De Rosa and Secretary, Department of Family, Community Services and Indigenous Affairs
[2007] AATA 1525
•9 July 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1525
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/57
GENERAL ADMINISTRATIVE DIVISION ) Re ALISA DE ROSA Applicant
And
SECRETARY, DEPARTMENT OF FAMILY, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS
Respondent
DECISION
Tribunal Senior Member, Mrs Josephine Kelly Date of hearing 18 June 2007
Date of published decision 9 July 2007
PlaceSydney
Decision The decision under review made by the Social Security Appeals Tribunal on 13 December 2006 is affirmed. ........................[sgd]......................
Senior Member
Mrs Josephine Kelly
CATCHWORDS
SOCIAL SECURITY – Family Tax Benefit – whether adjusted taxable income calculated correctly – what is the correct definition of taxable income – reviewable decision affirmed.
CASES
Holmes vSecretary, Department of Family & Community Services [2003] AATA 888
LEGISLATION
Acts Interpretation Act 1901: section 13
A New Tax System (Family Assistance) Act 1999: section 3, clauses 2, 3 & 6 of Schedule 3.
Income Tax Assessment Act 1997: sections 2-35 to 2-45, 4-15
Social Security Legislation Amendment Act (No. 2) 1994
Social Security Act 1991REASONS FOR DECISION
Senior Member, Mrs Josephine Kelly Introduction
1. This matter is about the amount of Family Tax Benefit (“FTB”) that should be paid to Mrs Alisa De Rosa for the year ended 30 June 2006 (“the 2006 tax year”). This turns on the calculation of her adjusted taxable income (“ATI”) for that year. Mrs De Rosa was not present at the hearing but was represented by her husband, Mr Simon De Rosa.
The Issue
2. The issue in these proceedings is, as Mr De Rosa stated, what is the definition of “taxable income” to be applied when calculating ATI?
The Law
3. FTB is calculated based on the amount of ATI for the individual and his or her partner.
4. Clause 2 of Schedule 3 of A New Tax System (Family Assistance) Act 1999 (“the FA Act”) prescribes how to calculate an individual’s ATI:
2 Adjusted taxable income
(1) For the purposes of this Act and subject to subclause (2), an individual's adjusted taxable income for a particular income year is the sum of the following amounts (income components):
(a) the individual's taxable income for that year;
(b) the individual's adjusted fringe benefits total for that year;
(c) the individual's target foreign income for that year;
(d) the individual's net rental property loss for that year; and
(e) the individual's tax free pension or benefit for that year;
less the amount of the individual's deductible child maintenance expenditure for that year.
5. Clause 3 of Schedule 3 has the effect that an individual’s ATI includes the ATI of his or her partner:
6. Clause 6 of Schedule 3 defines net rental property loss (“NRPL”) which is included in the calculation of ADI in Cl. 2(d) of Schedule 3:
The net rental property loss of an individual for an income year is:
(a) if the expenses incurred by the individual on rental property during that year exceed the individual's gross rental property income for that year--the amount by which those expenses exceed that gross rental property income; or
(b) if the expenses incurred by the individual on rental property during that year do not exceed the individual's gross rental property income for that year--nil.
7. Section 3 of the FA Act states that taxable income has the same meaning as in the Income Tax Assessment Act 1997 (“ITAA 1997”). That definition is found in section 4-15 of ITAA 1997:
4-15
How to work out your taxable income
(1) Work out your taxable income for the income year like this:
Method statement
Step 1. Add up all your assessable income for the income year.
To find out about your assessable income, see Division 6.
Step 2. Add up your deductions for the income year.
To find out what you can deduct, see Division 8.
Step 3. Subtract your deductions from your assessable income (unless they exceed it). The result is your taxable income. (If the deductions equal or exceed the assessable income, you don't have a taxable income.)
Note: If the deductions exceed the assessable income, you may have a tax loss which you may be able to deduct in a later income year: see Division 36.
The facts
8. The facts in this case are essentially agreed by the parties.
9. The Australian Taxation Office (‘ATO’) issued Mrs De Rosa with a Notice of Assessment dated 10 August 2006 [T11] showing taxable income for the 2006 year of $53,182. It appears that for the purposes of calculating Mrs De Rosa’s component of ATI none of the adjustments in Clause 2 apply. The Notice of Assessment, as well as a letter dated 15 August 2006 from the ATO to Mrs De Rosa [T13], show that Mrs De Rosa’s FTB entitlement was calculated to be $739.20.
