DCA 43 - TAX ON COMPENSATION PAID TO ADF RESERVISTS - FINANCE PAY SYSTEM (FPS)

DEFENCE COMPENSATION ADVICE - NO 43

Commonwealth Employees Rehabilitation And Compensation Act 1988

TAX ON COMPENSATION PAID TO ADF RESERVISTS - FINANCE PAY SYSTEM (FPS)

1.  The purpose of this DCA is to clarify the issue of taxation of weekly compensation paid to ADF Reserve members, and to advise of the recently created FPS transaction code to be used in such cases.

2.  The Australian Taxation Office (ATO) has provided a ruling that weekly compensation payments made in lieu of lost Reserve earnings are not subject to income tax. PAYE tax should therefore not be deducted from these payments. I have enclosed a copy of ATO's advice for your information.

3.  While these payments are not taxable, where weekly compensation paid to a Reserve member includes compensation in lieu of both lost Reserve earnings and civilian earnings, the component of compensation relating to the lost civilian earnings remains fully taxable. For example, where $400 of a members weekly compensation entitlement of $500 relates to lost civilian earnings and $100 to lost Reserve earnings, PAYE taxation is to be deducted from the civilian component of $400.

4.  In all Reserve cases, where weekly payments are to be made in respect of lost Reserve earnings, entitlement sub-code 9892 is to be used. The enclosed entitlement chart provided by Department of Finance details the payment parameters of this sub-code. The FPS transaction codes to be used in the example mentioned in paragraph 3 are as follows:

5.  Please ensure that adjustments are made to the payment process of all cases affected by the new entitlement sub-code as soon as possible so that compensation payments made in respect of lost Reserve earnings are not taxed.

6.  If you have any enquiries, please contact Paul Reis on (06) 266 8640.

G E TYE

Assistant Director

Compensation & Rehabilitation