Ferreira and Secretary, Department of Social Services (Social services second review)

Ferreira and Secretary, Department of Social Services (Social services second review) [2018] AATA 1290 (15 May 2018)
Division:GENERAL DIVISION
File Number: 2017/3293
Re:Paul Ferreira
APPLICANT

AndSecretary, Department of Social Services
RESPONDENT

DECISION
Tribunal:Senior Member Dr M Evans
Member L M Gallagher
Date:15 May 2018
Place:Perth

The Tribunal affirms the AAT Tier 1 Decision of 16 May 2017.
.......[sgd].................................................................
Senior Member Dr M Evans
CATCHWORDS
SOCIAL SECURITY – Parenting Payment (Single) – Income Test – Income from Family Trust – when Applicant entitled to receive trust income - permissible deductions for rental property income – repairs or capital improvements – decision under review affirmed
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) – s 25(1)
Evidence Act 1995 (Cth) – s 163
Income Tax Assessment Act 1997 (Cth) – s 8-1, s 8-5
Social Security Act 1991(Cth) – s 8, s 503, s 500I(1), s 1068A, s 1072, s 1073, s 1073(1), s 1075(3) and (4), s1207, s 1707A, s 1207B, s 1207C, s1207P, s 1207V, s 1207V(2)(a), s 1207X(2)(c)
Social Security (Administration) Act 1999(Cth) – s 142(1), s 179(1), item 8, Table to s 147, s 237(3)
CASES
British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205
Lindsay v Federal Commissioner of Taxation (1961) 106 CLR 377
Mount Isa Mines Ltd v Federal Commissioner of Taxation (1992) 176 CLR 141
Phillips v Whieldon Sanitary Potteries Ltd (1952) 33 Tax Cas 213
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529
SECONDARY MATERIALS
Australian Master Tax Guide (58th ed, CCH Australia Limited, 2016)
Julie Cassidy, Concise Income Tax (5th ed, Federation Press, 2010)
CCH Commentary: Australian Income Tax Guide - para [4-075]
Guide to Social Security Law - para 4.3.8.30
Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2017 - para 7(2)(c)
REASONS FOR DECISION
Senior Member Dr M Evans
Member L M Gallagher
15 May 2018
BACKGROUND

The Applicant is a single parent of a minor child. He made a claim for a parenting payment (single) (PPS) on 15 February 2016 (T9).
His claim for a PPS was rejected on 13 April 2016 (Exhibit R3, Attachment A, p 5) and 23 June 2016 (T17) on the basis that he failed to provide sufficient information about his income and assets.
By a Director’s Declaration dated 2 September 2015, the Applicant received a lump sum distribution from the Ferreira Family Trust (Family Trust) for the financial year ending 30 June 2015 (T6). The Trustee of the Family Trust is a company of which the Applicant’s parents are the Directors (T13, page 146).
The Applicant provided further information about his income and assets, however, on 8 September 2016 his claim was rejected on the basis that his assets exceeded the limit (Exhibit R3, Attachment A, p 11).
The Applicant sought an internal departmental review, and on 2 November 2016 an authorised review officer of the Department affirmed the decision to reject the Applicant’s claim for a PPS on the basis that he exceeded both the income and assets tests at the time he made his claim (T19).
The Applicant made a further claim for a PPS on 11 November 2016 (T9), which was granted on 6 February 2017 because he was able to provide evidence of a change in the value of his assets and a decrease in his income (T23).
On 6 February 2017, the Applicant made an application to the Social Services & Child Support Division of the Administrative Appeals Tribunal (AAT Tier 1) (T24) to review the decision of the authorised review officer dated 2 November 2016.
On 16 May 2017, the AAT Tier 1 affirmed the decision of the authorised review officer dated 2 November 2016 (the Reviewable Decision). The AAT Tier 1 did not review the substantive issues regarding the Applicant’s assets and income due to a finding that the Applicant lodged his application for a Tier 1 review outside of the 13 week timeframe. This Tribunal respectfully disagrees with those findings for the reasons set out below under the heading “Jurisdiction” and has considered the substantive issues, as set out in these reasons below.
On 6 June 2017, the Applicant made an application to appeal the Reviewable Decision to the General Division of the Administrative Appeals Tribunal (AAT Tier 2) (T1).
ISSUE
The overall issue requiring determination by the Tribunal is whether the Applicant’s claim for a PPS on 15 February 2016 was correctly rejected.