10. Mr De Rosa’s Notice of Assessment from the ATO for the 2006 year [T10], dated 8 August 2006, shows taxable income as Nil. The unsigned copy of Mr De Rosa’s income tax return, at T4, shows a taxable loss of $58,416. For the purpose of calculating Mr De Rosa’s component of ATI it is relevant to note that for the 2006 year Mr De Rosa reported in his tax return a net rental loss of $55,820.
11. On 28 August 2006 Mr De Rosa appears to have telephoned Centrelink to query the calculation of Mrs De Rosa’s FTB. A computer phone note dated 28 August 2006 states that Mr De Rosa was advised the calculation was based on his NRPL being added to ‘zero taxable inc.’ and that this was due to ‘the effect of the FTBB quarantine rule’.
Applicant’s contentions
12. Mr De Rosa disputes the calculation of his ATI. He says that his ATI should be negative $2,596. He arrives at this figure by starting with his taxable income (which he argues can be a negative amount) of -$58,416 and adding back his net rental property loss of $55,820 to give an ATI of -$2,596. He argues that Centrelink’s approach of treating any taxable loss as zero is not consistent with the purpose of the legislation because it has the effect, in his case, of adding back the NRPL twice.
13. Mr De Rosa agrees that the purpose of the adjustment is to prevent any benefit being gained from NRPL. However he argues that where a person is in a net taxable loss position before deducting NRPL, the calculation of ATI gives an inequitable result. In his case, effectively, his NRPL is added back twice – once when his taxable loss is ignored and his taxable income is taken to be nil, and a second time when it is added again. He says this problem only occurs because he is in a taxable loss position before deducting NRPL.
14. To avoid this inequitable result Mr De Rosa asserts that the definition of taxable income can result in a positive or negative amount. He arrives at this construction by referring to the ‘broad definition’ of taxable income, that is the first part of s 4-15:
How to work out your taxable income
(1) Work out your taxable income for the income year like this:
15. Mr De Rosa contends that the fact that a negative amount cannot be taxable income, but is considered to be a tax loss, is in the remainder of the definition (that is, the method statement and note). He concedes that the effect of this definition, including the method statement and note, is to ensure that taxable income is a positive amount. He also concedes that this is required for the purpose of calculating tax liability. Tax losses are not taxable. However if this is applied to the calculation of ATI, he argues that it leads to an inequitable result that Parliament would not have intended, as set out earlier.
16. It is on this point that Mr De Rosa disagrees with Holmes vSecretary, Department of Family & Community Services [2003] AATA 888, a decision by Mr M Allen, Member, and Centrelink’s Family Assistance Guide (the Guide). In particular Mr De Rosa disputes the conclusions in paragraphs 25 – 28 of Holmes.
17. That case was about overpaid FTB. Mrs Holmes was in a tax loss position. For the purpose of calculating her FTB, Centrelink had taken her taxable income to be nil, and then added NRPL. Mrs Holmes had argued that her taxable income should have been the negative tax loss position.
18. Following consideration of the relevant provisions in the ITAA 1997 and the FA Act with which I am concerned, and the Family Assistance Guide, the Member concluded
“25. At least for the purposes of assessing income tax payable, it is clear from s4-15(1) of ITAA 1997 that a person's taxable income cannot be a negative amount. If the allowable deductions equal or exceed the assessable income then the person will not have a taxable income but may have a tax loss that can be carried forward to a later income year and deducted from the assessable income in that later year - so as to reduce the taxable income in the later year.
“26. Where the deductions do not exceed the assessable income - so that there remains a positive amount - then the person will have a taxable income for the year and that positive amount will become the "income component" specified in clause 2(1)(a) of schedule 3 of the Assistance Act to which the other income components are added. That is what happened in relation to Mr Holmes' income and NRPL and there has been no suggestion that that was not the correct way to deal with his position. However, Mrs Holmes has contended that, in her case, her taxable income should have been the negative amount of $18,440 and that negative amount should have been used as the income component in clause 2(1)(a) of schedule 3 - with her NRPL of $19,960.00 then being used as income component (d) to arrive at an ATI of $1,520.00.
“27. Because taxable income for FTB purposes is defined to have the same meaning as in the ITAA 1997 (and, previously, the ITAA36) for income tax purposes, this Tribunal has held (in relation to the equivalent family allowance provisions of the Social Security Act 1991 ("the SSA") which preceded the FTB provisions and the ITAA36) that the assessment of the Commissioner of Taxation of a person's taxable income is conclusive of that amount - and that a figure of "below zero" (ie a negative amount) "can only be said to be a loss and consequently represents no income or nil income" : Re Secretary, Dept of Social Security and Durkin (1990) 59 SSR 804.”
