discharged on administrative grounds on 2 October 2005. On 14 October 2005, he started receiving retirement benefits and was not considered eligible for an invalidity pension.

    On 19 May 2010, it was determined by CSC that Roger should have been discharged on medical grounds and classified as Class A incapacity with an effective commencement date for the invalidity pension of 14 October 2005.

    While the invalidity pension had an effective commencement date of 14 October 2005, CSC commenced paying the invalidity pension (including a lump sum payment in arrears) on 14 June 2010.

    Roger is affected by the court decision as the invalidity pension commenced for tax and superannuation purposes after 20 September 2007. His invalidity pension payments are taxed as superannuation lump sums.

    End of example

    If you are affected

    You may wish to register for our current review process to seek a review of your assessments for previous years by completing a simplified request for objection – for recipients of certain invalidity benefits form. You can complete the form and mail to us if:

    • it's for the 2010–11 to 2019–20 financial years
    • you are impacted by the court decision, and
    • you have lodged all overdue income tax returns.

    Find out more about our remediation process at Treatment of military invalidity benefits following Full Federal Court decision.

    Reversionary beneficiaries

    There are changes for certain reversionary beneficiaries due to the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220.

    Work out if you are affected

    You are impacted by the decision if:

    • you are a reversionary beneficiary of a deceased veteran
    • at the time they died, the deceased veteran was receiving invalidity benefits that  
      • were paid under the DFRDB scheme or MSB scheme
      • started on or after 20 September 2007
       
    • you are a death benefit dependant under tax law.

    If you are affected

    If you are affected, your reversionary benefit pension income is a death benefit lump sum which is non-assessable and non-exempt income.

    This means:

    • you do not need to pay tax on your reversionary pension
    • you are entitled to a refund of amounts CSC has withheld from these pension payments.

    Your 2022 individual income tax return

    We will refund any amounts CSC has withheld from your pension payments during the 2021-22 income year, when you lodge your tax return.

    CSC will have sent you a payment summary that includes the amounts withheld from your pension. You should prepare your return as usual based on the payment summary CSC have given you. We will also pre-fill your tax return based on the payment summary from CSC for when you or your tax agent prepare your return.

    Once you lodge your return, we will undertake the necessary processes to adjust it. We will remove the pension income and refund excess credits to you. Once we process your return, we will issue you a notice of assessment which will reflect these changes. Your outcome will depend on your personal circumstances but is likely to result in a reduced tax liability or a refund.

    We will amend any other returns we can for you at the same time. We can only amend returns which are within your period of review. For most taxpayers with simple affairs, the amendment period of review is two years from the day we issued you with an assessment.

    Amending your individual income tax returns for other years outside your period of review

    If you have included these payments as income in your tax return for the 2008 and later income years you will need to lodge an objection to have your return amended for any year we cannot amend when you lodge your return for the 2022 year.

    Before you lodge an objection, it is important that you understand how it may impact you:

    • If you have an existing debt, any credits will be offset against that debt before any remaining amounts are refunded to you.
    • An objection will result in changes to your assessable income on your notice of assessment. Changes to your assessable income may have financial impacts to other payments and obligations that you may wish to discuss with your financial adviser. This can include impacts to  
      • family tax benefits
      • child care subsidy
      • child support payments to or from an ex-spouse
      • paid parental leave payments
      • other government support payments that consider your taxable income.
       
    • Seek professional advice if you are unsure how an objection to earlier assessments may impact you.

    Next steps

    • Find out how to object to a decision and get a copy of the objection form.
    • When you complete the objection form you should clearly state the following:

      I am a reversionary beneficiary of a veteran who was receiving an invalidity benefit provided under the MSB or DFRDB scheme impacted by the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220.

    We have worked closely with CSC and in most cases, you will not need to provide any additional information. If we do need additional information, we will contact you.

    For more information, see Self-assessment and the period of review.

    The 2021–22 income year and onwards

    You do not need to pay tax on your reversionary pension. CSC are responsible for making the necessary changes to make sure you don't pay tax on your reversionary pension from 1 July 2021 onwards.

    CSC have advised us they will be contacting you to advise you of the change in the way this income is taxed and will:

    • stop withholding tax from the payments they make to you
    • repay any amounts they have already withheld during the 2021–22 year.

    Superannuation changes

    We will use information from CSC to:

    When we adjust your total super balance, we will also consider if the change means you have no longer exceeded your contributions caps and if you are now entitled to a co-contribution of the low-income super tax offset.

      Last modified: 08 Aug 2022QC 64921