The Douglas decision
The Federal Court decision in Commissioner of Taxation v Douglas [2020] FCAFC 220 (the Douglas decision) found that, from 1 July 2007, certain invalidity pension payments for veterans and their beneficiaries are superannuation lump sums, and not superannuation income stream benefits.
The vast majority of veterans will be in a better tax position due to the Douglas decision – paying less tax. Tax will increase for a small number of veterans.
As a result of the Douglas decision, a veterans' superannuation (invalidity pension) tax offset (VSTO) has been introduced to ensure veterans and their beneficiaries don't pay more tax because of the Douglas decision.
Who is affected by the Douglas decision?
You are affected by the Douglas decision if you're a veteran or their beneficiary and your invalidity pension payment:
- started on or after 20 September 2007, and
- is paid by the Commonwealth Superannuation Corporation (CSC) under either
- the Defence Force Retirement and Death Benefits (DFRDB) scheme
- the Military Superannuation and Benefits scheme (MSBS).
You will enter your military invalidity pension payment amount at question 8 Australian superannuation lump sum payments in your tax return.
If you stopped receiving payments for a period of time, you may have a new start date for your invalidity pension.
Find out how the decision affects you.
If your invalidity pension does not meet the above 2 conditions, you're not affected by the Douglas decision and your payments were correctly taxed as superannuation income stream benefits (recorded at question 7 Australian annuities and superannuation income streams in your tax return).
When your invalidity pension started
You're only affected by the Douglas decision if your invalidity pension start date was on or after 20 September 2007. Your pension start date will be shown on documents provided to you by the CSC.
The start date will generally align with when you were classified as having either a Class A or B incapacity.
Example: invalidity pension started before 20 September 2007
Sandra was discharged on 2 July 2007. On 24 July 2007, she was determined by CSC as having a Class B incapacity and started receiving invalidity pension payments. The classification has remained the same since.
As Sandra's invalidity pension started before 20 September 2007, she is not affected, and her invalidity pension payments were correctly taxed as superannuation income stream benefits.
End of exampleIf your date of discharge was on or after 20 September 2007, any invalidity pension will always start on or after 20 September 2007.
There may have been a gap between your discharge date and your invalidity pension start date. Whether you're affected will depend on when your invalidity pension started, not your discharge date.
Example: invalidity pension started on or after 20 September 2007
Bryce was discharged on 15 September 2007. On 19 November 2007, he started receiving invalidity pension payments in accordance with being determined by CSC as having a Class A incapacity – the classification has remained the same since.
Even though Bryce was discharged before 20 September 2007, his invalidity pension started after 20 September 2007. As such, he is affected by the Douglas decision and his invalidity pension payments are taxed as superannuation lump sums.
End of exampleReclassification of your invalidity pension
Reclassification of your invalidity pension can determine if you are affected by the Douglas decision.
If you were reclassified on or after 20 September 2007 from:
- a retirement pension to an invalidity pension, you are affected by the Douglas decision because your invalidity pension start date is after 20 September 2007
- one DFRBD invalidity pension class that started before 20 September 2007 to another invalidity pension class, you are not affected by the Douglas decision because your invalidity pension start date doesn’t change
- one MSBS invalidity pension class that started before 20 September 2007 to another invalidity pension class, and your payment stops and restarts
- if it's backdated to the date the payments stopped, it's not affected by the Douglas decision because your invalidity pension start date doesn’t change
- if it's not backdated, you are affected by the Douglas decision because your new invalidity pension start date is after 20 September 2007.
Example: reclassification with a new start date
Shane received an invalidity pension from the MSBS that started in August 2005.
In July 2008, Shane's invalidity pension status is subsequently reviewed and ceased. CSC reviews Shane's circumstances in October 2010 and determines that he is eligible for a new invalidity pension.
As Shane started a new pension after 20 September 2007, the Douglas decision applies to Shane's invalidity pension payments from October 2010.
End of exampleA classification (or reclassification) with a retrospective effective date does not change the date that the invalidity pension started.
Example: classification to Class A with backdated effect
Roger was discharged on administrative grounds on 2 October 2005. On 14 October 2005, he started receiving retirement benefits and was not considered eligible for an invalidity pension.
On 19 May 2010, CSC determined that Roger should have been discharged on medical grounds and classified as having a Class A incapacity. The effective start date for the invalidity pension is 14 October 2005.
While the effective start date is 14 October 2005, CSC started paying the invalidity pension (including a lump sum payment in arrears) on 14 June 2010.
