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Military Super Invalidity Pension

The treatment of Military Super invalidity pensions for Family Law purposes seems to be under some debate. My view of issues from an actuarial perspective may be very different to how a Court may treat the situation.

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In a Full Federal Court decision [ Commissioner of Taxation v Douglas [2020] ] the judgement was that the invalidity benefits paid to Mr Douglas from the DFRDB Scheme and to Mr Walker from Military Super were to classified as a superannuation lump sum payment instead of a superannuation income stream. From a tax perspective this may be positive or negative for an individual. In April 2022 the Federal Government announced they would look at legislation to ensure no veteran was worse off.

For Family Law property settlements an item can be an asset; a financial resource or excluded. Assets are divisible (can be split) under Section 79 of the Family Law Act. The Commonwealth Superannuation Corporation in commenting upon the impact of the Douglas matter with regards to Family Law splits as follows:

Can my invalidity pension still be subject to a family law split?

Yes, superannuation splitting under the Family aw Act 1975 does not rely on the very specific definition of “superannuation income stream” and “pension” under Regulation 1.06 of the Superannuation Industry (Supervision) Regulations 1994 which were considered in the Douglas matter.

As such, the outcome of the Douglas matter has not affected the Family Courts’ power to split an invalidity pension, or the way in which CSC has complied with validly made Family Court Orders and Agreements previously. CSC will continue to comply with its obligations under the Family Law Act to implement Family Court Order and Agreements splitting superannuation benefits.

This is how they have been processing invalidity pension entitlements for years. Military Super (and DFRDB) will provide Form 6 Family Law Information as a “superannuation interest” for invalidity pension notwithstanding some special features to this type of entitlement. They will also create an “associate member account” for splits. Valuers of these entitlements use the Attorney-General approved special methods and factors for the calculations./p>

It is possible that the above approach could be challenged because:

  1. Not all Military Super invalidity pensions qualify as a disability superannuation benefit. This is because a disability superannuation benefit is dependent on the recipient being totally and permanently incapacitated, whereas the Military Super invalidity pension are based on varying levels of incapacity; and
  2. Military Super invalidity benefits can be reviewed and changed to reflect the recipient’s incapacity for civilian employment. A Class A level has an indexed pension; a Class B a half rate indexed pension; and a Class C has no indexed pension. There are various other components e.g. Member Benefits that are either unrestricted or restricted preserved.

Personally, I think that if the whole entitlement at the time of valuation is not taken to be a splittable superannuation asset, then at least a component of it should be. The use of lower valuation factors for the pension as compared to a normal retirement pension could be argued as a recognition of a lower anticipated payment duration on average – most pensions do not get reduced. However, the Douglas decision is at odds the defined benefit design (as the pension is generated from a dollar sum conversion).

I don’t know what position will ultimately prevail or what legislation will be implemented. It is not unheard of to have this level of uncertainty. We have until recently been living with a similar change of approach and calculation uncertainty with Exempt Current Pension Income calculations.

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