The Respondent conceded at the commencement of the hearing that the Applicant satisfied the assets test for a PPS because the Applicant provided evidence that the value of his assets at the time of his claim were less than the assets value limit. The Tribunal is also satisfied on the evidence that the Applicant satisfied the assets test at the time of his claim and refers to paragraphs 39 to 52 of Exhibit R2 in this regard. Thus, the specific issue before the Tribunal is whether the Applicant satisfied the income test on the day that he made his claim or during the following 13 weeks.
To determine whether the Applicant satisfied the income test the Tribunal must consider:
(a)whether the Applicant received income by way of a distribution from the Family Trust on 2 September 2015?; and
(b)whether the installation of a new gas cooktop and a new ducted split system air conditioning system in the Waikiki rental property were permissible deductions for the purpose of calculating rental income under the Social Security Act 1991(Cth)(the Act)?
JURISDICTION
The jurisdiction of the AAT is established by s 25(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act), which states:
(1)An enactment may provide that applications may be made to the Tribunal:
(a)for review of decisions made in the exercise of powers conferred by that enactment; or
(b)for the review of decisions made in the exercise of powers conferred, or that may be conferred, by another enactment having effect under that enactment.
In summary, s 25(1) of the AAT Act states that the jurisdiction of the Tribunal is given to it by other “enactments”, which grant it jurisdiction to review certain decisions made under those enactments.
Section 142(1) of the Social Security (Administration) Act 1999 (Cth) (Administration Act) gives the AAT jurisdiction to conduct a Tier 1 Review. It provides:
(1)Subject to section 144, application may be made to the AAT for review (AAT first review) of:
(a)a decision of the Secretary, the Chief Executive Centrelink or an authorised review officer made under section 126 or 135; or
(b)a decision under this Act made personally by the Secretary or the Chief Executive Centrelink.
Section 179(1) of the Administration Act provides that an application may be made to the AAT for a Tier 2 Review:
(1) Application may be made to the AAT for review (AAT second review) of a decision of the AAT on AAT first review made under subsection 43(1) of the AAT Act.
As noted above, the AAT Tier 1 affirmed the decision of the authorised review officer dated 2 November 2016 on the basis that the Applicant had made his application for an AAT Tier 1 review more than 13 weeks after being given notice of the authorised review officer’s decision.
The AAT Tier 1 Decision found that the Applicant was provided with the authorised review officer’s decision on 2 November 2016, and consequently, that when he lodged his application for the AAT Tier 1 Review on 6 February 2017, he was outside of the 13 week period. This meant that, if the AAT Tier 1 made a decision in the Applicant’s favour, it would not result in a material difference to him because it would take effect from 6 February 2017 (being the date he lodged his application for AAT Tier 1 review), when he was already in receipt of a parenting payment (Item 8, Table to s 147 of the Administration Act).
However, as the Respondent has correctly stated (in Exhibit R5), 2 November 2016 was actually the day that the authorised officer’s decision was sent to the Applicant. Instead, the decision should be presumed to have been given to the Applicant on the fourth working day after the letter was posted (s 160(1) Evidence Act 1995 (Cth)).
Accordingly, the Tribunal respectfully disagrees with the AAT Tier 1 findings regarding the date the Applicant received the authorised review officer’s decision. Instead, this Tribunal finds that the Applicant did lodge his application for review within the 13 week period because he is presumed to have received the authorised review officer’s decision on 8 November 2016 (four working days after 2 November 2016) unless there is evidence to raise doubt about this presumption (s 237(3) of the Administration Act). Consequently, if he is successful at this AAT Tier 2 review, he would be entitled to be paid the parenting payment from 15 February 2016.
MATERIAL BEFORE THE TRIBUNAL
The hearing commenced on 7 March 2018. The matter was part heard and then adjourned until 18 April 2018 to give the Applicant an opportunity to review the Respondent’s Statement of Facts Issues and Contentions (Exhibit R2) which he did not have before him at the hearing.
Both parties appeared at the hearing by telephone. The Applicant was self-represented, and the Respondent was represented by Mr Jonathon Tsianikas from the Department. Oral submissions were made by the parties, and the Applicant gave oral evidence to the Tribunal.
