9.2 Reducing incapacity payments by superannuation benefits

Superannuation benefits may be paid in the form of a pension, a lump-sum benefit, or a combination of both pension and lump-sum. Incapacity payments are reduced dollar for dollar by the Commonwealth-funded portion of the pension (a weekly amount). Lump-sum benefits are converted to a weekly amount before incapacity payments are reduced dollar for dollar by the Commonwealth-funded portion.

If a person has an overpayment as a result of receiving incapacity payments and having an entitlement to superannuation for the same period, the overpaid incapacity amount can be recovered from the Commonwealth Superannuation Corporation (CSC). A new 'transitional' approach to recover these overpayments has been developed by DVA, the Australian Taxation Office (ATO) and CSC. The transitional approach should be applied to cases from July 2019 and is to be applied until a final process is established between the three agencies. The transitional approach is applicable to incapacity payment calculations under both MRCA and DRCA.

Broadly, under the transitional approach DVA will recover the gross incapacity overpayment from the net CSC pension in arrears payment (overpayments within the same financial year can be recovered at the net amount). The CSC will first repay to DVA any 'pre 2005' amount, and apply a new (more beneficial) tax rate to any remaining arrears.

For cases where the CSC arrears is not enough to repay the full incapacity overpayment, DVA is required to recover the remaining overpayment from the person. Once the overpayment is repaid in full or DVA is satisfied repayment of the full amount will occur under a formal repayment arrangement, the ATO will reassess the tax paid in previous financial years and refund any overpaid tax to the person.

Tax amendments and debt repayment

When a person has received both incapacity payments from DVA and a retrospective superannuation pension (an arrears payment) from the CSC they may incur a debt to DVA. Once the debt is repaid the person is able to seek an amendment of their tax and may receive a refund.

Three different scenarios may occur:

1. The debt is repaid in full by CSC (via the arrears payment);
2. The debt is repaid in full by a combination of CSC (via the arrears payment) and the person (via a lump sum payment i.e. from incapacity payment or permanent impairment payment) at the same time; or
3. The debt is partially repaid by CSC and a portion of the debt remains with the person to repay via a repayment arrangement with DVA. 

To facilitate a tax amendment DVA is required to furnish the person with either; 

1.  a letter confirming that the full amount of the debt has been repaid (scenarios 1 and 2 above); or
2.  a letter confirming that DVA is satisfied repayment of the full amount will occur under a formal repayment arrangement with the person (scenario 3); and 
3.   an amended payment summary for each relevant year that the debt has been repaid for (this may be a payment summary, or the information contained in a letter). 

There is an element of risk to being satisfied that the debt will be repaid as compared to being certain it has been repaid after the fact of repayment. The intent of (2) is to allow the person to access a refund sooner (even though the debt has not been fully repaid) and potentially use that refund to repay the remaining debt owing to DVA. However, DVA cannot compel a person to pay a debt from a refund or garnish a refund directly.

Debt recovery

There are a variety of mechanisms available to DVA to recover a debt. These include recovery from DVA payments and recovery directly from the person. DVA cannot garnish wages or tax refunds to recover a debt.

What is a formal repayment arrangement?

1. Person is still receiving incapacity payments and an amount is withheld each pay.
2. Person is not receiving incapacity payments but has agreed to pay periodic amounts either from other DVA payments or a regular deposit.
3. Person has agreed to repay any outstanding debt from an upcoming PI lumpsum payment (i.e. claim is outstanding). Consultation with the appropriate PI processing team should be undertaken to identify timing and likely outcome of the PI claim.
4. Person has agreed to repay any outstanding debt from a tax refund issued following a tax amendment (facilitated by DVA).

When is DVA satisfied repayment of the full amount will occur under a formal repayment arrangement with the person?

This will vary case by case and depend on the amount of the debt outstanding i.e. smaller amounts would be more likely to be recovered. It is anticipated that most debts could be recovered in full.

Factors to consider in establishing that the repayment of the full amount will occur under a formal repayment arrangement include;

• The amount of the debt
• Whether the person agreed in writing to a repayment plan
• How much the person is repaying periodically
• If the person is repaying via their incapacity payment, how much longer the person will be eligible to receive incapacity payments for, including;
  • whether they will continue in payment after 45 weeks. After 45 weeks has the person agreed to continue repayments?
  • age of the person. At the rate of current repayments, will the debt be repaid before they are age pension age?
• If the person is repaying via a withholding of another DVA payment, i.e. a supplement, at the current rate will the debt be repaid in their lifetime?
• Does the person have any other debts with DVA?

If the person has agreed to repay the debt from an outstanding PI lump sum, delegates would also need to consider how many PI points the person currently has i.e. high/maximum points already will limit additional payments.

What to do when DVA is not satisfied the full amount will occur under a formal repayment arrangement with the person

Seeking a tax amendment for the full debt amount repaid is simpler for the person rather than seeking a tax amendment for the portion of the debt repaid by CSC and then separately seeking an amendment for the portion of the debt repaid or under repayment by the person. While the preference is for a single amendment, it remains open to the person to seek multiple amendments from the ATO. In this case multiple tax amendment letters may be sent to the person.

