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Military invalidity pensions

Understand how your military invalidity pension is taxed.

Last updated 14 October 2025

Compensation overview

Veterans are subject to a very unique compensation system. You may receive compensation from either the Department of Veterans' Affairs (DVA), the Commonwealth Superannuation Corporation (CSC), or both. You may also start on government support payments before receiving compensation.

Some compensation may be exempt from tax and not included in various income tests, some may be exempt from tax and included in some income tests, and some may be taxable.

Following a judicial review of invalidity payments made by CSC under the Defence Force Retirement and Death Benefits (DFRDB) scheme and the Military Superannuation Benefits Scheme (MSBS) (hereafter referred to as the Douglas decision), payments first paid from these 2 schemes on or after 20 September 2007 were eligible for a different tax treatment to those already being received before that date. For veterans who are worse off because of the Douglas decision, a veterans' superannuation (invalidity pension) tax offset (VSTO) is available to ensure that they pay no more tax than they would before the Douglas decision.

It's also common for many veterans to receive an arrears from either or both, CSC and DVA as a result of belatedly recognising the veteran was entitled to a medical discharge. Sometimes an amount previously received from Services Australia will have to be repaid if the arrears is paid by DVA, and if the arrears is paid by CSC an amount previously received from DVA may have to be repaid.

Further, where you were on a retirement pension from CSC under DFRDB, a commutation taken on retirement will need to be repaid. This repayment obligation arises because at law, you can't be compensated twice for the same injury.

Tax treatment of ongoing compensation

Veterans may be medically discharged and immediately start receiving payments from DVA and CSC. Or they may be granted a retrospective medical discharge.

This section considers the ongoing regular compensation payments. Those who receive an arrears in a particular year as well as those who have to make repayments will have that tax treatment as covered in Taxation of arrears payments.

DVA payments that are subject to tax are taxed in the same way as employment income.

One off CSC payments will be taxed as a super lump sum.

Fortnightly CSC payments will be taxed as a super income stream unless it is one of the DFRDB or MSBS payments that the Douglas decision found had to be taxed as a super lump sum.

The Taxed element of a CSC super payment is not subject to tax when received after turning 60.

If you receive a super income stream that has a Taxed element and you are under 60, a super tax offset equal to 15% of the Taxed element is available if the invalidity payment is classified as a disability superannuation benefit (DSB). The DSB is covered in Disability superannuation benefits.

The Untaxed element of a super income stream payment received after you turn 60 entitles you to a super tax offset of 10% of the Untaxed element. The tax offset may be reduced if you have a high super income stream as there are some income caps that apply. See Superannuation-related tax offsets for further information.

A super lump sum payment is subject to tax rate caps as listed at Payments from super. A tax offset will be shown on the Notice of assessment for any tax paid above the caps. Following the reduction in tax rates for the 2025 tax year, a tax offset is unlikely for most veterans unless their taxable income exceeds $135,000.

Taxation of arrears payments

Arrears are taxed in the year of receipt and not in the year to which they attach. Some tax offsets and exemptions are available if more tax, Medicare levy or Medicare levy surcharge are payable than would otherwise be payable if the arrears were included in those earlier years. For more information see Lump sum payment in arrears. The calculation of the lump sum payment in arrears tax offset in respect of payments from CSC are complex and may extend the processing time of your income tax return.

Repayments

Repayments to Services Australia and DVA are common following a retrospective medical discharge. Less common is a repayment to CSC. The repayment results from the fact that you can't be compensated twice for the same injury. The payments were assessable in the year received. The arrears are also assessable and that would result in tax being paid on the same income twice.

To ensure that you don't pay tax twice on the same income, amounts repaid that relate to the years 2004 and later, are eligible to be excluded from the respective years.

You may have to repay amounts to DVA relating to tax years before 2004. Tax returns before 2004 can't be amended for repayments. Instead CSC will reduce the assessable arrears by the amount repaid to DVA in respect of the years before 2004 so tax is not paid on the same amount twice.

DVA will provide a letter to you and the ATO, advising the repaid amounts in respect of each year. The ATO will then amend the relevant year's income tax returns. As a general rule, attempts to self-amend will not be successful due to integrity checks built into ATO systems.

For more information about repayments see Amend a return for repayment of income.

Veterans' superannuation (invalidity pension) tax offset

The veterans' superannuation (invalidity pension) tax offset (VSTO) is a non-refundable tax offset that ensures veterans and their beneficiaries don't pay more tax because of the Douglas decision. It applies from the 2007–08 income year.

All veterans affected by the Douglas decision are eligible for the VSTO. However, only a small number of veterans will be entitled to a VSTO amount because the Douglas decision has resulted in them paying more tax.

You don’t need to apply for the VSTO. We will work out if you are entitled to a VSTO amount after you lodge your tax return. Your notice of assessment will include any VSTO amount you are entitled to and how it was applied.

How we work out the tax offset

After you lodge your tax return each year, we will work out your entitlement to any VSTO amount. We're unable to advise you what this amount will be before you lodge your tax return.