The following material was before the Tribunal at the time of the hearing on 7 March 2018:
(a)the Respondent’s s 37 documents, including documents T1 to T26 (Exhibit R1);
(b)the Respondent’s Statement of Facts Issues and Contentions dated 29 November 2017 (Exhibit R2);
(c)Attachment A to Respondent’s Statement of Facts Issues and Contentions dated 29 November 2017 (12 pages) (Exhibit R3);
(d)Attachment B to Respondent’s Statement of Facts Issues and Contentions dated 29 November 2017 (35 pages) (Exhibit R4);
(e)an email dated 28 July 2017 from Mr Tsianikas to the Applicant “…to confirm the Secretary’s view of what is in issue in this matter” (Exhibit R5).
The following additional material was before the Tribunal at the time the hearing was resumed on 18 April 2018:
(a)an email from the Applicant to the Tribunal dated 15 March 2018 attaching copies of the following documents (collectively labelled Exhibit A1):
(i)an “Owner Income and Expenditure Statement” for July 2015 to June 2016 for the Waikiki and Rockingham rental properties;
(ii)an invoice for “installation of 10Kw LG ducted split system” in the Waikiki property dated 4 January 2016;
(iii)a Tax Receipt for Tax Depreciation Report of the Waikiki property dated 22 February 2016;
(iv)a Tax Invoice for “Replace cook top” for the Waikiki property dated 1 December 2015; and
(v)an interest statement from Westpac Bank showing the interest charged in the 2015-2016, 2016-2017 and 2017-2018 financial years on a loan contract for an unspecified property.
(b)Secretary’s Closing Submissions dated 20 March 2018 (Exhibit R6).
The Tribunal has considered all of the material before it, as well as the oral submissions of the parties and the evidence of the Applicant. The Tribunal is satisfied that the parties had an adequate opportunity to be heard by the Tribunal.
FAMILY TRUST
Legal framework and consideration
Part 3.18 of the Social Security Act 1991 (the Act) “…sets up a system for the attribution to individuals of the assets and income of private companies and private trusts” (s 1207 of the Act).
The Family Trust is a discretionary trust, and therefore is a “designated private trust” within the meaning of s 1207P of the Act. As noted above, a company, of which the Applicant’s mother and father are the Directors, is the Trustee.
It is also a “controlled private trust” within the meaning of s 1207V of the Act which provides as follows:
(1)For the purposes of this Part, a trust is a controlled private trust in relation to an individual if the trust is a designated private trust and:
(a)the individual passes the control test set out in subsection (2); or
(b)the individual passes the source test set out in subsection (3).
Control test
(2)For the purposes of this section, the individual passes the control test in relation to a trust if:
(a)the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust;…
Thus the Family Trust is a “controlled private trust” because in accordance with s 1207V(2)(a) of the Act, the Applicant’s mother and father control the Family Trust as Directors of the trustee company. An “associate” is defined to include a parent (ss 1207A, 1207B and 1207C of the Act).
The Secretary contends that the Applicant is an “attributable stakeholder” of the Trust in accordance with s 1207X(2)(c) of the Act. For context, s 1207X(2) of the Act provides:
(2)For the purposes of this Part, if:
(a)a trust is a controlled private trust in relation to an individual; and
(b)the trust is not a concessional primary production trust in relation to the individual (see section 1208U);
then:
(c)the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and
(d)if the individual is an attributable stakeholder of the trust—the individual’s asset attribution percentage in relation to the trust is:
(i)100%; or
(ii)if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage; and
(e)if the individual is an attributable stakeholder of the trust—the individual’s income attribution percentage in relation to the trust is:
(i)100%; or
(ii)if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage.
Paragraph 7 of the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2017 (the Principles) provides:
7 Circumstances affecting relationship with company or trust
(1)The Secretary must consider whether there are relevant circumstances that make it inappropriate for the individual to be an attributable stakeholder of the company or trust.
(2)For subsection (1), relevant circumstances include the extent to which the relationship between the individual and the company or trust is affected by any of the following circumstances:
(a)circumstances arising from the legal structure of the company or trust;
(b)circumstances arising from the administrative arrangements of the company or trust;
(c)whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust.
Relevantly, the Respondent submits that, applying paragraph 7(2)(c) of the Principles, “… available information supports a finding that the trust is controlled by the applicant’s parent or both of his parents and he does not exercise effective control over it” (Exhibit R2, para 70), and consequently, that “…only the actual amount of any distributions made to the applicant should be assessed as income under the social security law” (Exhibit R2, para 72). The Tribunal agrees with this assessment of the Respondent, based upon the Family Trust documentation before it (T6) in which the Applicant is a beneficiary with no apparent control over the Family Trust or the distribution made to him under it.