19. Chapter 3.2 of the Guide addresses the calculation of ADI, and how to treat NRPL in 3.2.5 which relevantly states:
Assessing NRPL - general
The taxation legislation allows a NRPL as a deduction from assessable income in deriving a person's taxable income (FA Act section 3(1)-'taxable income'). For ATI (1.1.A.20) purposes, a NRPL is added back to the person's taxable income as part of their ATI.
Example: A person made a NRPL on a rental property of $5,000. The ATO assessed their taxable income as $25,000. For FA purposes the $5,000 is added back to the person's taxable income to give an ATI of $30,000.
The amount of NRPL that an applicant/recipient, and/or their partner (1.1.P.30), receives from rental property is assessed for ATI. This applies to residential AND commercial land and buildings, regardless of:
· the nature of the ownership, OR
Example: The person may be an owner, mortgagee, lessee or lessor.
· whether the income results from a property investment or not.
Explanation: If part of a person's principal home is rented out, any NRPL will be assessed as well as any NRPL a person has from investment properties.
NRPL DOES NOT apply to personal property such as cars.
Act reference: FA Act schedule 3 clause 6 Adjusted taxable income - Net rental property loss
…
Assessing NRPL - negative income
If a person's taxable income is calculated to be a negative value, it is taken to be zero, before adding the NRPL and other income components.
Explanation: This is because taxation legislation provides for taxable income losses to be carried forward to the next tax year. If the person does not receive the benefit of the loss in one year, it is carried forward to reduce their taxable income for the next year.
Example: A person provides the following estimate of their income:
Income Details Estimate Income from wages $10,000 Loss from rental property $15,000 Taxable income ($ 5,000) The taxable income is taken to be zero, then the NRPL of $15,000 is added, giving ATI of $15,000.
Consideration
20. The Social Security Legislation Amendment Act (No. 2) 1994 amended the Social Security Act 1991 to change the way income was calculated for the purpose of the income test for family payment (the predecessor to ATI/FTB). The second reading speech does not assist. The relevant explanatory memorandum is entitled:
Explanatory Memorandum
Supplementary Memorandum
Amendments Relating to Net Rental Property Loss
It states:
Treatment of negative gearing
From 1 January 1995, the income test for family payment and the parental income test for ‘under age’ job search allowance and sickness allowance will be amended so that certain tax deductible expenses on rental property are included as income. As a result, income testing arrangements for those payments will be more equitable and improve targeting of the payments.
21. Returning to the definition of taxable income, I do not agree that the method statement in section 4-15 does not form part of the ITAA 1997. I understood Mr De Rosa to concede that for the purposes of calculating income tax liability the effect of the entire of section 4-15 is to ensure a positive taxable income amount. That is, for the purpose of the ITAA 1997 Mr De Rosa accepts that the method statement forms part of the provision, but for the purposes of the FA Act he argues that only the first part of the section should be applied. This approach would be inconsistent. Either the method statement forms part of the definition, or it does not.
22. The ITAA 1997 specifically identifies ‘non-operative’ material that does not form part of the Act (such as Guides and examples) (see sections 2-35 to 2-45). Method statements are not mentioned.
23. Section 13 of the Acts Interpretation Act 1901 provides that no marginal note, footnote or endnote to an Act form part of an Act. Method statements are not specifically excluded and I do not understand them to fall into any of the excluded categories.
24. It is consistent with my conclusion that throughout the ITAA 1997, method statements form crucial parts of various provisions (see for example the value-shifting provisions in Division 723 and the thin-capitalisation provisions in Division 820). It is a form of drafting suited to revenue legislation which is formulaic.
25. Clearly, the Parliament wished to preclude an individual benefiting from the assessment of FTB on taxable income which was reduced by an NRPL. Whether or not parliament intended the kind of result experienced by Mr De Rosa, that is, in his words, his NRPL being added twice, the words of the section are clear and must be applied. If that is an unintended consequence, that is matter for Parliament to address.
Conclusion
26. The reviewable decision is affirmed.
I certify that the 26 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member,
Mrs Josephine KellySigned: Ms P Nimmagadda
AssociateDate of Hearing 18 June 2007
Date of Published Decision 9 July 2007
Applicant’s representative Self-represented
Respondent’s representative Centrelink Legal Services
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