If you receive DFRDB invalidity pay or an MSBS invalidity pension that started on or after 20 September 2007, your fortnightly payments are taxed as superannuation lump sums because of the Douglas decision. Most affected veterans pay less tax as a result. If the change would leave you paying more, a tax offset brings your tax back to what it would have been, and since 31 May 2024 a separate rule keeps the Douglas treatment from changing your service pension or Age Pension.
Who is affected
The ATO says payments first made from these two schemes on or after 20 September 2007 get the different tax treatment. Payments that were already being made before that date keep the old treatment.
| Your pension | How it is taxed |
|---|---|
| DFRDB invalidity pay or MSBS invalidity pension that started on or after 20 September 2007 | Superannuation lump sums. The veterans' superannuation (invalidity pension) tax offset may apply. |
| A pension paid to a surviving spouse or other beneficiary after the death of a member whose invalidity pension started on or after 20 September 2007 | Superannuation lump sums. The same tax offset may apply. |
| DFRDB or MSBS invalidity pension that started before 20 September 2007 and has not been cancelled and restarted since | Superannuation income stream, as before Douglas |
| Retrospective invalidity, where CSC decides after 20 September 2007 that you should have been medically retired earlier | In the Douglas case, the Court held the pension started for tax purposes when CSC made its decision, not on the backdated date |
The rules cover DFRDB and MSBS invalidity benefits only. For serving members, Douglas matters only if you are in one of those schemes and later leave the ADF with an invalidity classification. A pension starting now would begin after 20 September 2007, so it would be taxed as lump sums.
To check where you stand, look at the scheme and benefit name on your CSC correspondence, the date your invalidity benefit started, and how the payments appear on your income statement.
How the payments are taxed now
CSC withholds tax from each fortnightly payment using the ATO's tax table for super lump sums, with a change that can reduce withholding if you claim the tax-free threshold from CSC. If you also earn wages or other income with tax withheld, the ATO suggests claiming the tax-free threshold from the other payer instead of CSC, or asking for more tax to be withheld from the other income, so you don't end up with a debt at tax time.
Part of each payment may be tax-free. The ATO says you have a tax-free component if your ADF service started before 1 July 1983, or if CSC has classified your benefit as a disability superannuation benefit and you were discharged before your ADF retirement age. With that classification, the longer your time to retirement age at discharge, the bigger the tax-free part.
You can apply to CSC for a disability superannuation benefit determination. The ATO says most veterans qualify, because a medical discharge recognises you could no longer do ADF work. If the determination covers earlier years, CSC will tell you to ask the ATO to review those assessments with the objection form and a copy of CSC's letter. The ATO says the review can take up to 3 months.
The veterans' superannuation (invalidity pension) tax offset
The Treasury Laws Amendment (2022 Measures No. 4) Act 2023 kept the lump sum treatment for DFRDB and MSBS invalidity benefits and added this offset. It applies from the 2007–08 income year. Everyone affected by Douglas is eligible, but the ATO says only a small number get an amount, because only a few end up paying more tax.
You don't apply for it. After you lodge your tax return, the ATO works out your income tax, Medicare levy and Medicare levy surcharge with the payments treated as lump sums, and again as if they were an income stream. If the lump sum figure is higher, the difference is your offset. It reduces your tax first, then any Medicare levy or surcharge. Anything left over is not refunded, transferred or carried forward. Your notice of assessment shows the amount and how it was applied.
The calculation can take longer if you have lump sum arrears, employment termination payments, foreign residency, or special professional or primary production averaging.
Getting earlier tax years amended
If you haven't asked the ATO to review returns for years before 2021, you can use the ATO's request for review form. A review covers every year that is eligible, not just the ones you choose. The 2023 law lets the ATO amend assessments for income years starting on or before 1 July 2021 to apply the offset and the new rules, even where the usual time limits for amendments have passed.
The ATO says most people are better off after a review, but lists possible results:
- a refund, which may be reduced by a debt you owe the ATO or another government agency
- more tax to pay, usually because you now have a study loan you didn't have when you first lodged
- no overall change
- a change in taxable income that affects Child Care Subsidy, Parental Leave Pay, Family Tax Benefit, child support or other payments based on taxable income.
Reviews take longer if you have a disability superannuation benefit, lump sum arrears, more than one super scheme, a family law split, bankruptcy or several years to amend. The amended notice of assessment usually goes to your myGov inbox. The ATO says you may want professional financial advice first, to understand how a change in taxable income would affect you.
Arrears after a retrospective medical discharge
Many veterans are paid arrears by CSC, DVA or both when their medical discharge is recognised late. Arrears are taxed in the year you receive them. A tax offset may apply if receiving them in one year pushes up your tax or Medicare levy.
You may also have to repay amounts to Services Australia or DVA, because you can't be compensated twice for the same injury. For repayments to DVA, DVA gives you and the ATO a letter showing what was repaid for each year, and the ATO amends those years. The ATO says trying to amend them yourself usually won't work.
Service pension, Age Pension and other means-tested payments
The Social Services and Other Legislation Amendment (Military Invalidity Payments Means Testing) Act 2024 changed the means tests from 31 May 2024. Under the Veterans' Entitlements Act, DFRDB invalidity pay and MSBS invalidity pensions are now called military invalidity pension income streams.
- They are not counted under the assets test.
- For the income test, DVA counts the gross annual payment minus a special reduction amount, which is the tax-free component the payments would have if they were still an income stream.
- Means test assessments made before 31 May 2024 on the old basis are validated.
DVA says this keeps the income support result the same as before Douglas, while you keep the tax benefit. The Act also put a similar rule into the Social Security Act, which covers payments made through Services Australia. Read about the DVA service pension.
Read DVA's policy on military invalidity pension income streams
Where to get help
CSC handles questions about your pension, its start date and disability superannuation benefit status. The ATO or a registered tax agent can help with assessments, amendments and the offset. A licensed financial adviser can explain how a change in taxable income affects your other payments. Free ex-service organisation advocates help with DVA claims and reviews, not tax returns. Read about DFRDB and MSBS invalidity pensions or the Douglas case itself.