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Edited version of private advice
Authorisation Number: 1051834741342
Date of advice: 11 June 2021
Ruling
Subject: Taxable income - incapacity payments
Question: Are your Incapacity Payments paid by the Department of Veterans' Affairs considered to be taxable income (either partially or in full)?
Answer: No.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You were a serving part-time member of the Australian Defence Force Reserve ('the Reserves').
You suffered injuries and illnesses during your service as a part-time Reservist.
You were medically discharged from the Reserves.
You are entitled to receive the compensation, in the form of incapacity payments, in accordance with section 118 of the Military Rehabilitation and Compensation Act 2004 (MRCA).
You receive incapacity payments which are calculated with reference to normal earnings under sections 154 and 161 of the MRCA.
Relevant legislative provisions
Income Tax Assessment Act 1997 paragraph 51-33(2)(d)
Income Tax Assessment Act 1997 section 52-65
Income Tax Assessment Act 1997 section 53-20
Taxation Administration Act 1953 subsection 12-1(1)
Taxation Administration Act 1953 section 12-120
Reasons for decision
You contend that the incapacity payments made to you are exempt because section 53-20 of the ITAA 1997 exempts payments that are similar to exempt payments made under the Veterans' Entitlements Act 1986 (VEA 1986) as listed in section 52-65 of the ITAA 1997. The VEA 1986 does not apply to Reservists: it applies to individuals who sustained an injury in war or a war-like area.
You receive incapacity payments under the MRCA because of an injury or disease sustained as a part-time Reservist. Paragraph 51-33(2)(d) of the ITAA 1997 states that a compensation payment for the loss of pay or an allowance worked out by reference to your normal earnings as a part-time Reservist is exempt from income tax. In that case, subsection 12-1(1) of the Taxation Administration Act 1953 (TAA 1953) would apply which means there is no need for an entity to withhold tax as would otherwise be required under section 12-120 of the TAA 1953.