The Douglas decision found that certain veterans’ invalidity pension payments in the Defence Force Retirement and Death Benefits (DFRDB) and Military Superannuation Benefits (MSB) schemes are superannuation lump sums for income tax purposes rather than superannuation income stream benefits.

The draft legislation released this week will retrospectively and prospectively reverse the impact of the Douglas decision in relation to all schemes, other than invalidity benefits and death benefits for beneficiaries of invalidity pensioners paid from the DFRDB and MSB schemes that commence on or after 20 September 2007.

In addition, the draft bill will introduce a non-refundable tax offset to prevent adverse income tax outcomes being experienced by veterans in the DFRDB and MSB schemes affected by the retention of the decision.

The draft bill also extends these changes to spouse and children’s pensions paid to a spouse or child following the death of a member of a DFRDB or MSB scheme affected by the Douglas decision.

In a joint press release, Minister for Financial Services Stephen Jones said the government’s approach means that affected veterans in the DFRDB and MSB schemes will not only retain the income tax benefits of the Douglas decision but also retain the resulting benefits of changes in their taxable income, such as family tax benefit entitlements and the childcare subsidy.

“While the veteran community has broadly welcomed the Douglas decision, and many veterans have benefited from the decision, the government is concerned that a number of veterans are facing higher end of year tax liabilities,” said Mr Jones.

Mr Jones said the non-refundable tax offset will prevent any adverse income tax outcomes for affected veterans in the DFRDB and MSB schemes.

“This will reverse higher end of year tax liabilities that would have occurred for some of these veterans and enable the ATO and CSC to include the impact of the new offset in determining fortnightly tax withholding, in order to address higher withholding that has occurred due to the Douglas decision,” he explained.

This offset will be for veterans adversely affected by the Federal Court’s decision in MSB and DFRDB schemes that started on or after 20 September 2007 and will apply retrospectively as well as prospectively.