Policy

Small amounts of incapacity payments may be converted to a lump sum payment. This is referred to as a ‘redemption’ under the DRCA and may be referred to as a redemption or commutation under the MRCA (though those terms are not referenced in the legislation). Redemption of payments is a practical alternative to continuing to make long term payments, where a person's incapacity status is stable and unlikely to change.

Section 23(1) of the DRCA provides that weekly incapacity compensation is not payable under section 19, 20, 21, 21A or 22 to a person who has reached age pension age. Section 120 of the MRCA provides that weekly incapacity compensation is not payable under section 118 to a person who has reached age pension age.*  However other forms of compensation (e.g.

Section 23(2) of the DRCA and Section 122 of the MRCA states the Commonwealth is not liable to pay compensation for a week to a person who is incapacitated for work if the person is imprisoned for the week in connection with his or her conviction of an offence.

DRCA original determinations made on or after 21 April 2025 must be appealed directly to the Veterans’ Review Board (VRB) within 12 months. Subsequent determinations by the VRB can be appealed to the Administrative Review Tribunal. Claimants cannot request a reconsideration by the Commission for determinations made on or after 21 April 2025, however the Commission continues to have the discretion to initiate a reconsideration of own motion.

SRCA Section 22 of the SRCA and section 127 of the MRCA provides that where:

• A person is receiving incapacity payments; and

• As a result of their service injury or disease is being maintained in a hospital, nursing home or similar place/institution; and

• Has been a patient of that institution for a continuous period of at least one year; and

Some arrears of incapacity payments will involve recoveries in respect of pensions paid by Centrelink under the Social Security Act 1991 (SSA) or under the Veterans' Entitlements Act 1986 (VEA) or an internal debt recovery. Taxation should be withheld from the payment before processing any recoveries.

Lump sum redemptions made in accordance with sections 30 or 137 of the SRCA and section 138 of the MRCA are taxable.  However that component of a lump sum redemption to a former employee under section 137 of the SRCA that is made in substitution of incapacity payments beyond age 65 is exempt from income tax.  See chapter 11 for further information on redemptions.

Incapacity payments for loss of part-time Reserve income are not taxable.

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.

When a person is incapacitated for part of a week or their incapacity falls over a period of a whole week/s plus a part of a week i.e. a week and 1 day, then compensation is calculated using the following formula: