Weekly incapacity benefits which are paid for loss of part-time Reserve income are not considered to be taxable income because they are considered to retain the original nature of the salary payment. In other words, Reserve earnings are not taxable so compensation for loss of ability to earn in the Reserve is also considered not to be taxable. The tax situation for reservists (the 'reserves earnings' component only, of their income is not taxable) is discussed at 31.9 and 38.3.
While Reserves payments (earnings) are tax-free. All other earnings, i.e. earnings from civilian employment, are subject to tax. However there is only one NWE. Both civilian and reserves earnings combined, form a single amount, only part of which is taxable. The Defcare Incapacity Calculator identifies what portion of any compensation paid is taxable and non-taxable.
Notes
Where NWE is deemed using the 'daily Reserve rate x 7', all of the weekly compensation payment is taxable.
Where a Reservist was injured during a period of full-time service their NWE is based on their full-time ADF rate of pay. Incapacity payments made in these circumstances are also taxable.