Further, s 1073 of the Act provides:
(1)Subject to points 1067G‑H5 to 1067G‑H20 (inclusive), 1067L‑D4 to 1067L‑D16 (inclusive), 1068‑G7AA to 1068‑G7AR (inclusive), 1068A‑E2 to 1068A‑E12 (inclusive) and 1068B‑D7 to 1068B‑D18 (inclusive), if a person receives, whether before or after the commencement of this section, an amount that:
(a)is not income within the meaning of Division 1B or 1C of this Part; and
(b)is not:
(i)income in the form of periodic payments; or
(ii)ordinary income from remunerative work undertaken by the person; or
(iii)an exempt lump sum.
the person is, for the purposes of this Act, taken to receive one fifty‑second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount.
Division 1B and 1C in Part 3.10 of the Act do not apply to discretionary trusts with Division 1B applying to “income from financial assets…” and Division 1C applying to “income from income streams not covered by Division 1B”.
The effect of s 1073(1) of the Act is that the trust distribution to the Applicant was correctly apportioned as weekly income over 52 weeks, “commencing on the day on which… [he became]…entitled to receive that amount”. The Tribunal finds that the date the Applicant became entitled to receive this amount was on 2 September 2015. This was the date stated in the Family Trust distribution documentation as the date of the declaration by the Directors of the Trustee company (the Applicant’s parents). There is no contrary evidence before the Tribunal to suggest an alternate date.
Consequently, the Tribunal finds that the Family Trust income was distributed to the Applicant on 2 September 2015, and was correctly apportioned as weekly income for 52 weeks from this date, for the purpose of assessing the amount of his income for a PPS.
PERMISSABLE DEDUCTIONS FOR RENTAL INCOME
Legal framework and consideration
Section 503 of the Act provides:
A person’s parenting payment rate is worked out using:
(a)if the person is not a member of a couple—the Pension PP (Single) Rate Calculator at the end of section 1068A (see Part 3.6A);…
Section 500I(1) of the Act provides that, “a parenting payment is not payable to a person if the person’s parenting payment rate would be nil”. At the time the Applicant made his claim, the rate calculator provided that his income needed to be less than $2,044.60 per fortnight for his rate not to be nil (Exhibit R2, paragraph 55; T4, page 38). The Applicant’s fortnightly income of $2,612.92 was not in dispute, and the Tribunal considers is established by the evidence before it (Exhibit R4). What is, however, in dispute between the parties is whether there are permissible deductions which could be applied to reduce the Applicant’s fortnightly income to below $2,044.60.
Section 1068A of the Act provides:
(1)If a person is not a member of a couple, the person’s rate of parenting payment is the pension PP (single) rate.
(2)The pension PP (single) rate is worked out in accordance with the rate calculator at the end of this section.
Step 5 of the calculation method under the s 1068A Rate calculator is “Apply the ordinary income test using Module E below to work out the income reduction” (emphasis added).
Section 8 of the Act also defines “income” as follows:
income, in relation to a person, means:
(a)an income amount earned, derived or received by the person for the person’s own use or benefit; or
(b)a periodical payment by way of gift or allowance; or
(c)a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8).
Section 8 of the Act provides a definition of “ordinary income” as follows:
ordinary income means income that is not maintenance income or an exempt lump sum.
Section 1072 of the Act further provides:
A reference in this Act to a person’s ordinary income for a period is a reference to the person’s gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 1A.

Subsections 1075(3) and (4), in Division 1A of the Act, relate to rental income:
(3)If a person’s ordinary income for a period includes rental income from a property that is not business income, the person’s ordinary income from that property is to be reduced by losses and outgoings that relate to the property and are allowable deductions for the purposes of section 8‑1 of the Income Tax Assessment Act 1997 for that period.
(4)If the amount of the allowable deductions relating to a property for a period under section 8‑1 of the Income Tax Assessment Act 1997 exceeds the amount of the rental income from the property for that period, the amount of the ordinary income from the property for that period is taken to be nil.
Section 8-1 of the Income Tax Assessment Act 1997 (Cth) (the Tax Act) provides:
8-1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)…
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b)it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non‑assessable non‑exempt income; or
(d)a provision of this Act prevents you from deducting it.
(3)A loss or outgoing that you can deduct under this section is called a general deduction.
Section 8-5 of the Tax Act provides:
8‑5 Specific deductions
(1)You can also deduct from your assessable income an amount that a provision of this Act (outside this Division) allows you to deduct.