Roger is affected by the Douglas decision as the invalidity pension started for tax and superannuation purposes after 20 September 2007. His invalidity pension payments are taxed as superannuation lump sums from 14 June 2010 onwards only.
End of exampleHow the decision affects you
How the Douglas decision affects your tax position depends on a range of factors, including your age and whether you receive a disability superannuation benefit (DSB) or have service days before 1 July 1983.
The vast majority of veterans and their beneficiaries will pay less tax. A small number of veterans and their beneficiaries would pay more tax without the new tax offset.
When you will pay less tax
You are most likely to pay less tax because of the Douglas decision if you are a:
- veteran under 60 years old – as your invalidity pension is taxed more concessionally as a super lump sum
- veteran 60 years old or older who either
- receives a disability superannuation benefit (DSB), or
- has service days before 1 July 1983.
If you receive a DSB or have service days before 1 July 1983, this increases your tax-free component. When you combine this with the changes due to the Douglas decision, you will generally pay less tax overall.
If you are paying less tax because of the Douglas decision, you may want to amend prior year tax assessments using our objection form. You may be entitled to a refund.
Example: does not pay more tax because of the Douglas decision
Dev receives an invalidity pension from the MSBS that started in January 2008. Dev is under 60 years old and is not eligible for DSB tax status and has no pre-July 1983 service days.
The Douglas decision means Dev's invalidity pension is treated as a superannuation lump sum for income tax purposes but there is no change to the amount included in his taxable income.
As a result, his taxable income will not change. Because Dev is under 60 years old, his invalidity pension is taxed more concessionally as a super lump sum.
Dev is paying less tax because of the Douglas decision. He may choose to lodge an objection to amend his prior year tax returns.
End of example
Example: disability super benefit tax status
Graham is 65 years old and receives an invalidity pension from the DFRDB scheme, which started on 13 March 2010. Graham is also eligible for DSB tax status.
The Douglas decision applies to his invalidity pension, which is now taxed as a super lump sum – which also increases his tax-free component.
Graham not only receives more favourable tax treatment because his pension is being treated as a lump sum but also a decrease in his taxable income because of the tax concessions due to his DSB status.
Graham may choose to lodge an objection to amend his prior year tax returns.
End of exampleWhen you would pay more tax
You are likely to pay more tax because of the Douglas decision if you are 60 years old or older and one or both of the following apply:
- you don’t have service days before 1 July 1983
- your invalidity pension is not classed as a DSB.
The veterans' superannuation (invalidity pension) tax offset (VSTO) will offset any additional tax you would have paid because of the Douglas decision.
Example: Additional tax offset by the VSTO
Lottie receives a modest invalidity pension from the DFRDB scheme that started on 15 January 2015 but is not eligible for DSB tax status.
Lottie is over 60 years old and was previously eligible for a 10% superannuation tax offset on the untaxed component of the benefit because it was a superannuation income stream for income tax purposes. However, because of the Douglas decision, Lottie's invalidity pension is now considered to be a superannuation lump sum for income tax purposes.
So, Lottie's invalidity pension is no longer eligible for the 10% superannuation income stream tax offset. But she is now eligible for a superannuation lump sum tax offset. The superannuation lump sum tax offset is capped at 15% but varies depending on how much income a person receives.
In Lottie's case, the superannuation lump sum tax offset she is entitled to is less than the 10% superannuation tax offset she would have been eligible for but for the Douglas decision.
This means she would pay more tax following the Douglas decision.
Lottie is eligible for the VSTO, ensuring she is in exactly the same income tax position as she would have been before the Douglas decision.
End of exampleVeterans' 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 do not 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.
VSTO for prior year tax assessments
If you have already had your prior year tax assessments reviewed and amended by us, you don't need do anything further.
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 are 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 commenced in March 2019. His invalidity payments are affected by the Douglas decision.
When processing Andrew's 2022 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 exampleYour notice of assessment
Information about your VSTO entitlement if any, and how it was applied, will be included with your notice of assessment.
Your tax returns
If you're affected by the Douglas decision, when you lodge your tax return:
- your military invalidity pension payment will be treated as a superannuation lump sum payment
- we will work out any VSTO amount you are entitled to and use it to reduce your tax and Medicare liabilities
- details of any VSTO entitlement will be included with your notice of assessment.
You need to include your military invalidity pension payment amounts in your tax return at question 8 Australian superannuation lump sum payments. Find these amounts on your CSC payment summary.
If you lodge using myTax, we will normally pre-fill this amount in your tax return. If it's not pre-filled, you will need to manually include it.
