How Military Pensions Are Taxed in Australia

Military superannuation pensions from the DFRDB (Defence Force Retirement and Death Benefits) scheme and MSBS (Military Superannuation and Benefits Scheme) have a unique tax structure unlike most civilian super pensions. The key difference is that your fortnightly pension payment is split into a tax-free component and a taxable component.

The tax-free component arises from the "productivity component" of the DFRDB scheme and the "employer-financed productivity component" of MSBS that existed before major reforms. For most veterans receiving a DFRDB or MSBS age pension, roughly 30–60% of their gross pension is tax-free, while the remainder is assessed as ordinary income.

The Australian Taxation Office (ATO) requires your super fund — typically the Commonwealth Superannuation Corporation (CSC) — to provide an annual PAYG Payment Summary (now part of your income statement via myGov) showing the exact split between tax-free and taxable components. You must include the taxable portion in your tax return each year.

FY 2025-26 Tax Rates for Military Pensioners

For the 2025-26 financial year, the Stage 3 tax cuts (passed in 2024) apply. The taxable portion of your military pension is added to any other income — such as part-time work, investment income, or rental income — and taxed at the following marginal rates.

You also pay the Medicare Levy of 2% on your taxable income, which adds to your overall tax bill. Most military pensioners aged 65+ may be eligible for the Senior and Pensioners Tax Offset (SAPTO), which can reduce or eliminate your tax liability entirely if your total income is below certain thresholds.

For a detailed breakdown of how these rates apply to your specific income, use our take-home pay calculator and include your taxable military pension income.

DFRDB Pension Tax Treatment

The DFRDB scheme closed to new members on 30 September 1991 but still pays pensions to members who joined before that date. DFRDB pensions consist of a defined benefit calculated on your final salary and years of service. The tax-free portion is calculated based on the "productivity component" which was introduced from 1 January 1986.

For DFRDB members who joined before 1 January 1986, the portion of their pension attributed to service before that date receives a more favourable tax-free treatment. The Commonwealth Superannuation Corporation (CSC) automatically calculates this split and reports it to both you and the ATO.

Generally, a DFRDB pension paid at age 55 or older (the standard preservation age for military members) will have between 30% and 50% classified as tax-free. The exact percentage depends on your service period before 1 January 1986 relative to your total service.

You do not need to make any election or claim — the tax-free percentage is determined by legislation and applied by CSC before they issue your PAYG summary.

MSBS Pension Tax Treatment

The Military Superannuation and Benefits Scheme (MSBS) covers members who joined the permanent ADF from 1 October 1991. MSBS has two components: a defined benefit (the "MSBS Defined Benefit") and an accumulation component (the "MSBS Accumulation").

MSBS pensions operate differently from DFRDB in that the tax-free component largely comes from the "employer-financed productivity component" which was introduced from 1 July 1986. For post-1 July 1986 service in the MSBS, the tax-free percentage is generally lower than DFRDB.

For most MSBS pensioners, the tax-free portion of their defined benefit pension ranges from 5% to 20% of the gross pension amount. The accumulation component — which operates like a standard super fund — has its own tax-free / taxable split based on contributions history.

MSBS members also have access to a "transition to retirement" (TTR) pension from age 55, which follows the same tax rules as a full MSBS pension.

ADF Super Pension Tax Treatment

ADF Super is the modern accumulation scheme introduced on 1 July 2016 for all new permanent ADF members. Unlike DFRDB and MSBS, ADF Super is not a defined benefit scheme. Instead, it operates like a standard accumulation super fund with employer and employee contributions.

When you retire and draw down an income stream from ADF Super, the tax treatment follows standard superannuation rules. The tax-free component equals your after-tax (non-concessional) contributions plus certain government co-contributions. The taxable component includes your employer contributions and salary sacrifice contributions, which have already been taxed at 15% inside the fund.

The key advantage of ADF Super is its full portability — you can roll it into any retail or industry super fund of your choice with no loss of benefits. If you have ADF Super and want to understand how much tax you'll pay in retirement, the income tax calculator can help estimate your tax liability on your withdrawal income.

Senior and Pensioners Tax Offset (SAPTO) for Military Pensioners

SAPTO is a valuable tax offset that can reduce or eliminate the tax payable by eligible military pensioners aged 65 and over. For the 2025-26 financial year, the SAPTO thresholds are:

If your total taxable income (including the taxable portion of your military pension) falls within these thresholds, SAPTO will offset your tax dollar-for-dollar. This means many military pensioners with moderate incomes pay very little or no income tax.

The offset phases out at 12.5¢ per dollar above the threshold. It is important to note that SAPTO applies after the Low Income Tax Offset (LITO) — you can potentially receive both offsets if eligible. Your Medicare levy may also be reduced or waived if your taxable income is below the seniors' Medicare levy exemption threshold of approximately $40,000 (single) for FY 2025-26.

Frequently Asked Questions

Is a military pension considered taxable income in Australia?

Yes, the taxable portion of your military pension — from DFRDB, MSBS, or ADF Super — is assessable income. However, a portion (typically 30–50% for DFRDB and 5–20% for MSBS) is tax-free. Your PAYG summary from CSC shows the exact split.

Do I need to include my military pension in my tax return?

Yes. The taxable component of your military pension is included in your annual tax return as assessable income. The Commonwealth Superannuation Corporation reports this directly to the ATO, and it will be pre-filled in your myGov tax return. Your take-home pay calculator can help you estimate your net income after tax.

Do military pensioners get the tax-free threshold?

Yes. Every Australian resident — including military pension recipients — can use the tax-free threshold of $18,200. The first $18,200 of your taxable income (including the taxable portion of your military pension) is tax-free. Combined with SAPTO, many veterans pay minimal tax.

Are DFRDB invalidity pensions taxed differently?

Invalidity (disability) pensions from DFRDB are generally taxed the same as age-based DFRDB pensions, with a tax-free component and a taxable component. However, if you are considered "permanently incapacitated" and under preservation age, the taxable component may be taxed at a lower rate. Speak to the CSC or a tax professional about your specific situation.

How do I find out the tax-free percentage of my military pension?

Your annual PAYG Payment Summary (income statement) from CSC clearly shows the tax-free component and the taxable component. You can also log into your CSC online portal to view the breakdown. If you have questions about the calculation, contact the Commonwealth Superannuation Corporation directly on 1300 001 727.