Private ruling: Invalidity pension paid to you under the rules of the Military Superannuation and Benefits Scheme
Date of advice: 13 May 2016
Published: June 2016
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 12 August 2015

Ruling: Q1: Are the payments of the invalidity pension paid to you under the rules of the Military Superannuation and Benefits Scheme (MSBS) established by trust deed under the Military Superannuation and Benefits Act 1991 (MSBA) superannuation benefits as that term is defined in section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If yes to the previous question, are the payments of the invalidity pension paid to you excluded by section 307-10 of the ITAA 1997 from the definition of superannuation benefit in section 307-5 of the ITAA 1997? | A2: No. | Q3: If no to the previous question, does the invalidity pension constitute a superannuation income stream as that term is defined in section 307-70 of the ITAA 1997 and regulation 995-1.01(1) of the Income Tax Assessment Regulations 1997 (ITAR)? | A3: Yes. | Q4: If yes to the previous question, can you make the election in regulation 995-1.03 of the ITAR, before a particular payment of the invalidity pension is made, that the payment is not to be treated as a superannuation income stream benefit? | A4: Yes | Q5: Is the invalidity pension payable to you under the rules of the MSBS an employment termination payment? | A5: No. | Q6: Is the invalidity benefit paid from the MSBS paid in respect of an interest that is a defined benefit interest under section 291-175 of the ITAA 1997. | A6: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are over your preservation age. You were, but are no longer, a member of the Australian Defence Forces (ADF). As a member of the ADF, you became a member of the MSBS. The MSBS is a scheme which was established to provide benefits that are payable when an individual retires from the ADF. The MSBS is established by trust deed under the MSBA. The MSBS is administered by the Commonwealth Superannuation Corporation (CSC). Amongst other things, the MSBS Rules provide for the payment of an invalidity pension to certain individuals who have been retired because of their invalidity. To determine whether an invalidity pension is payable, the MSBS Rules provide for a mechanism by which a determination is made of a particular individual's capacity/incapacity to engage in civil employment after their retirement from the ADF: rule 22 MSBS Rules. Under that rule, an individual is assessed as having a Class A, Class B or Class C incapacity for civil employment. The MSBS Rules provide that a person whose incapacity for civil employment is classified as Class A is eligible for an invalidity pension, the starting amount for which is worked out having regard to an amount called the employer benefit: rule 27 MSBS Rules. A person whose incapacity for civil employment is classified as Class B is entitled to a pension of a different amount, which in very broad terms, may be half of the amount payable to a Class A recipient: rule 28 MSBS Rules. However, no invalidity pension is payable to a person whose incapacity for civil employment is classified as Class C: rule 31 MSBS Rules. In very simple terms, the 'employer benefit' is worked out having regard to your final average salary and your eligible service period. Schedule 8 to the MSBS Rules sets out the rules for the calculation of the employer benefit for some members, including a person who is retired from the ADF because of invalidity. Schedule 5 to the MSBS Rules sets out the rules used to calculate the rate of pension that is payable by conversion from the amount of the employer benefit. The MSBS Rules require an individual to undergo periodical reviews of their level of incapacity for civil employment: rule 25 MSBS Rules. The MSBS Rules generally provide that if an individual's level of incapacity for civil employment is adjusted to the extent that they are reclassified to another classification, the amount payable may be adjusted. If an individual is reclassified to Class C, the invalidity pension that had been payable to them (as either a Class A or Class B individual) is cancelled and the individual will have a preserved benefit of the amount of their employer benefit: rule 29 MSBS Rules. However, an individual who has reached the age of 55, cannot be reclassified to Class C incapacity for civil employment: subrule 23(2) MSBS Rules. Upon becoming entitled to receive an invalidity pension under the MSBS, an amount equal to the funded employer benefit is paid by the CSC to the Commonwealth and the invalidity pension is payable to the individual by the Commonwealth from the Consolidated Revenue Fund: section 13 MSBA. If an invalidity pension that was payable to an individual who was classified as having a Class A or Class B incapacity for civil employment is cancelled because the individual is reclassified to Class C, the Commonwealth must pay to the CSC an amount equal to the individual's funded employer benefit: section 15 MSBA. Under the MSBS Rules, the invalidity pension is paid fortnightly: rule 67 MSBS Rules. The amount payable as the invalidity pension is indexed twice each year in January and July with the indexation worked out by reference to increases in the consumer price index for the half-years ending 30 September and 31 March respectively: rule 56 MSBS Rules. You were retired from the ADF on the grounds of invalidity. You have advised that you have been classified under a certain class. The CSC is currently withholding amounts from your invalidity pension on the basis that each fortnightly payment of the pension is a superannuation income stream benefit that you are liable to include in your assessable income.

