5JBB of the VEA
46VAA of the VEA
What is a military invalidity pension income stream?
From 31 May 2024, a new income stream classification and income test assessment is applied to invalidity superannuation benefits paid under the Military Superannuation & Benefits Scheme (MSBS) and the Defence Force Retirement and Death Benefits Scheme (DFRDB). This is the result of the Social Services and Other Legislation Amendment (Military Invalidity Payments Means Testing) Act 2024, which amended the Veterans Entitlements’ Act 1986 (VEA) in response to the decision in Commissioner of Taxation v Douglas [2020] FCAFC 220.
These amendments introduced a new income stream category of military invalidity pension income stream and a new income test assessment to include the affected military invalidity benefits. Military invalidity pension income streams are asset test exempt.
These invalidity benefits are military invalidity pension income streams under the VEA. They are NOT defined benefit income streams. However, any assessments of these invalidity benefits that were made in the period prior to 31 May 2024 on the basis that the invalidity benefits could be treated as defined benefit income streams are validated by the amendments to the VEA.
The income stream is assessed from the date the person is notified of the approval of their claim. It is not the date the person applied for the invalidity benefit.
Characteristics of a military invalidity pension income stream
An income stream is a military invalidity pension income stream if -
The income stream is:
- invalidity pay within the meaning of the Defence Force Retirement and Death Benefits Act 1973 (DFRDB); or
- an invalidity pension under the superannuation scheme established under the Military Superannuation and Benefits Act 1991 (MSBS); or
- an income stream provided under a superannuation scheme and that is covered by an instrument under 5JA(1FA) of the VEA; and
- the income stream is not a defined benefit income stream.
Calculating the asset value
Military invalidity pensions income streams are not included in a person's assessable assets.
Income test assessment
The income test assessment for income support recipients receiving a military invalidity pension income stream is calculated as follows:
- Annual payment – special reduction amount.
Annual payment is the amount payable to the income support recipient for the year under the income stream. This is the gross amount payable, before any deductions.
The definition of special reduction amount under section 46VAA clarifies that the special reduction amount is the sum of the amounts that would be the tax-free components, worked out under Subdivision 307–C of the Income Tax Assessment Act, of the payments received from the military invalidity pension income stream during the year, if it were assumed that the military invalidity pension income stream is a superannuation income stream within the meaning of that Act.
The decision in Douglas found that, for tax purposes, the affected payments are superannuation lump sums, rather than superannuation income streams. The definition of the special reduction amount is intended to produce the same assessment of income as was obtained prior to the Douglas decision, when the affected payments were taken to be asset test exempt defined benefit income streams under the Veterans’ Entitlements Act, and to be superannuation income streams for tax purposes.
Section 46VAA does not include an equivalent provision to subsection 1099AAA(2) of the Social Security Act 1991 that introduces a 10% cap on the special reduction amount. This is because that formula is not a feature of the income support framework in the VEA.