(2)Some provisions of this Act prevent you from deducting an amount that you could otherwise deduct, or limit the amount you can deduct.
(3)An amount that you can deduct under a provision of this Act (outside this Division) is called a specific deduction.
In summary, the effect of s 1075(3) of the Act and s 8-1 of the Tax Act is that “general deductions” can reduce rental income, but “specific deductions” cannot. Additionally, an “outgoing of…a capital nature” (s 8-1(2)(a) of the Tax Act) cannot be deducted, and consequently cannot be applied to reduce rental income for the purpose of calculating the Applicant’s income for the purpose of assessing his eligibility for a PPS.
The Guide to Social Security Law (the Guide) is a policy which, among other things, provides clarification (at para 4.3.8.30) as to the expenses which are permissible or impermissible for the purpose of calculating income under the Act. With respect to whether the Tribunal should apply policy, in Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 (Drake (No 2)), Brennan J stated at 642:
In point of law, the Tribunal is as free as the Minister to apply or not to apply that policy. The Tribunal’s duty is to make the correct or preferable decision in each case on the material before it, and the Tribunal is at liberty to adopt whatever policy it chooses, or no policy at all, in fulfilling its statutory function.
Later in his judgment, Brennan J (at 645) explained how the AAT should apply government policy when reviewing administrative decisions:
In my view, the Tribunal, being entitled to determine its own practice in respect of the part which ministerial policy plays in the making of Tribunal decisions, should adopt the following practice.
When the Tribunal is reviewing the exercise of a discretionary power reposed in a Minister, and the Minister has adopted a general policy to guide him in the exercise of the power, the Tribunal will ordinarily apply that policy in reviewing the decision, unless the policy is unlawful or unless its application tends to produce an unjust decision in the circumstances of the particular case. Where the policy would ordinarily be applied, an argument against the policy itself or against its application in the particular case will be considered, but cogent reasons will have to be shown against its application, especially if the policy is shown to have been exposed to parliamentary scrutiny.
Accordingly, the Tribunal considers it appropriate to apply the Guide in assessing what are general deductions (and therefore permissible) which can be applied to reduce the Applicant’s rental income.
Relevantly, para [4.3.8.30] of the Guide states:
… Income from real estate for social security purposes is the same as that assessed for taxation purposes with some exceptions. The person's tax return and income TNA will provide evidence of the deductions claimed and allowed for tax purposes. Most common deductions will be necessary costs such as agent's fees, repairs, land and water rates.
If a loan was obtained to purchase the rental property, then those interest payments CAN be an allowable deduction for tax and social security purposes even if the mortgage is secured against another property, (e.g. the person's home).
…
The following deductions are allowed for tax purposes but NOT allowed for social security purposes:
·capital depreciation,
·special building write off,
·construction costs, AND
·borrowing costs, e.g. loan establishment fees.
For social security purposes:
·if the net income is a negative amount, the income for social security purposes is nil, AND
·losses from one property CANNOT be offset against income from another property.
The Applicant submitted two tax invoices for the Waikiki property. Firstly, a tax invoice for “Replace cook top” for the Waikiki property dated 1 December 2015 for $850 (exclusive of GST); and secondly, a tax invoice for “installation of 10Kw LG ducted split system” in the Waikiki property dated 4 January 2016 for $7,836 (inclusive of GST) (both contained in Exhibit A1).
The Tribunal notes, as per para 4.3.8.30 of the Guide outlined above, that a person’s tax return can provide evidence of the deductions claimed. This may provide some guidance to the Tribunal. As submitted by the Respondent at the hearing, income tax returns, such as the Applicant’s 2015/2016 personal income tax return, are compiled by tax professionals, who are in a position to assess whether outgoings are of a general or capital nature when compiling the tax return. However, it is not expressly clear from the Applicant’s 2015/2016 Income Tax Return if these items were included, and if so how. The Tribunal notes that the Applicant’s 2015/2016 Income Tax Return for the Waikiki property records an amount of $745 for “repairs and maintenance”, $1032 for “capital works deductions special building write off”, and “depreciation on plant” of $3958, so if the cook top and air conditioner costs were included, they would likely be under this latter amount, which suggests that they are capital expenses which are being depreciated.
The Applicant gave evidence at the resumed hearing that the replacement of the cook top and installation of the air conditioner system amounted to “repairs” (which would be a “general” and therefore a permissible deduction) and not “capital improvements” (which would be an “outgoing of…a capital nature” under s 8-1(2)(a) of the Tax Act and therefore an impermissible deduction) because they were not working and needed to be replaced entirely.