If you reached your preservation age or turned 60 years old during the income year, you will get 2 payment summaries from CSC:
- one showing 1 July as the date of payment for all payments made to you before you reached preservation age or turned 60 years old
- a second showing your most recent birthday as the date of payment or 30 June for all payments made to you after you reached preservation age or turned 60 years old, reflecting the way this income is taxed when this happens.
Lodge from late July
From late July, the information required from CSC will most likely be available and make lodging your tax return easier and result in fewer processing delays.
While you can lodge from 1 July, there is a much higher chance that your return will be missing important information. Your VSTO calculation may be incorrect if you lodge before we have all the information.
2020–21 and 2021–22 tax returns
If you included your military invalidity pension payment amounts in your 2020–21 and 2021–22 tax returns at question 8 Australian superannuation lump sum payments, we have already determined if you are entitled to a VSTO amount. We applied any entitlement for you in an amended notice of assessment.
2007–08 to 2019–20 tax returns
You can request a review of prior year tax assessments using an objection form, if you're affected by the Douglas decision. You must have received a payment of an invalidity benefit from CSC in the relevant year. As part of your objection request, you'll need to:
- include a written request for an extension of time as these income years are outside the period of review
- provide the necessary evidence that supports any amendments to your assessments for these years.
You can usually obtain necessary evidence that supports any amendments from CSC.
Potential outcomes of a review
It's important to consider the likely outcomes before lodging an objection. You may wish to seek professional financial advice to understand how a change in your taxable income affects your circumstances, including your superannuation 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 – we'll contact you to discuss your options including a payment arrangement with favourable terms
- no change to your tax outcome overall
- a change to your taxable income with financial impacts on other payments and obligations, such as
- child care subsidy
- parental leave payment
- family tax benefits or child support (see, Services Australia website for information on Commissioner of Taxation v Douglas decision and government support for debtsExternal Link)
- other government support payments that take into account your taxable income.
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 superannuation 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 are 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.
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.
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 an objection 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.
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.
If your invalidity pension payments are affected by the Douglas decision and are therefore super lump sum payments, you don't need to do anything. CSC has determined which rates apply to you and is withholding the updated amounts from your fortnightly payment. Your withholding amounts will take into account the tax-free threshold and Medicare levy exemption if you have claimed them.
The withholding rates are set out in the Tax table for super lump sums but with a modification that may reduce the amount if you have claimed the tax-free threshold from CSC.
If you're not affected by the Douglas decision, the Tax table for super income streams continues to apply.
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:
- whether you claim the tax-free threshold for your invalidity pension payments from CSC
- varying your PAYG withholding
- claiming an exemption from the Medicare levy.
Reversionary beneficiaries
You're affected by the Douglas decision if both apply:
- you're a reversionary beneficiary of a deceased veteran
- at the time they died, the deceased veteran was receiving an invalidity pension that
- was paid under the DFRDB scheme or MSBS
- started on or after 20 September 2007.
If the deceased veteran was not in receipt of an invalidity pension at the time they died, you are not an affected reversionary beneficiary.
If you're affected by the Douglas decision
If you're a death benefit dependant under tax law, your reversionary pension is non-assessable and non-exempt income.
This means:
- you don't need to pay tax on your reversionary pension
- you may be entitled to a refund of pay as you go (PAYG) withholding amounts CSC withheld from these pension payments dating back to the 2007–08 income year.
Prior year tax returns
We'll exclude your reversionary pension from your taxable income, and credit any excess pay as you go (PAYG) withholding amounts CSC has withheld from your reversionary pension payments during income years 2021–22 and 2022–23, after you lodge your tax return. The credit amounts are applied against your income tax liability, and we will refund any excess.. This will be in the original tax assessment, or we will issue an amended assessment.
The payment summary CSC sent you includes the amounts withheld from your reversionary pension. You should prepare your return as usual based on the payment summary. We'll also pre-fill your tax return based on the payment summary.
At the same time, we'll amend any other relevant returns within your period of review. For most taxpayers with simple affairs, the amendment period of review is 2 years from the day we issue you with an assessment.
If you received and included reversionary pension payments in your tax returns for years that are outside your period of review and we have not already amended your income tax assessments, you can lodge an objection form to correct these assessments.
Superannuation changes
We used information from CSC to identify people who are affected by the Douglas decision and took action to:
- ensure that payments which are now super lump sum payments are not counted towards your transfer balance cap
- adjust your total super balance as required.
When we adjusted your total super balance, we also checked if this has any impact on whether you had previously exceeded your contributions caps and made corrections where required. We also checked whether the adjustment to your total super balance affected your entitlement to co-contributions or the low-income super tax offset.