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6.1 Overview

Last amended: 1 July 2013

Incapacity payments are economic loss compensation payments due to the inability (or reduced ability) to work, because of a service injury or disease.

Sections 85, 86, 87 and 118 of the MRCA provide the legislative authority for the Commonwealth to pay compensation to current and former permanent and Reserve ADF members, Cadets, Officers and Instructors of Cadets and Declared members who are incapacitated for service or work.  The member or former member must:

  • have liability accepted for the service injury or disease that results in the person's incapacity for service or work; and
  • claim compensation for incapacity payments in accordance with section 319 (making a claim).

Incapacity payments are essentially the difference between a person's normal earnings (NE) and their actual earnings (AE) for a week.  Incapacity payments make up the full difference for serving members, however a number of different rules apply to the calculation of incapacity payments for former members.

Former members eligible to receive incapacity payments get the full difference between normal and actual earnings for a total period equal to 45 times their normal weekly hours.  This is referred to as maximum rate weeks.

If a former member is unable to work at all, their maximum rate weeks expires after 45 weeks.  After this period incapacity payments are a percentage of their normal earnings less actual earnings.  The percentage varies between 75% and 100% depending on the amount of hours they are able to work in a week when compared to their normal weekly hours (NWH).  For most people NWH will be 37.5 hours per week, but it may be different for Reservists.

The percentage of incapacity payments after a person's maximum rate weeks expires is shown by reference to the following table:

Hours worked as a percentage of NWH (usually 37.5 hours)

Percentage applied to NE



25% or less


More than 25% but not more than 50%


More than 50% but not more than 75%


More than 75% but not more than 100%


100% or more


Normal earnings for Permanent Forces members and Reservists on continuous full-time service (CFTS) are generally based on:

  • A member's ADF salary and allowances at the date of incapacity, if they are still serving; or
  • A former member's ADF salary and allowances at the date of discharge for their last period of service, if they are no longer serving.

Normal earnings for Reservists are generally based on:

  • a choice of either their full time ADF wage or their full time civilian income plus their part-time Reserve income — if the Reservist was rendering continuous full-time service (CFTS) at the time of the injury or contraction of the disease; or
  • a combination of their civilian income and their part-time Reserve income — if the Reservist was injured or contracted the disease whilst performing part time service.

Where normal earnings are based on full-time ADF pay and allowances, a remuneration loading is added to compensate for the loss of non-salary benefits a person received whilst serving in the ADF.

Where a person's normal earnings are less than the national minimum wage, then section 179 prescribes the national minimum wage as the default normal earnings for that person.

Actual earnings are what a person is actually earning from service or work.  It includes work the person is doing, or able to do, having regard to their age, experience, training, qualifications and other skills.

The earnings capacity and circumstances of Cadets and Declared members can vary widely and their incapacity payments are worked out on a case by case basis by reference to regulations 5 – 17.  The MRCA regulations can be found in the CLIK legislation library via the following link     

More detailed commentary on the calculation of incapacity payments for Cadets and Declared members can be found in 6.9 of this chapter.

Incapacity payments for members and former members are offset dollar-for-dollar by the Commonwealth-funded portion of superannuation pensions and or lump sums.

Incapacity payments may continue for as long as a person's actual earnings are less than their normal earnings, due to their service injury or disease.  However payments cease at age 65.  The exception to the age 65 rule is where the injury or disease causing an incapacity for service or work occurred between age 63 and age 65.  In these cases, incapacity payments can be paid for a maximum of 104 weeks.

Incapacity payments are taxable as they are income-related payments.  However, where the earnings being replaced are non-taxable, so too are the incapacity payments.  Examples of non-taxable incapacity payments are:

  • payments for the loss of pay and allowances while on a period of warlike service;
  • payment for the loss of allowances while on a period of non-warlike service; and
  • payment for the loss of pay or allowances as a part time Reservist.

It should be noted, however, that some incapacity payments for Reservists are taxable where normal earnings are based on:

  • the national minimum wage; or
  • seven times a person's daily rate of Reserve pay; or
  • a Reservist's civilian earnings.

Former members who are severely incapacitated may choose to receive the Special Rate Disability Pension (SRDP) in lieu of ongoing incapacity payments.  A person must be offered the choice of receiving taxable incapacity payments up to age 65 or a tax-free SRDP (indefinitely), if they meet the following criteria:

a)the person is receiving incapacity payments or has had his or her incapacity payments reduced to nil because of commonwealth superannuation offsetting or because of receipt of a lump sum payment;

b)the person has suffered an impairment that is likely to continue indefinitely;

c)the person's impairment constitutes at least 50 impairment points; and

d)the person is unable to undertake remunerative work for more than 10 hours per week, and rehabilitation is unlikely to increase the person's capacity to undertake remunerative work.

SRDP is offset dollar for dollar by any MRCA Permanent Impairment compensation that has been paid, compensation paid under the SRCA and VEA for any conditions and at 60 cents in the dollar for any Commonwealth superannuation that has or is being been paid.  There is compensation for the cost of financial and legal advice, from a suitably qualified financial adviser and/or lawyer, to help a person make the choice between incapacity payments and SRDP.

More detailed commentary on these provisions, and how to calculate incapacity payments is provided in Chapter 13 of this policy manual.