We often hear about the lucrative tax-free reserve day. Yet, if it is so compelling, why does Defence struggle to fill the organisation? In 2023–24, Defence was forecast to recruit 1,011 reservists against a target of 2,089[1]. In 2024–25, almost a third of the 33,000 reservists available to serve did no paid service at all[2].

One factor could be that, for the average person, a reserve day is not nearly as lucrative as we think. The shortfall grows for those willing to give more than a Tuesday night, those who could offer two or three days a week around study, caring or other work. Yet we continue pushing them towards SERCAT 5 (the active Reserve) rather than SERCAT 6 (part-time permanent service), which could offer a more compelling option.

Tax-free pay helps less than it seems

Take a sergeant on pay grade 4, increment 1. A permanent sergeant earns $111,041 a year, or $87,209 after tax[3][4], over about 227 working days once 25 days of recreation leave and nine weekday public holidays are removed. That is $489 per day worked before tax, or $384 after tax.

A reserve sergeant earns $304.22 per day, tax-free, and only for days actually served. The rate is the annual salary divided by 365, implying that reservists would have to work every day of the year, weekends and public holidays included, to make the same salary. After tax, the permanent sergeant still earns 26% more per day worked. Civilian employers do the opposite, paying casuals a loading of around 25% for the leave and public holidays they forgo[5].

The tax exemption only makes up the difference at a marginal tax rate of 37.8%, which means a civilian income above $135,000[6], about $27,000 more than average full-time earnings[7]. Below that, the same salary paid pro-rata and taxed normally is worth more.

Breakeven analysis on pro-rata (taxed) vs tax-free reserve pay

And the more someone serves, the less the exemption is worth to them. People offering several days a week usually have little other income, so they face low tax rates anyway.

Take a sergeant who left the permanent force to care for children or study full-time, Sergeant Barnes. They might prefer to keep serving, but the two-and-a-half reserve days a week they could do would earn them only $34,500 a year, with the tax exemption worth about $2,450 of that. Pro-rata pay for the same days would be worth $48,300 after tax, $13,800 more. Most in Sergeant Barnes’ position are choosing not to keep serving, and in a cost-of-living-challenged situation, $13,800 is highly significant.

The exemption is most valuable to high earners, yet they are the reservists for whom pay matters least. Their civilian salaries are already high, so they don’t need the same degree of support to serve. As a financial incentive, tax-free pay is weakest exactly where Defence needs it most[8].

Permanent service is worth even more than it looks

Salary is only part of permanent remuneration. Permanent members also receive employer superannuation of 16.4% ($15,479 a year after contributions tax)[9], free medical and dental care (worth about $2,124 a year more than reservists receive)[10] and, where eligible, rent allowance: $14,822 a year for a sergeant with family in Townsville, rising to $35,466 in Sydney[11].

Because these benefits are not taxed, they are worth more than the same amount of salary. Matching Townsville rent allowance with taxable pay would take a 19% pay rise; in Sydney, 48%.

Value per day worked, permanent and reserve sergeant[12]

Even without rent allowance, the permanent package is worth 52% more per day worked. For the many reservists who are former permanent members, the value Defence places on a day of their labour roughly halves the day they transfer.

What this means for Defence

Defence does not have a meaningful part-time offer in use. It has a full-time offer and a reserve offer, and the reserve offer is less attractive than it looks.

Some premium for full-time service is justified. Full-time members accept obligations that civilian employment does not impose: liability to deploy, to be posted anywhere and to be available at any hour. Defence needs those obligations and should pay for them. The question is how large that premium should be and whether the resulting offer is sufficient to attract the personnel that Defence wants.

At present, it doesn’t. Tax-free pay rewards high earners most, while SERCAT 5 does not pay enough to sustain the people who could give Defence meaningful part-time service: carers, students and those working reduced hours. It is little surprise that the Reserve misses its recruiting targets, or that a third of available reservists do no paid service.

SERCAT 6 was designed for exactly this. Members serve part-time, remain liable for permanent service, and keep their salary and benefits pro-rata[13]. Yet in 2024–25, only 140 members were in SERCAT 6[14], down from 361 in 2021[15], against roughly 18,400 in SERCAT 5[16], about one for every 130. The full analysis of SERCAT 6 underutilisation is beyond the scope of this article, but the difficulty of splitting full-time positions between SERCAT 6 staff and the lack of fungibility for Army Reserve Training Day funding are both likely significant frictions.

These frictions persist partly because of the myth. If a reserve day is lucrative, members who want to work less can simply transfer to the Reserve, and nobody needs to fix SERCAT 6.

If Defence is serious about its recruiting targets, it has two options. It could offer reservists a choice between the tax-free daily rate and a taxable pro-rata rate, keeping the exemption for the high earners who value it. This would cost Defence more per day, although much of the difference would return to the Commonwealth as income tax[17]. Or it could broaden the use of SERCAT 6, letting reserve funding support SERCAT 6 positions and making it easier to split full-time effort between different service types.

With pro-rata pay, Sergeant Barnes might have kept serving. There are thousands like them. If Defence wants the part-time workforce it says it is pivoting towards, it must stop relying on the myth of the lucrative reserve day.

Footnotes

Updated November 2026