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  • Treatment of military invalidity benefits following Full Federal Court decision

    See tax remediation following the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220.

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    Tax and super treatment of benefits

    Due to the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220 (the Douglas decision), the tax and superannuation treatment of specific invalidity benefit payments has changed.

    To find out if you are affected by the Douglas decision, see Individuals receiving military invalidity benefits – impact of court decision.

    If you are affected by the Douglas decision:

    If you are a non-resident affected by the Douglas decision, the only change is to payments that were subject to tax in Australia. These payments will now be taxed as a superannuation lump sum.

    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 benefits that started on or after 20 September 2007 under either:

    • the Defence Force Retirement and Death Benefits Scheme
    • the Military Superannuation and Benefits Scheme.

    The tax offset aims to ensure veterans and their beneficiaries receiving these pensions don't pay more tax because of the Douglas decision (Commissioner of Taxation v Douglas [2020] FCAFC 220). 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. If this change becomes law, we will amend affected returns.

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

    Your 2022 individual tax return

    If you are affected by the Douglas decision, your military invalidity benefit payment will be treated as a superannuation lump sum payment when you lodge your 2022 tax return. If the tax treatment of your military invalidity benefit payment subsequently changes, we will amend your tax return.

    Important information to note before lodging your 2022 tax return:

    • We are pre-filling amounts reported by the Commonwealth Superannuation Corporation (CSC) into your tax return – at Label 8 Australian superannuation lump sum payments.
    • If you received a payment summary from CSC but the amounts are not pre-filled, you will need to manually include it.

    For most individuals, the payment summary you receive from CSC will show either 1 July 2021 or 30 June 2022 as the date of payment. However, it will include the sum of all the payments made to you throughout the year, including the tax free and taxable components of the payment.

    If you reached your preservation age or turned 60 during the 2021–22 financial year, you will get 2 payment summaries from CSC:

    • The first will show 1 July 2021 as the date of payment for all payments made to you before you reached preservation age or turned 60.
    • The second will show your most recent birthday as the date of payment or 30 June 2022 for all payments made to you after you reached preservation age or turned 60. This is because the way this income is taxed changes when you reach preservation age or turn 60.

    We may amend your return if:

    • you lodge your individual tax return before you have the payment summary information from CSC
    • the information you report to us is different to what we receive from CSC.

    Refer to Pay as you go withholding for military superannuation payments.

    2021 Individual tax returns

    If you are affected by the Douglas decision, your military invalidity benefit payments for the 2020–21 income years were treated as lump sum payments when you lodged your 2021 tax return.

    Amending your prior year returns

    If you are affected by the Douglas decision, and want to request amendments for your previous year tax assessments, refer to:

    Current review process

    Our current review process is underway for individuals affected by the Douglas decision. It involves the review of income tax assessments and super reporting for income years from 2010–11 to 2019–20.

    To be eligible for the review process, you must:

    1. be affected by the Douglas decision – work out if you are affected
    2. have lodged all overdue tax returns – you can check and lodge any outstanding returns.

    If you believe you qualify for a disability superannuation benefit (DSB), you should apply to the CSC for a determination before you start the review process – this will save you time.

    Before making a decision to take part in the review process, it's important that you understand:

    Potential outcomes of a review

    Participating in the review process may not be in your best interests. It is important to consider the likely outcomes before deciding whether to register. We encourage you to seek financial advice to help you understand how a change in your taxable income affects your circumstances including superannuation and other payments and obligations.

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

    • a credit or refund
    • a debit where you will have to pay money
    • no change overall
    • additional financial impacts to other government payments and obligations.

    Amendments that result in a change to your taxable income may have financial impacts to other payments and obligations, such as:

    • family tax benefits
    • child care subsidies
    • parental leave payments
    • child support
    • other government support payments that take into account your taxable income.

    Process and timeframes

    We are committed to finalising reviews as quickly as possible. While simple amendments may take around 2 months, complex cases can take longer to finalise.

    If your review has taken more than 2 months to be processed, it is likely due to the complexity of your circumstances. Complex circumstances include individuals with any of the following:

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

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

    If the outcome of your review is:

    • a credit assessment, your refund may be reduced by any debt you have with us or any Australian Government agency – see Using refunds or credits to pay debt
    • a debit assessment, we will contact you to discuss your options including setting up a payment arrangement with favourable terms.

