Next Steps for the Taxation of Invalidity Benefits
For veterans, the recent decision regarding proper taxation of invalidity benefits is one that is closely followed. In Commissioner of Taxation v Douglas  FCAFC 2020, it was held that Consumer Superannuation Corporation (CSC) payments did not serve as a superannuation income stream benefit. The implications from this decision concern payments under the Military Superannuation Benefits (MSB) and Defence Force Retirement and Death Benefits (DFRDB) schemes that commenced after 20 September 2007. These will now become partially tax free.
Since this decision in December, veterans across the country have been waiting for information from the Australian Taxation Office (ATO) regarding how past assessments of taxation will be recalculated. The ATO has recently released an estimated timeline for dealing with the tax calculations of veterans who are affected as a result of the decision.
During March and April 2021, the ATO will obtain information from the CSC regarding payments received by affected veterans. The ATO estimates that they will have this information by mid-April 2021, at which point they will provide affected veterans with the opportunity to opt in to a “streamlined amendment process”. Veterans may choose not to opt in to the streamlined amendment process and pursue a conventional taxation objection for each affected year of income. In that alternative process, an affected veteran will need to seek an extension of time to object to each tax returns assessed more than four years ago. This may be more complicated than the streamlined amendment process and will involve the veteran objecting against the Income Tax Return for each year in which an invalidity payment was received.
While more details are still to be provided by the ATO, we expect that veterans will be able to provide contact details and opt in to the streamlined process. The ATO will verify the identity of those who have provided contact details, as well as identify affected years of income tax. We anticipate that the ATO will then make amendments to income tax assessment based on information obtained by the CSC. This may take up to 56 days for simple cases, or longer for more complex cases.
Veterans will be required to provide any other information that the ATO requests throughout the course of the amendment process. It does not appear at this time that veterans will have to seek an extension to object to Income Tax Returns greater than four years old if opting in to the streamlined amendment process. However, the ATO may require more further information by veterans in the course of the streamlined process.