10.1 Warlike and non-warlike service

Generally all pay and allowances are tax-free while a member is deployed on warlike service.  As incapacity payments retain the same nature of the payments they are compensating, incapacity payments for the loss of pay and allowances while on a period of warlike service are tax-free.

Generally for non-warlike service only allowances are tax-free.  Therefore any incapacity payments for loss of deployment or other allowances during a period of non-warlike service are also tax-free.

The tax-free nature of incapacity payments only continues for the loss of pay or allowances during the period of the warlike or non-warlike service.  Thereafter any incapacity payments are taxable.

Delegates should access the Service Eligibility Assistant in the CLIK legislation library to assist with verification of warlike or non-warlike service. 

10.1.1 Payments when tax exemption ceases on Defence pay

DVA is liable to pay a person for loss of pay and allowances resulting from a deployment period being reduced (i.e. returned to Australian earlier than anticipated posting) due to an accepted condition as detailed in 10.1. As per the Income Tax Assessment Act 1997 Section 51-32, these compensation payments for losses of pay or allowances whilst on warlike service are tax exempt.

Whilst DVA may pay the lost pay or allowances, a person’s regular pay continues to be administered and paid by Defence at the same gross rate. However, while on deployment this regular pay would have been non-taxable.  As the gross amount of their regular pay remains the same, even after their early return from deployment, there is not considered to be a loss of pay and DVA can only compensate for the loss of deployment allowances.

There is no mechanism under which DVA can compensate a person for a change in tax status of their regular pay after their return to Australia. Any changes or amendments to their taxation could only be administered by Defence and are not covered by the provisions of the MRCA. The person could pursue this issue with the Australian Taxation Office.