    Register for the review process

    If you are eligible, and want to be part of the review process, you can register by completing the Request for objection – for recipients of certain invalidity benefits form (NAT 75383).

    Tax returns for 2007–08 to 2009–10 income years

    You can request a review of your income tax assessments for the 2007–08 to 2009–10 income years through the normal objection process – see how to lodge an objection.

    As part of your objection request, you will need to include a written request for an extension of time if the tax periods you are objecting to are outside the period of review.

    If you do object, you will need to provide the necessary evidence that supports any amendments being made to your assessments for these years. You should be able to obtain this information from CSC and Department of Veterans' Affairs (DVA).

    Superannuation remediation

    For individuals who have been identified as being affected by the Douglas decision, we have used the information from CSC to:

    • ensure that payments which are now super lump sum payments are no longer counted towards your transfer balance cap
    • adjust your total super balance as required.

    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 co-contributions or the low income super tax offset.

    Additional guidance

    Disability superannuation benefits (DSB)

    If you are receiving a military invalidity benefit and believe you qualify to have your benefit taxed as a disability superannuation benefit, we recommend you apply to CSC for a determination before you start the review process to ensure that your amendments can be processed as efficiently as possible.

    Individuals receiving military invalidity benefits from CSC may qualify for those benefits to be treated as disability superannuation benefits. Where a military invalidity benefit is also a disability superannuation benefit, an additional modification to the tax-free component of the benefit applies.

    Your benefit will be treated as a disability superannuation benefit if:

    • you experience physical or mental ill health, and
    • two qualified medical practitioners have certified that because of the ill-health it is unlikely that you can ever be gainfully employed in a capacity for which you are reasonably qualified because of education, experience, or training.

    Medical certificates that do not address your ability to work into the future are not sufficient.

    Note: If the medical certificate does not state a date as to when you were unable to gainfully employed then the DSB will apply from the date the medical certificate was provided.

    Where this evidence has been supplied to CSC during your invalidity assessment process, CSC will treat your benefit as a disability super benefit. It will also report this to us so that we can tax your benefit appropriately.

    If you have not provided 2 medical certificates to CSC that specifically state that you meet the disability superannuation benefit, you can provide them at any time to CSC. CSC will then treat your benefit as a disability superannuation benefit going forward. They will inform us so that we can ensure you are taxed correctly.

    Note: We do not make medical assessments. Your medical practitioner will make any medical assessment regarding your capacity to be employed in the future and provide medical certificates accordingly. We will only determine whether the disability superannuation benefit test under tax laws has been met and we may contact your medical practitioner to determine this if required.

    If you receive a military invalidity benefit it does not mean you automatically qualify for a disability superannuation benefit. You must also obtain the medical certification described above.

    Definition of a registered medical practitioner

    A registered medical practitioner must have either a general or specialist registration with the Medical Board of AustraliaExternal Link.

    Objections and review rights

    The review process simplifies the objection process, but it applies the same legal powers as an ordinary objection and you retain the same rights to seek an external review if you disagree with the outcome of the review process.

    Legislative instruments

    We have published legislative instruments on our Legal database to provide alternative methods to calculate the tax free and taxable components of a superannuation benefit for recipients of certain military invalidity pensions.

    • Pre-1 July 2021 (MS 2021/1): This legislative instrument sets out an alternative method for calculating the tax free and taxable components of pension payments made before 1 July 2021 that are affected by the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 2020 to ensure that no affected pension recipient is disadvantaged by the recalculation.
    • 2021–22 financial year (LI 2022/1): This legislative instrument extends the application of the alternative method for calculating the tax free and taxable components to pension payments made between 1 July 2021 and 30 June 2022 that are affected by the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 2020.
    • 2022–23 financial year (LI 2022/33): This legislative instrument extends the application of the alternative method for calculating the tax free and taxable components to pension payments made between 1 July 2022 and 30 June 2023 that are affected by the Full Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 2020.
      Last modified: 24 Nov 2022QC 62497