The Douglas Decision and DSB

When did it change?

The implementation of CSC applying lump sum tax withholding occurred on 19 May 2022.

Any DFRDB or MSBS invalidity pensioner who had commenced their pension on or after 20 September 2007 or will commence in the future, can apply to have super lump sum tax applied to their payments.

DFRDB and MSBS invalidity pensions that commenced prior to 20 September 2007 are still treated as income streams.

ADF Cover invalidity pensions are treated as income streams.

Veteran’s superannuation tax offset (VSTO)

CSC will withhold tax based on the superannuation lump sum tax table.

When the Veteran lodges their tax return, the ATO will assess whether the client would have paid less tax if the pension was treated as an income stream or a superannuation lump sum.

The ATO will apply whatever results in the lower tax obligation.

If the lump sum tax is lower, the VSTO is $0.00.  If the lump sum tax is higher, the VSTO will be the difference between the income stream and super lump sum tax.  For example, income stream tax may be $2,600 lower, therefore the VSTO will be $2,600.

How it works

CSC applies the withholding arrangements moving forward. They don’t retrospectively refund previous financial years (unless it’s a retrospective invalidity claim).

You can apply to the ATO for a refund of previous financial years using the ATO Objection form.

There may have been a gap between the discharge date and the invalidity pension start date. Whether the Veteran is affected will depend on when the invalidity pension started (not the discharge date).

If you were classified/reclassified on or after 20 September 2007 from:

A retirement pension to an invalidity pension, they are affected by the Douglas Decision because their invalidity pension start date is after 20 September 2007.

One invalidity pension class that started before 20 September 2007 to another invalidity pension class, they are not affected by the Douglas decision because their invalidity pension start date doesn’t change.

One MSBS invalidity pension class that started before 20 September 2007 to another invalidity pension class, and their payment stops and restarts:

If it’s backdated to the date the payments stopped, it’s not affected by the Douglas decision because their invalidity pension start date doesn’t change.

If it’s not backdated, they are affected by the Douglas decision because their new invalidity pension start date is after 20 September 2007.

What is the Disability Superannuation Benefit (DSB)?

• It is a benefit being paid to a person because of ill-health; and
  
  
• Where two legally qualified medical practitioners have certified that, due to ill-health, it is unlikely that you can ever work in a job that you are reasonably qualified for.

How is the Disability Super Benefit (DSB) taxed?

Both regular payments (income streams) and lump sums can be treated as a DSB for tax purposes.

Income streams (An income stream for a veteran is a regular payment, often from superannuation or a military pension, that provides income during retirement or for a fixed period)

If you start a pension before your preservation age, you get a 15% tax offset on the taxable part of your payments.

Lump sums: You get extra tax-free amounts. This is calculated using:

• How long you’ve been a member of the fund, and

• Your Compulsory Retirement Age (CRA).

Important note:  Not all invalidity pensions will qualify as a disability superannuation benefit. This is because a disability superannuation benefit is dependent on the recipient being totally and permanently incapacitated, whereas ADF invalidity pensions are based on varying levels of incapacity.

How do you apply for DSB treatment?

If you are a Veteran, obtain medical certificates from two qualified medical practitioners stating that because of ill-health, it’s unlikely they can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

Apply using the CSC ACCESS-MED application form.

The Doctor: specify the date the doctor considers they satisfied this criteria and were unable to work.

Send the completed application form to CSC by email to Casework.Services@csc.gov.au or post to GPO Box 2252, Canberra ACT 2601.

CSC will review the medical evidence and advise your client of the outcome in writing.

Case study: Douglas and DSB taxation

When a person is in receipt of a pension that is subject to the Douglas decision and eligible for DSB, it will change the proportioning of tax components.

Generally, it will move money from the taxable componentsinto the tax-free component.