If you are receiving a Defence Force Retirement and Death Benefits (DFRDB) or Military Super (MSBS) Class A or B Invalidity Benefit, you may be able to pay less tax if you have your benefits classified as Disability Superannuation Benefits. In some cases, the tax savings are substantial.
Tax savings may be available in one of two ways:
- Modification for Disability Superannuation Benefits or
- Disability Superannuation Benefit Tax Offset.
Both ways are outlined below, including how to work which way might apply to you.
Note. DFWA is not a financial, tax, or legal advisor and this information is provided in general terms only. You should seek independent professional advice that considers your personal circumstances.
What is a disability superannuation benefit?
Your DFRDB or MSBS Invalidity Benefits maybe classified as disability superannuation benefits if you meet the definition in the Income Tax Assessment Act 1997 (Cth) Section 995-1:
- the benefit is paid to you because you suffer from ill-health (whether physical or mental); and
- two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that you can ever be gainfully employed in a capacity for which you are reasonably qualified because of education, experience or training.
Modification for Disability Superannuation Benefit
If your disability superannuation benefit is also a superannuation lump sum, you are entitled to a modification of the tax-free and taxable components. In many cases, this will mean a portion of your pension becomes tax free.
Typically, this would apply to the following benefits:
- MSBS Invalidity Benefits that commenced on or after 20 September 2007.
- DFRDB Invalidity Benefits that commenced on or after 20 September 2007.
Commencing on or after 20 September 2007 means that the Commonwealth Superannuation Corporation made its decision to approve invalidity benefits on or after that date, even if your invalidity benefits were backdated prior to that date (i.e. you received a back pay).
As a result of the Federal Court Decision in Commissioner of Taxation v Douglas [2020] FCAFC 220 (often referred to as “Douglas“), DFRDB and MSBS Invalidity Benefits that commenced on or after 20 September 2007 are classed as superannuation lump sums.
What is the modification?
The modification changes the tax-free component of your pension, based on the amount of time you served and the amount of time between when you were medically discharged and your compulsory retirement age (generally 60 years old).
The formula is:
Example: Jayden
Jayden was born on 1st of March 1990 and joined the Navy on 20th of January 2009. He was medically discharged on 1st of June 2016. Jayden receives a Military Super Class A Invalidity Benefit.
Jayden's fortnightly pension (without the disability superannuation benefit modification) is made up of:
| Tax-Free Component | $ 0 |
| Taxable Taxed Element | $ 50 |
| Taxable Untaxed Element | $ 1,950 |
| Pre-Tax Benefit | $ 2,000 |
| Less Tax Payable | - $ 311 |
| Fortnightly Pension | $ 1,689 |
Because Jayden's pension commenced on or after 20 September 2007, his pension payments are considered superannuation lump sums.
Two doctors have certified that due to Jayden's medical condition, he is unlikely to be gainfully employed in a capacity for which he is reasonably qualified because of education, experience or training. This means his pension is a disability superannuation benefit.
Because each of Jayden's pension payments are both a superannuation lump sum and a disability superannuation benefit, he is entitled to the modification:
Jayden served from 20th of January 2009 to 1st of June 2016, which is 2,690 days. Had Jayden served until compulsory retirement age, he would have served until his 60th birthday on 1st of March 2050, which is another 12,326 days.
Because of that modification, Jayden's modified fortnightly pension becomes:
| Tax-Free Component | $ 1,641 |
| Taxable Taxed Element | $ 50 |
| Taxable Untaxed Element | $ 309 |
| Pre-Tax Benefit | $ 2,000 |
| Less Tax Payable | - $ 7 |
| Fortnightly Pension | $ 1,993 |
Jayden is $309 better off each fortnight as a result of the Disability Superannuation Benefit modification.
To calculate what you might receive with the Disability Superannuation Benefit modification, you can use this calculator.
Disability Superannuation Benefit Tax Offset
If your disability superannuation benefit is a superannuation income stream and includes a “taxable taxed” element, you may be entitled to a 15% offset on the taxable taxed element.
Typically, this would apply to the following invalidity benefits:
- MSBS Invalidity Benefits the commenced before 20 September 2007.
- Some DFRDB Invalidity Benefits that commenced before 20 September 2007, and the date of discharge is prior to 1994.
Your latest CPI increase letter from the Commonwealth Superannuation Corporation will detail if you have a taxable taxed element to your fortnightly pension.
What is the 15% tax-offset
If you are eligible for the tax offset, the amount of tax you pay will be reduced by 15% of the taxable taxed element.
Example: Sarah
Sarah receives a Military Super Class A invalidity benefit. Her pension commenced in June 2006.
Sarah's fortnightly pension is made up of:
| Taxable Taxed Element | $ 200 |
| Taxable Untaxed Element | $ 1,800 |
| Pre-Tax Benefit | $ 2,000 |
| Less Tax Payable | - $ 284 |
| Fortnightly Pension | $ 1,716 |
Because Sarah's pension commenced before 20 September 2007, her pension is considered a superannuation income stream.
Two doctors have certified that due to Sarah's medical condition, she is unlikely to be gainfully employed in a capacity for which she is reasonably qualified because of education, experience or training. This means her pension is a disability superannuation benefit.
Because each of Sarah's pension payments are both a superannuation income stream and a disability superannuation benefit, she is entitled to the disability superannuation tax-offset.
The tax-offset is 15% of the taxable taxed component of her pension: 15% of $200 is $30.
Sarah's modified fortnightly pension becomes:
| Taxable Taxed Element | $ 200 |
| Taxable Untaxed Element | $ 1,800 |
| Pre-Tax Benefit | $ 2,000 |
| Less Tax Payable | - $ 284 |
| Add Tax-Offset | $ 30 |
| Fortnightly Pension | $ 1,746 |
Sarah is $30 better off each fortnight as a result of the Disability Superannuation Benefit Tax Offset.
How do I claim the Disability Superannuation Benefit?
To have your DFRDB or MSBS invalidity benefits classified as disability superannuation benefits and claim the modification or the tax offset, you need to apply to CSC and provide your two doctors certificates.
CSC webpage information about tax changes
ATO webpage with information about tax changes
DFWA are not financial, tax, or legal advisors and this advice is general in nature only. You should consult the appropriate professional to advise you based on your specific circumstances.