Military invalidity pensions – Douglas decision

Work out if your military invalidity pension is affected by the Douglas decision and what it means for your tax.

Advising you of your options   From late February, we will write to those veterans affected by the Douglas decision who haven't yet requested a review of their prior year tax returns to advise on their options. See We're contacting some veterans.

On this page

• The Douglas decision
• How the decision affects you
• Your tax returns
• Simplified review process for 2010–11 to 2019–20
• PAYG withholding
• Reversionary beneficiaries
• Superannuation changes

The Douglas decision

The Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220 (the Douglas decision) found that, from 1 July 2007, certain invalidity pension payments for veterans and their beneficiaries are superannuation lump sums, and not superannuation income streams.

The vast majority of veterans will be in a better tax position – paying less tax. For veterans that will pay more tax (see Who is affected by the Douglas decision?), the government has proposed a new tax offset. The proposed tax offset will not apply until it becomes law.

Proposed tax offset

On 23 November, the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022External Link was introduced into parliament. This Bill proposes a new tax offset for individuals receiving invalidity pensions that started on or after 20 September 2007 under either:

• the Defence Force Retirement and Death Benefits (DFRDB) scheme
• the Military Superannuation and Benefits (MSB) scheme.

The tax offset aims to ensure veterans and their beneficiaries receiving these pensions don't pay more tax because of the Douglas decision. This proposed change is not yet law.

Until the proposed offset becomes law, we will process 2020–21 and 2021–22 tax returns under the current law (that is, applying the Douglas decision). If this change becomes law, we will amend these returns if required.

For more information on the changes proposed, see Tax treatment of invalidity pensions.

Who is affected by the Douglas decision?

You are affected by the Douglas decision if you are a veteran or their beneficiary and your invalidity pension payment:

• started on or after 20 September 2007, and
• is made by the Commonwealth Superannuation Corporation (CSC) under either  
  • the Defence Force Retirement and Death Benefits (DFRDB) scheme
  • the Military Superannuation and Benefits (MSB) scheme.
   

Note: if you stopped receiving payments for a period of time, you may have a new start date for your invalidity pension.

Find out how the decision affects you.

If your invalidity pension does not meet the above two conditions, you're not affected by the Douglas decision and your payments were correctly taxed as a superannuation income stream.

When your invalidity pension started

You're only affected by the Douglas decision if your invalidity pension start date was on or after 20 September 2007. Your pension start date will be shown on documentation provided to you by the CSC.

The start date will generally align with when you were classified as having a Class A or B incapacity.

If your date of discharge was on or after 20 September 2007, any invalidity pension will always start on or after 20 September 2007.

There may have been a gap between your discharge date and your invalidity pension start date. Whether you're affected will depend on when your invalidity pension started, not your discharge date.

Reclassification

Reclassification of your invalidity pension can determine if you are affected by the Douglas decision.

If you were reclassified on or after 20 September 2007 from:

• a retirement pension to an invalidity pension, you are affected by the Douglas decision because your invalidity pension start date is after 20 September 2007
• one DFRBD invalidity pension class that started before 20 September 2007 to another invalidity pension class, you are not affected by the Douglas decision because your invalidity pension start date doesn’t change
• one MSB invalidity pension class that started before 20 September 2007 to another invalidity pension class, and your payment stops and restarts  
  • if it's backdated to the date the payments stopped, it is not affected by the Douglas decision because your invalidity pension start date doesn’t change
  • if it's not backdated, you are affected by the Douglas decision because your new invalidity pension start date is after 20 September 2007.
   

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

How the decision affects you

How the Douglas decision affects your tax position depends on a range of factors, including your age and whether you receive a disability superannuation benefit (DSB) or have pre-July 1983 service days.

The vast majority of veterans and their beneficiaries will pay less tax.

• A small number of veterans and their beneficiaries will pay more tax.

When you will pay less tax

You are most likely to pay less tax because of the Douglas decision if you are a:

• veteran aged under 60 – as your invalidity pension is taxed more concessionally as a super lump sum
• veteran aged 60 or over who either  
  • receives a disability superannuation benefit (DSB), or
  • has pre-July 1983 service days.
   

