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.
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:
- 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
- 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.