Relevant legislative provisions: Income Tax Assessment Regulations 1997 regulation 995-1.03 Superannuation Industry (Supervision) Act 1993 section 10 Superannuation Industry (Supervision) Regulations 1994 regulation 1.06

Reasons for decision: Detailed Reasoning - Question 1: Are the payments of the invalidity pension paid to you under the rules of the Military Superannuation and Benefits Scheme (MSBS) established by trust deed under the Military Superannuation and Benefits Act 1991 (MSBA) superannuation benefits as that term is defined in section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Detailed Reasoning - Answer 1: Yes | Detailed Reasoning - Reasons: Item 1 of the table in subsection 307-5(1) of the ITAA 1997 effectively states that a 'superannuation benefit' includes a payment made to you from a superannuation fund because you are a fund member. 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). Paragraph (b) of the superannuation fund definition in subsection 10(1) of the SISA refers to a 'public sector superannuation scheme.' This term is also defined in that subsection to include a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established by or under a law of the Commonwealth or the government of a State or Territory. The MSBS is established under the law of the Commonwealth. In the Commissioner's view, it is established to pay superannuation, retirement or death benefits. In particular, it provides for benefits that are in the nature of superannuation benefits that are payable on retirement from the ADF, including where that retirement is due to invalidity. It is therefore a superannuation fund for both SISA and income tax purposes. In this regard, the Commissioner notes that, in Michael James Hammerton v Comcare Australia [1995] AATA 63, the Administrative Appeals Tribunal reached a similar conclusion about the scheme established under the Defence Force Retirement and Death Benefits Act 1973 (DFRDB Act). That Act also provides for certain invalidity benefits to retired service personnel. Section 125 of that Act, like the MSBA, provides that all benefit payments are made by the Commonwealth and are made out of the Consolidated Revenue Fund. Further, in the Commissioner's view, the invalidity pension payments are made because the recipients are, or have been, fund members. Each individual's entitlement to the benefits arises because they were a fund member who retired due to invalidity. The Commissioner considers that the MSBS invalidity pensions are superannuation benefits as defined in section 307-5 of the ITAA 1997. | Detailed Reasoning - Question 2: If yes to the previous question, are the payments of the invalidity pension paid to you excluded by section 307-10 of the ITAA 1997 from the definition of superannuation benefit in section 307-5 of the ITAA 1997? | Detailed Reasoning - Answer 2: No | Detailed Reasoning - Reasons: Paragraph 307-10(a) of the ITAA 1997 excludes from the definition of 'superannuation benefit' amounts payable under an income stream because of the person's temporary inability to engage in gainful employment. The MSBS invalidity pension is paid because a member is retired from the ADF on the ground of invalidity. It is not paid because of the person's temporary inability to engage in gainful employment but rather on the assessment of their incapacity in relation to civil employment. The assessment of incapacity determines whether an individual is entitled to a pension and if so how much is payable as the pension. On review, the assessment of incapacity can also determine whether a different amount is payable or whether a pension should be cancelled (if the individual is reclassified as having Class C incapacity). The payment of an invalidity pension under the MSBS occurs when there is a permanent, not temporary incapacity. An individual's degree of incapacity must be such that first, the individual is retired from the ADF. Secondly, the degree of incapacity that is necessary for an individual to be paid an invalidity pension is such that it has diminished the individual's capacity to undertake the kinds of civil employment which a person with the vocational, trade and professional skills, qualifications and experience the particular individual has and that they might reasonably undertake: see for example, rules 22 and 23 of the MSBS Rules. In the Commissioner's view, the MSBS invalidity payments do not relate to temporary disability or temporary incapacity and they are not excluded from being superannuation benefits by paragraph 307-10(a) of the ITAA 1997. | Detailed Reasoning - Question 3: If no to the previous question, does the invalidity pension constitute a superannuation income stream as that term is defined in section 307-70 of the ITAA 1997 and regulation 995-1.01(1) of the Income Tax Assessment Regulations 1997 (ITAR)? | Detailed Reasoning - Answer 3: Yes | Detailed Reasoning - Reasons: Superannuation benefits are either superannuation income stream benefits or superannuation lump sums (Subdivision 307-B of the ITAA 1997). A superannuation income stream benefit is relevantly 'a payment from an interest that supports a superannuation income stream, other than a payment to which regulation 995-1.03 of the ITAR applies: subsection 307-70(1) and (2) of the ITAA 1997 and subregulation 995-1.01(2) of the ITAR. A definition of "superannuation income stream" is set out in subregulation 995-1.01(1) of the ITAR. On the issue of whether these MSBS pensions are superannuation income streams, an 'income stream' that commenced on or after 20 September 2007 is a superannuation income stream if it is taken to be a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations or SISR. The expression 'income stream' is not defined by either the income tax or superannuation laws. It must be given its ordinary meaning. In the Commissioner's view an income stream is a series of periodic payments that relate to each other and that are payable over an identifiable period of time. The invalidity pension payable under the MSBS amounts to such a series of fortnightly payments. The Commissioner has examined the terms under which the invalidity pension is payable under the MSBA and MSBS and is satisfied that the invalidity pension is a pension that meets the requirements set out in subregulation 1.06(1) of the SISR. You refer in your application to the circumstances in which the invalidity pension may vary under the MSBS rules and point to the conditions in paragraph 995-1.03 of the ITAR in order to conclude that the invalidity pension is not a superannuation income stream. However, we note that regulation may only affect whether a particular payment from a superannuation income stream is a superannuation income stream benefit or a superannuation lump sum. It has no effect on whether a person's benefits paid from their superannuation fund are a superannuation income stream or not. Regulation 995-1.03 only applies if a member's benefits are being paid as a superannuation income stream as defined. | Detailed Reasoning - Question 4: If yes to the previous question, can you make the election in regulation 995-1.03 of the ITAR, before a particular payment of the invalidity pension is made, that the payment is not to be treated as a superannuation income stream benefit? | Detailed Reasoning - Answer 4: Yes | Detailed Reasoning - Reasons: Regulation 995-1.03 of the ITAR effectively allows a person in receipt of a superannuation income stream to elect to have a payment made from the income stream be treated as a superannuation lump sum instead of a superannuation income stream benefit (provided the person makes the election before the payment is made). However, an election under regulation 995-1.03 of the ITAR may only be made if the conditions to which the superannuation income stream is subject permit the amount of payments in a year to vary other than in the circumstances set out in sub-paragraphs (a)(i)-(iv). Effectively this means that an election can only be made if the payment amount in a year is capable of being varied other than by way of: indexation under the pension rules; the application of the family law splitting rules; the commutation of the income stream; or the payment of an assessment of excess contributions tax. Rule 23 permits a person who has been classified under Rule 22 to be reclassified under Rule 22 at a future time. For example, a retiree who was classified as Class A under Rule 22 may, where the requirements of Rule 23 are met, be reclassified as Class B or Class C at some later time (and vice versa). In the case of a person in receipt of an MSBS invalidity pension who is reclassified Class A or Class B, this effectively means the annual payment amount of their pension will change significantly given the annual amount of a Class B invalidity pension may in general terms equate to only half the annual amount payable as a Class A invalidity pension. The Commissioner considers that in the circumstance where the annual amount of payments from an MSBS invalidity pension is altered in response to the application of Rule 23, this reflects a circumstance other than one set out in sub-paragraphs 995-1.03(a)(i)-(iv). Hence, the Commissioner considers that a person in receipt of an MSBS invalidity pension may make an election under regulation 995-1.03 or the ITAR 1997 in respect of a payment provided they make the election before the payment from their pension is made. | Detailed Reasoning - Question 5: Is the invalidity pension payable to you under the rules of the MSBS an employment termination payment? | Detailed Reasoning - Answer 5: No | Detailed Reasoning - Reasons: Under section 82-130 of the ITAA 1997, a payment is an employment termination payment if each of three conditions is met: • it is received by a person in consequence of