If you receive a DSB or have pre-July 1983 service, this increases your tax-free component. When you combine this with the changes due to the Douglas decision, you will generally pay less tax overall.

If you believe you qualify to have your military invalidity pension taxed as a DSB, you can apply to CSCExternal Link for a determination. If CSC reclassifies your benefit as a DSB, they will inform the ATO so we can ensure you're taxed correctly.

If you are paying less tax because of the Douglas decision, you may want to amend prior year tax assessments (back to the 2010–11 income year) using our simplified review process. You may be entitled to a refund.

 

When you will pay more tax

You are likely to pay more tax because of the Douglas decision if you are aged 60 or over and don’t have pre-1983 service days or an entitlement to a disability superannuation benefit (DSB). See Proposed tax offset.

Your tax returns

If you're affected by the Douglas decision, when you lodge your tax return your military invalidity pension payment will be treated as a superannuation lump sum payment.

You need to include your military invalidity pension payment amounts in your tax return at question 8 Australian superannuation lump sum payments. These amounts will be shown in your CSC payment summary. If you lodge via myTax, we will normally pre-fill this amount in your tax return. If it's not pre-filled, you will need to manually include it.

If you reached your preservation age or turned 60 during the financial year, you will get 2 payment summaries from CSC:

• one showing 1 July as the date of payment for all payments made to you before you reached preservation age or turned 60
• a second showing your most recent birthday as the date of payment or 30 June for all payments made to you after you reached preservation age or turned 60, reflecting the way this income is taxed when this happens.

2020–21 and 2021–22 tax returns

If you have lodged your 2020–21 and 2021–22 tax returns and your military invalidity pension was not treated as a superannuation lump sum payment, we should amend your return.

We're committed to amending your tax returns as quickly as possible, but each person’s circumstances are different. Some amendments can take some time, as much as four months to complete.

Simplified review process for 2010–11 to 2019–20

Our simplified review process will amend your tax assessments in line with the Douglas decision.

If you participate, we will amend your tax assessments for the 2010–11 to 2019–20 income years.

To be eligible for the review process, you must:

• be affected by the Douglas decision
• have lodged all overdue tax returns – check and lodge any outstanding returns.

Before participating in our review process, it's important you understand:

• the potential outcomes of a review
• the process and timeframes.

To participate in our simplified review process, complete the form Request for objection – for recipients of certain invalidity benefits (NAT 75383). This authorises us to review and amend your tax assessments for the relevant financial years to reflect the correct taxation position.

We're contacting some veterans

We are writing to some veterans who are affected by the Douglas decision, to invite them to participate in the simplified review process.

The personalised letters will be sent progressively over the coming months, starting in late February.

The letters will provide advice on how to apply for a review of tax assessments, that include invalidity benefits, between the 2010–11 to 2019–20 income years.

We will not write to veterans who have:

• outstanding income tax returns for the 2010–11 to 2019–20 income years
• previously opted into the remediation process.

We're committed to finalising reviews as quickly as possible – see Process and timeframes.

Potential outcomes of a review

It's important to consider the likely outcomes before deciding whether to participate. You may wish to seek professional financial advice to understand how a change in your taxable income affects your circumstances, including your superannuation and other payments and obligations.

The outcome of your review will depend on your personal circumstances, and may result in any of the following:

• a credit assessment – but your refund may be reduced by any debt you owe to us or another Australian Government agency (see Using refunds or credits to pay debt)
• a debit assessment, that is you will be liable to pay more tax – in which case we'll contact you to discuss your options including a payment arrangement with favourable terms
• no change to your tax outcome overall
• a change to your taxable income with financial impacts on other payments and obligations, such as  
  • family tax benefits
  • child care subsidy
  • parental leave pay
  • child support (see Services Australia website for information on Act of Grace payments (PDF 165KB)This link will download a file)
  • other government support payments that take into account your taxable income.
   

Process and timeframes

We're committed to finalising reviews as quickly as possible, but each person’s circumstances are different. If you do participate in this process, it could take time to determine any refund owing to you, but we will keep you informed along the way.

Complex cases can take longer due to circumstances such as:

• receiving disability superannuation benefits
• if you have lump sum payment in arrears
• multiple super schemes
• being party to a family law split
• bankruptcy
• multiple income years to amend.