The tax amendment letter can be sent for the portion of the debt repaid by the CSC before the remainder of the debt is repaid. In this case that repayment should be apportioned back over financial years, starting at the latest year. The person may use the refund to repay DVA, subsequently generating additional amendments. Otherwise, an amendment should only be sought when the remaining debt is repaid. This will lead to a higher administrative cost across agencies should multiple amendments be undertaken. It may also restrict the persons ability to actually repay the debt if the amendment is not done for the full amount.

9.2.1 Use of Superannuation benefit for a family law settlement

A person may have their superannuation benefit split and part of the benefit paid to their former spouse as a result of a family law settlement. Following a family law settlement, the member’s superannuation entitlement is reduced in line with the amount paid to their former spouse.

The policy prior to the 15 December 2016 was to reduce a person’s incapacity payment by the full (pre-settlement) amount of any Commonwealth-funded superannuation benefit that is derived from the ADF employment that gave rise to the incapacity. This policy has now ceased and should not be applied regardless of the date of the family law settlement.

From date of family law settlement

A person's incapacity payment can only be reduced by the Commonwealth-funded superannuation amount the person actually receives. Following a family law settlement only the reduced (post-settlement) amount of their Commonwealth-funded superannuation benefit (derived from the ADF employment that gave rise to the incapacity) can be included in calculations. The amount the person receives is as advised by the CSC. Any amount of superannuation paid to the spouse is no longer included in calculations.

Delegates are not expected to seek out and correct calculations where the pre-settlement superannuation amount has been held prior to 15 December 2016, but should correct these calculations as they are identified i.e. during the regular review process. For example, in a case where the pre 15/12/2016 policy had been applied to a family law settlement in 2013, incapacity payments will need to be recalculated back to the date of the family law settlement.

9.2.2 Indexation of Superannuation pensions

The 'current (CPI-adjusted)’ weekly amount of a person's superannuation pension is the amount of pension currently paid to the person, and includes all indexation adjustments to the relevant date. Commonwealth superannuation pensions, including DFRDB, MSBS and ADF Cover pensions, are indexed to protect the value of the pensions against cost/price inflation in the economy. Until 2001 pensions generally were increased each year on the first payday in July, with the increase taking effect from the first day of that pay period (e.g. in late June). The increase was an amount based on upward movement of the Consumer Price Index for the 12 months ending on 31 March of that year.

After July 2001, the Commonwealth-funded portion of all superannuation pensions paid by the CSC (formerly ComSuper) are adjusted twice a year – in January and June/July each year.

The 'original’ weekly amount of a person's superannuation pension is the amount of pension initially approved by the CSC upon retirement from service or at the time of the date of effect of any reclassification.

9.2.3 Commutation of a DRFDB pension to a lump sum

A DFRDB superannuation pension can be commuted (converted) in part to a lump sum benefit. The person's superannuation entitlement after the commutation is regarded as comprising part pension and part lump sum.

Until 24 December 1992, the DRCA did not provide for the situation where a person received both pension and a lump sum (i.e. S21A). In such cases, the lump sum is to be ignored and S20 is applied.

Where the person retired after 24 December 1992, S21A applies and both the Commonwealth-funded portion of the pension and the lump sum are to be taken into account in the calculation of incapacity payments.

In the case where part of a pension entitlement is commuted to a lump-sum, and the balance of the superannuation benefit is paid at a reduced rate of pension, the reduced rate of pension is the 'original’ weekly amount.

9.2.4 Conversion of lump sum amount to weekly amount

Under the DRCA, the Commonwealth-funded portion of the lump-sum superannuation benefit is multiplied by a set interest rate and then divided into notional weekly payments.

DRCA lump-sum conversion calculation prior to 27 April 2007

For incapacity calculations prior to 27 April 2007, the superannuation lump-sum amount is multiplied by 10% and divided by 52 (or divided by 520) to establish an equivalent weekly amount.

DRCA lump-sum conversion calculation on or after 27 April 2007

For incapacity calculations on or after 27 April 2007, the superannuation lump-sum amount is multiplied by a rate in line with the 10 year Government bond rate and divided by 52 to establish an equivalent weekly amount. The rate is set by the Minister for Employment (who has primary responsibility for SRCA) by legislative instrument. A new rate is applicable from 1 July each year and is available via CLIK (the ‘specified weekly interest on lump sums’ rate). 

The date the person discharges has no influence on which interest rate is used. The interest rate used for the calculation is the rate that is applicable for the period of incapacity.  

Calculation Example 

A person receives a lump-sum superannuation benefit of $156,000. The current ‘specified weekly interest rate on lump sums’ is 3.26% (rate as at 1/7/15).

