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Edited version of your written advice
Authorisation Number: 1051461575509
Date of advice: 30 November 2018
Subject: Compensation payments
Question
Are the Incapacity payments received by the Taxpayer from the Department of Veterans Affairs, exempt income under subsection 51- 33(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)?
Answer
Yes
Compensation for Part-time defence reservists that leave the Reserve Defence Forces due to injury or disease sustained while performing employment for a Reserve Defence Force paid using the Normal Earnings formula under the Military Rehabilitation and Compensation Act 2004 for loss of pay and allowances is exempt.
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You were a serving member of the Australian Defence Force Reserve (the Reserves) from XXXX to XXXX. You suffered injuries and illnesses in the course of your service.
In XXXX, you were discharged from the Reserves as “medically unfit” due to the injuries and illnesses sustained.
You were injured in XXXX.
In XXXX you received a “Determination of your claim for Incapacity payments and Reasons for Decision” notification from the Department of Veteran’s Affairs (DVA). It stated:-
● In XXXX, you were discharged from the Reserves.
● Prior XXXX you were paid under section 86 Military Rehabilitation and Compensation Act 2004 (the MRCA), “Compensation for incapacitated part-time reservists” which was taxable income.
● From XXXX you became a “former member” of the Reserves and became entitled to compensation for incapacity to work under section 118 of the MRCA.
Section 118 of the MRCA states that
“The Commonwealth is liable to pay compensation to a person for a week if:
(a) the person is a former member; and
(b) the Commission has accepted liability for a service injury or disease of the person; and
(c) the service injury or disease results in the person’s incapacity for work for the week; and
(d) a claim for compensation in respect of the person has been made under section 319.”
● Your entitlement to compensation has been calculated in line with your Normal Earnings and under section 161 of the MRCA and with the formula applicable to former part-time Reservists not engaged in civilian work (the Compensation Payments).
● In accordance with the Department’s Policy (CLIK Reference 5.16 MRCA) tax is applicable to payments made under Section 161 of the MRCA.
5.16 MRCA - Service giving rise to injury is Part-time Reserves – Not engaged in civilian work - Section 161
“Where NE is calculated by reference to seven times the daily rate of Reserve pay, as distinct from the actual number of Reserve days the person performed Reserve service, the total amount of incapacity payments are assessable for income tax purposes”.
● You received payment in arrears
● It amounted to a total of $XX,XXX of which Tax was withheld.
● From XXXX you will receive an ongoing entitlement of a fortnightly payment
● Your medical certificate expires in XXXX. A new medical certificate is required for if your incapacity is to extend beyond this date and for payments to continue.
You have been in dispute with the DVA as to the tax status of the Compensation Payments. The DVA has been withholding tax from the Compensation Payments based on its policy that such payments are taxable.
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