Once the review process is complete, we'll send you an amended notice of assessment. In most cases this will be sent to your myGov inbox.

Review of 2007–08 to 2009–10 tax returns

The streamlined review process does not apply to the 2007–08 to 2009–10 income years. You can request a review of your income tax assessments for these years through the normal objection process.

As part of your objection request, you'll need to:

• include a written request for an extension of time as these tax periods are outside the period of review
• provide the necessary evidence that supports any amendments to your assessments for these years. You should be able to obtain this information from CSC.

PAYG withholding

Your fortnightly invalidity pension payments are subject to the pay as you go (PAYG) withholding system. The amount withheld depends on, among other things, whether your payments are either:

• super income stream benefits
• super lump sum payments.

If your invalidity pension payments are affected by the Douglas decision and are therefore super lump sum payments, you don't need to do anything. CSC has determined which rates apply to you and is withholding the updated amounts from your fortnightly payment. Your withholding amounts will take into account the tax-free threshold and Medicare levy exemption if you have claimed them.

The withholding rates are set out in the Tax table for super lump sums but with a modification that may reduce the amount if you have claimed the tax-free threshold from CSC.

If you're not affected by the Douglas decision, the Tax table for super income streams continues to apply.

Different PAYG withholding tax tables apply depending on your personal circumstances. Individuals with the same invalidity pension payment per fortnight may have different amounts of PAYG withheld and, therefore, different take home amounts.

Adjust your PAYG withholding

Depending on your personal financial circumstances, you may want to consider:

• whether you claim the tax-free threshold for your invalidity pension payments from CSC
• varying your PAYG withholding
• claiming an exemption from the Medicare levy.

Reversionary beneficiaries

You're affected by the Douglas decision if both of these apply:

• you're a reversionary beneficiary of a deceased veteran
• at the time they died, the deceased veteran was receiving an invalidity pension that  
  • was paid under the DFRDB scheme or MSB scheme
  • started on or after 20 September 2007.
   

If you're affected by the Douglas decision

If you are a death benefit dependant under tax law, your reversionary pension is non-assessable and non-exempt income.

This means:

• you don't need to pay tax on your reversionary pension
• you're entitled to a refund of amounts CSC withheld from these pension payments dating back to the 2007–08 income year.

Your 2021–22 tax return

We'll refund any amounts CSC has withheld from your reversionary pension payments during the 2021–22 income year, after you lodge your tax return. This will be in the original tax assessment, or we will issue an amended assessment.

The payment summary CSC sent you includes the amounts withheld from your reversionary pension. You should prepare your return as usual based on the payment summary. We'll also pre-fill your tax return based on the payment summary.

At the same time, we'll amend any other relevant returns within your period of review. For most taxpayers with simple affairs, the amendment period of review is two years from the day we issue you with an assessment.

Amending returns outside your period of review

You will need to lodge an objection to amend any tax returns outside your period of review that included your reversionary pension payments – back to the 2007–08 income year.

Before lodging an objection, you need to understand how it may impact you:

• If you have an existing debt with us or another Australian Government agency, 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, which may have financial impacts on other payments and obligations, including  
  • family tax benefits
  • child care subsidy
  • child support payments to or from an ex-spouse
  • paid parental leave payments
  • other government support payments that take into account your taxable income.
   

Seek professional financial advice if you're unsure how an objection to earlier assessments may impact you.

To lodge an objection:

• See How to object to a decision and get a copy of Objection form – for taxpayer.
• On the objection form clearly state the following:
  
  I am a reversionary beneficiary of a veteran who was receiving an invalidity pension provided under the MSB or DFRDB scheme affected by the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220.

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

Superannuation changes

We used the information from CSC to identify people who are affected by the Douglas decision and took action to:

• ensure that payments which are now super lump sum payments are not counted towards your transfer balance cap
• adjust your total super balance as required.

When we adjusted your total super balance, we also checked if this has any impact on whether you had previously exceeded your contributions caps and made corrections where required. We also checked whether the adjustment to your total super balance affected your entitlement to co-contributions or the low income super tax offset.

Work out if your military invalidity pension is affected by the Douglas decision and what it means for your tax.