What are incapacity payments and how to get them

Important information about incapacity benefits, including obligations of recipients.

What are incapacity payments?

Incapacity payments are compensation for economic loss due to the inability (or reduced ability) to work because of an injury or disease that has been accepted as service related under the Military Rehabilitation and Compensation Act 2004 (MRCA) or the Safety, Rehabilitation and Compensation (Defence-related Claims) Act 1988 (DRCA).

Your incapacity payments will be based on the difference between your normal earnings (what you were earning prior to your injury or incapacity) and your actual earnings or ability to earn at the time you are incapacitated for service or work.

Incapacity payments are initially payable at a rate equal to 100% of your normal earnings, less any amount of actual earnings at the time you are incapacitated for service or work and any Commonwealth superannuation payments (pension and/or lump sum) you receive. If you are in payment longer than 45 weeks, your payments will be based on a percentage of your normal earnings (between 75% and 100%, depending on the number of hours you are able to work each week), less your actual earnings (and any Commonwealth superannuation payments). This has the effect of reducing the amount you will receive if you are not working full-time. If you are not working, the rate will reduce to 75% of your normal earnings.

Incapacity payments will affect or be affected by any payments you may be receiving from Services Australia or a Commonwealth-funded superannuation scheme. Other deductions can include Child Support and offsets to benefits received under the Veterans’ Entitlements Act 1986 (VEA) for the same injury or disease that is causing your incapacity. Incapacity payments are subject to review annually and when your circumstances change and are not payable past Age Pension age in most cases.

For more detailed information, please refer to How we calculate incapacity payments

Important Information about receiving incapacity payments

Medical certification required

To receive incapacity payments, you will need to provide current medical certificates when requested, that show:

• whether you are currently incapacitated (i.e., unfit) for work;
• if you are unfit for work, the condition(s) that are causing your incapacity;
• the degree of incapacity, for instance wholly incapacitated for all work, partly incapacitated for all work or capable of working with some restrictions;
• what restrictions you may have in relation to employment; and
• the period you will be unfit for work, including start and end dates.

Please be aware that payments will cease if you do not supply medical certification when requested. Similarly, payments may be suspended if you refuse or fail to undergo a medical examination as directed by DVA without reasonable excuse, or if you obstruct such an examination.

Employment information required

As any actual earnings or ability to earn at the time you are incapacitated for service or work will be relevant to the calculation of your incapacity payments, you will need to inform DVA of all employment undertaken and any income earned while you are receiving incapacity payments. This includes any fulltime, part-time, contract, intermittent or self-employment, including any involvement in a business, whether as a sole trader, partner or in a company structure, whether paid or unpaid. You will need to provide evidence of any earnings from employment (e.g., employment contract, payslips, tax return, profit/loss statement) and advise whenever there is a change to your rate of pay from employment.

Other information required

You are also required to advise DVA if:

• you commence any course of study (whether part-time or full-time);
• you receive any payments from any other source, including Commonwealth superannuation (whether pension, lump sum or a combination of both);
• there is a change in your Commonwealth superannuation payments;
• you change address or contact details; and/or
• you intend to travel for more than 3 months or reside overseas.

As an incapacity payment recipient, you have an ongoing obligation to notify DVA of any changes in your circumstances. You will also be required to complete and return a D1352 Annual Review of Circumstances form when requested. Failure to notify DVA of any of these changes may affect your payments. You will need to provide your Tax File Number (TFN) as incapacity payments are generally taxable. For further information see Taxation information. 

Retrospective Invalidity assessment and its impact on incapacity payments 

Retrospective Invalidity assessment is a process where a veteran’s circumstances are assessed to determine if there were grounds on which they could have been medically transitioned from the ADF. If approved, a veteran may be entitled to an Invalidity Benefit from Commonwealth Superannuation Corporation (CSC). For further information see their ADF Medical Transition webpage.

CSC suggest that before proceeding with a Retrospective Invalidity application you consider the financial implications of this decision or access financial advice.  You can find details of this assistance via their website by typing ‘financial planning’ into the search function on the CSC home page.  

DVA incapacity payments are offset (reduced) by the Commonwealth-funded portion of superannuation payments received, including payments received through the CSC. CSC will notify DVA of the assessment outcome so DVA can determine the impact on your incapacity entitlements. 

These processes will also apply if you are seeking a reclassification of your Invalidity Benefits to a higher level of invalidity.  

If you have been in receipt of incapacity payments and are later paid an Invalidity Benefit retrospectively from CSC for the same period, this will impact your incapacity payments and you will have an overpayment. 

Please be aware that depending on how long you have been in receipt of incapacity payments this overpayment may be significant. 

This happens because the offset (reduction) was not applied to your incapacity payments at the time you were receiving them. DVA will recover any overpayment directly from your CSC Invalidity Benefit arrears payment, before any payment is made to you. CSC will release the relevant amount from the Invalidity Benefit arrears directly to DVA prior to releasing the remainder, if any, to you.  

If the arrears payment is not enough to repay the whole amount of the overpayment, you may have an outstanding debt with DVA. DVA will need to negotiate a recovery plan with you to repay this debt. 

Tax implications 

CSC is required to withhold tax from the Invalidity Benefit arrears in accordance with the Australian Taxation Office (ATO) requirements. Before CSC releases the remaining arrears, DVA will recover the incapacity overpayment.  

You should be aware that the CSC arrears may not cover the full DVA overpayment as DVA is required to recover the gross pre-tax amount of the overpayment.  

You can ask the ATO to amend your prior income tax assessments once the overpayment has been repaid or you have entered into a payment plan with DVA to repay any remaining amount. This is because you repaid an amount that you previously paid tax on and therefore you may be entitled to receive a tax refund (after offsetting certain other Commonwealth liabilities).  

If you are on a payment plan, DVA encourages you to use any tax refund to assist with repaying your remaining DVA overpayment. If you do not use these funds for repayment purposes, your overpayment with DVA will remain.

You should discuss any implications with DVA and/or a financial adviser relating to your arrears recovery. 

Rehabilitation

If you are receiving incapacity payments, you may be expected to participate in a rehabilitation program initiated by DVA to increase your capacity for suitable employment (a paid job that is suitable to your skills and level of incapacity).

Rehabilitation may consist of return to work and non-return to work assistance depending on your assessed needs, and you will be supported while you undergo the program. If you are assessed as having the potential to return to work your rehabilitation program will include a period of facilitated job search assistance. At the end of your rehabilitation you may be deemed with an ability to earn at the appropriate level if you are not genuinely seeking employment.

Please be aware that if you refuse or fail to participate in a rehabilitation program your incapacity payments may be suspended.

Taxation information

Incapacity payments are income-related payments and are generally taxable. You will need to declare these payments as part of your tax return. At the end of each financial year, you will receive a Payment Summary similar to the type of summary you would receive from an employer. This summary will assist you to complete your tax return.

DVA deducts income tax from your payments based on the rate selected when you provided your Tax File Number Declaration. If you wish to change the rate of tax deducted from your payments you will need to provide a new Tax File Number Declaration form. Please note you can only claim the tax-free threshold from one payer at a time; if you are also claiming the tax-free threshold from another payer (such as your superannuation fund or your employer) you may not be paying enough tax and may have a tax liability at the end of the financial year.

DVA recommends that you consult the Australian Taxation Office or a tax professional to learn more about how receiving incapacity entitlements (including lump sum arrears payments) will affect your tax.