Equivalent weekly amount = $156,000 x 3.26% / 52 = $97.80

MRCA lump-sum conversion calculation

Under the MRCA, an actuary table, prepared by the Australian Government Actuary (AGA), is used to convert the Commonwealth-funded portion of lump sum superannuation benefit to an equivalent weekly amount that can then be used to calculate incapacity payments (or SRDP). The actuary tables are available via CLIK.  http://auth-clik.dvastaff.dva.gov.au/military-compensation-mrca-manuals-and-resources-library/actuary-tables-used-age-adjusting-lump-sum-payments

Calculation example – Converting the MRCA superannuation lump-sum to a weekly amount

A 55 year old male receives a lump-sum benefit of $156,000. According to the current Actuary table his age based number is 737.2 (age next birthday is 56).

Equivalent weekly amount = $156,000/737.2 = $211.61

Choosing the correct table to apply

The AGA instructions specify that for the purposes of section 135 and 136 the date used to determine which table is applicable, should be the date on which section 135 or 136 began to apply to their incapacity entitlement.

The applicable table under sections 135 and 136 are fixed for the duration of the persons compensation amount and is not intended to be indexed from time to time so this is not updated when new tables are released at a later date. 

Examples – determining when section 135/136 began to apply to find the correct table

Example 1

• Person received incapacity payment for the period 1 Jan 2019 to 3 March 2019.
• Person receives a superannuation lump sum amount on 2 Feb 2020 (lump sum received date).
• Person applies for and receives incapacity payments from 1 Jan 2025 ongoing (section 135/136 began to apply).
• Choose AGA table according to date 135/136 began to apply - 1 Jan 2025 (applicable table on or after 1 March 2021).

Example 2

• Person receives superannuation lump sum 2 Feb 2018 (lump sum received date).
• Person received incapacity payments from 1 Jan 2019 to 3 March 2019 (section 135/136 began to apply).
• Person applies for and receives incapacity payments from 1 Jan 2025 ongoing. 
• Choose AGA table according to date section 135/136 began to apply - 1 Jan 2019 (applicable table on or after 4 May 2015 and before 1 March 2021).

Example 3

• Person received incapacity payments from 1 Jan 2019 ongoing.
• Person receives superannuation lump sum 2 Feb 2020 (lump sum received date and section 135/136 began to apply).
• Choose AGA table according to date 135/136 began to apply - 2 Feb 2020 (applicable table on or after 4 May 2015 and before 1 March 2021).

Example 4

• Person receives incapacity payments from 1 Jan 2017 ongoing.
• Person receives superannuation lump sum 2 Feb 2018 (lump sum received date and date section 135/136 should have been applied).
• Persons incapacity payments are not correctly adjusted to transfer entitlement to section 135/136 and offset the lump sum.
• Error identified 1 Feb 2025 and corrected to apply section 135/136 backdated to 2 Feb 2018 with overpayment raised.
• Choose AGA table according to date 135/136 began to apply – 2 Feb 2018 (applicable table on or after 4 May 2015 and before 1 March 2021).

Example 5

• Person receives incapacity payments from 1 Sept 2010 ongoing.
• Person receives superannuation lump sum 12 December 2010 (lump sum received date and date section 135/136 should have been applied).
• Persons incapacity payments are not correctly adjusted to transfer entitlement to section 135/136 and offset the lump sum.
• Error identified 23 March 2017 and corrected to apply section 135/136 backdated to 12 December 2010 with overpayment raised.
• Delegate determines (in error) that superannuation lump sum amount should not be offset 1 April 2020. 
• Error again identified 1 Feb 2025 and corrected to apply section 135/136 from the date the lump sum was received with overpayment raised.
• Same AGA table applied at all times as the date that section 135/136 applied to the persons entitlement did not change – section 135/136 began to apply 12 December 2010 (applicable table after 15 January 2010 and before 4 May 2015).

Example 6

• Person receives superannuation lump sum 15 May 2020.
• Person applies for incapacity payments on 10 Nov 2022 seeking retrospective payment back to 1 June 2010.
• Decision is made that the person is entitled to retrospective payments.
• For period 1 June 2010 to 14 May 2020 section 135/136 do not apply.
• For period from 15 May 2020 section 135/136 began to apply.
• Choose AGA table according to date 135/136 began to apply – 15 May 2020 (applicable table on or after 4 May 2015 and before 1 March 2021).

Example 7

• Person applies for and receives incapacity payments from 1 July 2006 but remains in the Reserves at the time so receives payments as a current serving member.
• Person receives superannuation lump sum 20 Nov 2010. Payments are not adjusted to offset the lump sum as for claims made and determined prior to 1 July 2013 there was no provision under the MRCA to reduce incapacity payments by superannuation.
• Person discharged from all ADF service 1 Nov 2016. Incapacity payments are calculated under Part 4 of Chapter 4 instead of Part 3 and are offset by the superannuation lump sum (section 135/136 began to apply).
• Choose AGA table according to date 135/136 began to apply – 1 Nov 2016 (applicable table on or after 4 May 2015 and before 1 March 2021).