Laws protect veterans' payments following the Douglas decision
The Douglas Decision was a ruling by the full Federal Court in December 2020 that changed the way in which certain invalidity pensions from two Defence superannuation schemes are treated for tax purposes.
Specifically, the Court found that pension payments for veterans and their beneficiaries of the Defence Force Retirement and Death Benefits (DFRDB) scheme, or the Military Superannuation and Benefits (MSB) scheme starting on or after 20 September 2007 are superannuation lump sums, and not superannuation income benefits.
As is often the case, the taxation impacts of this changed categorisation of payments are complicated and depend on an individual’s circumstances. The vast majority of veterans found themselves in a better tax position due to the Douglas decision.
This decision was inconsistent with the intended tax treatment of such payments through superannuation schemes, and since then the Treasury, ATO, DVA, the Department of Social Services and other agencies have been working to address the consequences to ensure veterans were not worse off, while also maintaining the integrity of the tax system.
In June 2023, the Government passed laws to correct this inconsistency as it affects non-veterans, but also to protect the benefits of the Douglas decision for veterans by exempting the DFRDB and MBS from the law changes (i.e. to keep the benefits of the Douglas decision) and provide a tax offset to ensure veterans who were actually worse off as a result of the Douglas decision in the first place were not disadvantaged.
This means that affected veterans not only retained the income tax benefits of the Douglas Decision, but also kept the resulting benefits of changes in their taxable income.
More recently, in May 2024, laws were changed to ensure the Douglas Decision does not negatively impact the assessment of veterans’ income support payments, such as the Service Pension or Aged Pension. These changes ensure that veterans (and partners) receiving a means-tested income support payment will have the same outcome as would have occurred prior to the Douglas decision. It also allows veterans to retain the tax benefits flowing from the decision.
More information about the taxation impacts of the Douglas Decision is available on the Australian Taxation Office (ATO) website.