We work it out as follows:

Your income tax liability if your invalidity pension is treated as a super income stream

minus (−)

Your income tax liability if your invalidity pension is treated as a super lump sum

equals (=)

Your VSTO amount (if greater than zero).

In most cases, the offset calculation will be part of the normal tax return processing timeframes. However, it may take longer to work out your VSTO (extending the processing time), if you have any of the following complex circumstances:

  • special professional averaging
  • foreign residency
  • employment termination payments or 'lump sum A' payments
  • primary production averaging
  • lump sum payment in arrears.

How the VSTO is applied

If you're entitled to a VSTO amount, we will use it to reduce any tax you need to pay. If your tax is reduced to zero, we will use any remaining VSTO amount to reduce any Medicare levy, or Medicare levy surcharge you may need to pay.

Any VSTO amount remaining can't be refunded to you, transferred, or carried forward into future income years.

Any offset amount you are entitled to will be shown on your notice of assessment.

Example: how the VSTO amount is applied

Andrew is 62 years old and receiving an invalidity pension from the MSBS that started in March 2019. His invalidity payments are affected by the Douglas decision.

When processing Andrew's 2025 tax return, we work out:

  • Andrew's tax payable would be $950 before applying the VSTO
  • Andrew is exempt from paying the Medicare levy and Medicare levy surcharge
  • Andrew would pay more tax due to the Douglas decision and is entitled to a VSTO amount of $900.

We use Andrew's VSTO amount to reduce his tax payable to $50.

The CSC withheld $2,200 in tax from Andrew's invalidity payments. As his tax payable is now $50 and he has no other outstanding debts, we will refund $2,150 to Andrew.

End of example

Your notice of assessment

Information about your VSTO entitlement if any, and how it was applied, will be included with your notice of assessment.

Note: Once CSC advise the ATO that you're eligible for the VSTO, all tax returns processed after that date will be considered for VSTO treatment. You will be eligible for the VSTO if you have eligible income reported in the tax return. If you have no eligible income reported, you're not eligible for the VSTO.

Disability superannuation benefits

If you believe you qualify to have your military invalidity pension taxed as a DSB, you can apply to CSCExternal Link for a determination. Most veterans qualify for a DSB as the medical discharge recognises that they could no longer work in the ADF and their ADF training was about performing duties peculiar to the ADF.

The DSB can result in less tax being paid:

  • If you're receiving a super income stream benefit, are under 60 and the payment includes a Taxed element, you will be entitled to a super tax offset equal to 15% of the Taxed element.
  • If you're receiving fortnightly super lump sum payments and you were discharged before your compulsory retirement age, part of your payment will be treated as tax-free. The greater your time to retirement, the greater the tax-free component.

If CSC reclassifies your benefit as a DSB, they will inform us so we can ensure you're taxed correctly. We use DSB data, provided to us monthly from CSC, to amend your tax assessments if they are within the period of review. This process can take up to 3 months.

For most taxpayers with simple affairs, the amendment period of review is 2 years from the day we issue you with an assessment.

For tax assessments that are outside the period of review, you can request a review of prior year tax assessments using this review form.

If there is a change in your taxable income, this could affect your Services Australia – Families and Child Support entitlements or obligations. Contact Services Australia for more information.

Review of your tax returns

You may not have requested a review of tax returns for years before 2021 that were affected by the Douglas decision. As a general rule, you will be financially better off following a review, especially if CSC have treated the payment as eligible for DSB treatment. You will be eligible for Douglas treatment if CSC are now treating your payments as a super lump sum. Use this review form if you want affected returns to be amended.

Potential outcomes of a review

It's important to consider the likely outcomes before seeking a review. You may wish to seek professional financial advice to understand how a change in your taxable income affects your circumstances, including your super 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 – however, your refund may be reduced by any debt you owe to us or another Australian Government agency (see Offsetting your credit or refund)
  • a debit assessment, that is you will be liable to pay more tax and usually arises because you currently have a student loan which you didn't have at the time that the tax return was lodged
  • no change to your tax outcome overall
  • a change to your taxable income with financial impacts on other payments and obligations, such as

Note: If you seek a review it will apply to all years that are eligible for review.

Process and timeframes

We're committed to finalising reviews as quickly as possible, but each person’s circumstances are different. 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 super 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.

We will work out any VSTO you may be entitled to when we review your assessments. If you're entitled to a VSTO amount, your amended notice of assessment will advise how much you're entitled to and how it was applied.

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.

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.

The Tax table for super income streams applies to super income streams.

The Tax table for super lump sums applies to super lump sums but with a modification that may reduce the amount if you have claimed the tax-free threshold from CSC.

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:

Veterans in receipt of a super lump sum and other income subject to PAYG withholding should consider claiming their tax-free threshold from the other payer rather than CSC or else an upwards variation in respect of the other income to avoid a debt arising when the tax return is assessed.

 

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