the termination of the person's employment: subparagraph 82-130(1)(a)(i), • it is received no later than 12 months after that termination: paragraph 82-130(1)(b), and • it is not excluded from being an employment termination payment by section 82-135 of that Act: paragraph 82-130(1)(c). Even in the event it could be said that payments made from the MSBS invalidity pension meet the first of these two conditions, under paragraph (a) of section 82-135 of the ITAA 1997, the payment of a superannuation benefit is not an employment termination payment. For the reasons set out for question 1 of this ruling, it is the Commissioner's view that the invalidity pension payments are superannuation benefits. Therefore, your invalidity pension payments are excluded from the definition of employment termination payment under paragraph 82-135(a) of the ITAA 1997. Further, paragraph 82-135(b) of the ITAA 1997 provides that the payment of a pension is not an employment termination payment. As the word "pension" as used in that paragraph is not defined, it takes its ordinary meaning. In Michael James Hammerton v Comcare Australia [1995] AATA 63, the Administrative Appeals Tribunal decided that the pension payable under the DFRDB scheme was a pension within the ordinary meaning of that word. We consider that this position can be consistently applied to the payments of the MSBS invalidity pension. We note that because the invalidity pension is a pension within the ordinary meaning of the term "pension", it may be included in assessable income as ordinary income under section 6-5 of the ITAA 1997 if it was not otherwise regarded as a superannuation benefit. | Detailed Reasoning - Question 6: Is the invalidity benefit paid from the MSBS paid in respect of an interest that is a defined benefit interest under section 291-175 of the ITAA 1997? | Detailed Reasoning - Answer 6: Yes | Detailed Reasoning - Reasons: Subsection 291-175(1) of the ITAA 1997 provides that an individual's superannuation interest is a 'defined benefit interest' to the extent it defines the individual's entitlement to superannuation benefits payable from the interest by reference to (relevantly for this advice): (a) the individual's salary or allowance in the nature of salary at a particular date or averaged over a period; … (d) specified conversion factors. However, subsection 291-175(2) provides that the interest is not a defined benefit interest if it defines that entitlement solely by reference to one or more of the following: (a) disability superannuation benefits; (b) superannuation death benefits; (c) payments of amounts mentioned in paragraph 307-10(a). As a member of the MSBS, an individual enjoys a range of potential prescribed entitlements under the scheme where the actual entitlement derived by the individual or their dependants upon the individual ceasing to be a member of the scheme is contingent upon the happening of some future event. Specifically, while a member of the scheme an individual has a contingent entitlement to benefits variously payable upon retirement, resignation, retrenchment and invalidity. Their dependants may also have a contingent entitlement to receive payments from the scheme on their death. In the case of these contingent entitlements, the member's employer benefit is derived under the scheme rules by a formula that references their final average salary and various other factors such as their years of service. In the event the benefit paid from the scheme is a pension, the annual pension amount is further derived by the application of specified conversion factors. Accordingly, the Commissioner considers that a member's interest in the MSBS is a defined benefit interest under subsection 291-175(1) of the ITAA 1997. Further, as a person, while a member of the MSBS, has a contingent entitlement to benefits that may be paid on retirement or resignation or retrenchment as well as upon invalidity or death, the Commissioner considers that subsection (2) can have no application as their interest in the MSBS cannot be said to be defined 'solely' by reference to disability superannuation benefits or death benefits as defined and, for the reasons set out in the answer to question 2, the invalidity pensions do not give rise to payments to which paragraph 307-10(a) applies. This conclusion is not affected by the fact a person is actually in receipt of an invalidity pension. This is because the right to the pension itself, is not the only right the person has in the scheme. For example, in the circumstances where a person has been receiving a pension but is reclassified to Class C incapacity for civil employment and the pension is cancelled, the Commonwealth must pay an amount of funded employer benefit back to CSC. The person then has an entitlement to the employer benefit again and that benefit is not any one of the kinds specified in subsection 291-175(2) of the ITAA 1997.