Military invalidity pensions, compensation and Family Law

Military invalidity pensions and compensation

When a separating couple includes a current or former ADF member, there are often specific financial issues that arise in their family law property matter.

Military superannuation, invalidity pensions and compensation paid under the Military Rehabilitation and Compensation Act 2004 (Cth) are not all treated the same way by the Federal Circuit and Family Court of Australia.

The critical point is this: the Court does not simply ask whether a payment exists. It asks:

1. what the payment is for,
2. whether it is truly property available for division as the rest of the jointly owned property;
3. whether it is to be treated separately as the sole contribution of the ADF member;
4. whether it is better characterised as a financial resource or

Military superannuation is not the same as an invalidity pension

In family law, ordinary superannuation is generally treated as property. That includes many military superannuation interests, such as preserved retirement benefits under the Military Superannuation and Benefits Scheme (MSBS). Those interests can usually be valued under the Family Law (Superannuation) regime and may be the subject of a splitting order.

An invalidity pension is different.

A military invalidity pension is commonly paid because a member has been discharged, or cannot continue service, due to injury or incapacity. In many cases, that pension has two distinct characteristics:

• a retirement or superannuation component; and
• a compensation component for personal injury, loss of earning capacity, or the consequences of service-related incapacity.

That distinction matters. The Court has repeatedly recognised that a payment which is compensatory in substance is not to be treated in the same way as a standard retirement benefit built up during the relationship.

How the Court approaches military invalidity pensions

The Family Law Act 1975 (Cth) does not provide a single rule for every invalidity pension. Instead, the Court looks at the legal and practical character of the benefit.

Broadly, the Court considers matters such as:

• whether the pension is payable because of retirement or because of invalidity
• whether it is reviewable or subject to reclassification under the Military Rehabilitation and Compensation Act 2004 (Cth) if the former ADF member’s health improves;
• whether it can be commuted to a lump sum;
• whether all or part of it is better treated as a financial resource relevant to future needs.

In many military cases, the Court has held that the invalidity pension is not simply an item of property to be divided. Rather, the pension is often treated, wholly or substantially, as a financial resource to be considered when assessing future circumstances under section 75(2) of the Family Law Act.

Sobol & Sobol: why this case matters

A leading authority in this area is Sobol & Sobol [2024] FedCFamC1F 1065.

In Sobol, the Court closely examined the nature of a military invalidity pension and found that it was not appropriate to treat the pension as an ordinary superannuation asset available for division in the usual way. The Court accepted that the pension had both superannuation and compensation features, but the compensation element was the predominant feature.

The key points from Sobol are:

• the invalidity pension was found to include a component representing ordinary superannuation and a component representing compensation for personal injury or incapacity;
• due to the predominant compensation component the whole pension and associated superannuation was not treated as property in the divisible pool;
• the pension and associated superannuation was instead treated as a financial resource relevant to future needs;
• the Court declined to make a splitting order in relation to the invalidity pension; and
• the non-commutable and reviewable nature of the pension was an important practical reason why splitting was unjust and unworkable.

The Court also recognised a significant practical difficulty: even if one could notionally identify an ordinary superannuation element within the pension, isolating and splitting only that component may not be possible without unfairly reducing the member’s invalidity pension.

That is an important point for practitioners and clients alike. In military matters, the question is not merely whether there is a pension. The question is whether that pension is, in substance, a retirement asset, compensation for injury, or a combination of both.

In practice, Sobol confirms that military invalidity pensions will often not form part of the divisible property pool.  Instead they are more commonly treated as a financial resource relevant to the Court’s assessment of contributions and future needs.

This does not mean the non-member spouse is ignored. It means the Court analyses the pension differently from a house, bank account or standard accumulation superannuation fund.

MRCA payments: how the Court usually sees them

Payments under the Military Rehabilitation and Compensation Act 2004 (Cth) are also treated distinctly.

Payments under the Act (“MRCA payments”)  are generally compensation for service-related injury, disease or impairment. They may include lump sums for permanent impairment and other statutory entitlements. Their purpose is compensatory. They are paid because of the member’s personal injury and its consequences.

For that reason, the Court often treats MRCA payments as qualitatively different from property created by the parties’ joint efforts during the relationship.

If the compensation money has been applied toward another asset that forms part of the pool, e.g. to pay off a mortgage on real property, the Court generally includes that asset in the pool, but gives substantial weight to the fact that the underlying funds were the injured party’s personal compensation which increases the assessment of that party’s financial contribution under section 79(4) of the Family Law Act 1975(Cth)

MRCA payments are often treated as a sole contribution

Authorities such as Nelson & Ashcroft [1]and O’Khelleher & O’Khelleher[2] show that courts frequently give significant contribution-based recognition to MRCA payments.

The underlying principle is straightforward: compensation paid for a party’s personal injury is ordinarily not treated as something generated by the relationship in the same way as wages, savings, or jointly acquired property.

Accordingly, where MRCA funds have been applied to existing property, the Court may:

• include the asset in the balance sheet;
• treat the compensation as having been contributed by the injured party alone; and
• adjust the percentage outcome in that party’s favour.

Under the MRCA, an injured service member may also receive additional compensation in respect of each dependant child. The Court has recognised that these additional amounts are likewise to be treated as the sole contribution of the serving member.  This was the case even where the payment was calculated by reference to children of the other party’s previous relationship: see O’Khelleher & O’Khelleher.

What if the MRCA money is paid after separation?

Where the MRCA money is received by one party after separation, but before a property settlement, it could be argued that the money could be ‘quarantined’ from the pool.  If the money is treated similarly to other compensation type payments, the Court looks at a range of factors to determine whether it should form part of the pool.  This includes when the money was received, it’s purpose, whether both parties could be argued to have contributed (e.g. through paying a shared premium for an insurance policy) and whether it has been kept separate.  If the MRCA money was determined not to be a marital asset to form part of the pool, it would then be considered as a section 75(2) financial resource available to one partner, which would likely affect the share of the pool that the other partner is entitled to.

What if the MRCA money has been spent?

If the compensation has already been spent on living expenses, medical needs, debt reduction, housing, or other legitimate expenditure, the Court will usually examine the evidence in a practical way.

The Court does not ordinarily undertake a forensic reconstruction of every dollar unless there is a proper basis to do so, such as:

• an allegation of waste;
• concealment of assets;
• suspicious transactions; or
• evidence that compensation funds have been diverted or hidden.

Absent that kind of evidence, the Court generally focuses on the current asset position and the overall justice of the outcome.

How these issues affect property settlements

In property proceedings, the Court is required to reach a just and equitable outcome. Military superannuation, invalidity pensions and MRCA payments can materially affect that exercise.

Common outcomes include:

• ordinary military superannuation being included in the property pool and potentially split;
• invalidity pensions being treated as a financial resource rather than a divisible asset, especially where the compensation element predominates;
• MRCA lump sums recognised as the injured party’s sole contribution if they are reflected in existing assets; and
• the Court adjusting the overall division of property to account for contributions, future needs, income capacity, health issues, and ongoing resources.

In practice, the final outcome may not turn on whether a benefit is technically “in” or “out” of the pool. In many cases, the real issue is how that benefit affects contributions and future-needs adjustments.

For separating couples where one party has served in the ADF, the classification of these entitlements can significantly affect the overall result. Careful attention must be given to the source of the payment, its legal character, the governing legislative scheme, and how the funds have been applied.

[1]Nelson & Ashcroft [2016] FCCA 1322

[2] O’Khelleher & O’Khelleher [2022] FedCFamC1F 393