Specifically, in his evidence at the hearing the Applicant stated that:
·in relation to both the cook top and air conditioner system, the repairs that were performed were to replace what “was already there”, rather than install these items for the first time; and
·replacing “what was already there” with a new cook top and air conditioner system was an economic exercise as it was cheaper to replace these items in their entireties than to replace only the particular parts in need of repair.
The subjective intention of the Applicant, however, is not the basis upon which an assessment of whether replacing these items amounted to repairs or capital improvements should be made, as stated at para [4-075] of the CCH Commentary: Australian Income Tax Guide:
Expenditure on improvements is of a capital nature and therefore no deduction is allowable. The question whether there has been an improvement as opposed to a repair is one of fact to be determined from an examination of all the circumstances.
The issue of whether something is a repair or a capital improvement has been the subject of judicial consideration. In Lindsay v Federal Commissioner of Taxation (1961) 106 CLR 377, Kitto J (quoting from the judgment of Donovan J in Phillips v Whieldon Sanitary Potteries Ltd (1952) 33 Tax Cas 213 at 219) said of the question as to whether deductions were repairs or expenditure of a capital nature: “Whichever alternative is the right one to adopt will depend upon the facts of the particular case”.
The question, “What is a repair?” was discussed at para [16-700] of the Australian Master Tax Guide (58th ed, CCH Australia Limited, 2016) (Master Tax Guide) as follows:
A repair involves a restoration of a thing to a condition it formerly had without changing its character. What is significant is the restoration of efficiency in function rather than the exact repetition of form and substance. Repair involves restoration by replacement or renewal of a worn out or dilapidated part of something but not reconstruction of the whole thing, ie the entirety. But determining what is the entirety is a question of fact in each case and often causes difficulty…
Judicial consideration has also been given as to whether something is a repair or improvement. Some of these authorities are discussed in Julie Cassidy, Concise Income Tax (5th ed Federation Press, 2010) (Cassidy). For example, in Vallambrosa Rubber Co Ltd v Farmer (1910) 5 TC 529 at 536 Lord Dunedin (discussed at page 362-363 of Cassidy) stated:
Now, I don’t say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.
However, as noted by Cassidy (at page 363), the reference that the expenses must occur every year in Lord Dundein’s “once and for all test” is “not to be taken literally”. Rather, Lord Dundein was referring to capital improvements being of a more permanent nature, whereas income expenditure (that is repairs) are more “continuous” in nature.
A further test is the “enduring benefit test” formulated by Viscount Cave LC in British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 at 213-214 (discussed at page 363 of Cassidy) as follows:
[W]hen an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
This test has been applied by the High Court in Mount Isa Mines Ltd v Federal Commissioner of Taxation (1992) 176 CLR 141. It should be noted that “enduring benefit” is not to be taken literally and something may have an enduring benefit if it “runs out” and if the expense had to be incurred again (Cassidy, page 363).
These principles are consistent with those stated in relevant income taxation commentary. For example, under the heading, “Improvement versus repair” (at para [16-700]), the Master Tax Guide states:
Some of the factors pointing to an improvement rather than a repair are whether:
·     the modification work has effected an improvement to the asset
·     there is greater efficiency of function of the property
·     there is an increase in the value of the asset
·     the expenditure reduces the likelihood of future repairs.
With respect to the gas cook-top, the Tribunal notes that the entire cooktop was replaced, as opposed to a part of it being repaired. Applying Lord Dundein’s “once and for all test”, replacing the item entirely is suggestive of a more permanent improvement to the property which will reduce the frequency of future repairs being needed. Similarly, the replacement of the cooktop in its entirety is suggestive of a more “enduring benefit” by improving the kitchen. This is consistent with the above factors from the Master Tax Guide, which suggest a capital improvement, rather than a repair. Specifically, improving the cooktop modernises the kitchen and improves the rental property as an asset, improves the functionality of the kitchen and reduces the likelihood of future repairs. Although there is likely to be little, if any increase in the value of the property from replacing a cooktop, overall these factors suggest that replacing the cooktop is a capital improvement, and not a repair.
Similar comments can be made about the ducted air-conditioning system. The system was replaced in its entirety, as opposed to a component of it being replaced. Again, this is suggestive of a more permanent improvement to the property, which will reduce the frequency of future repairs being needed, and is an improvement to the rental property as an asset. Indeed, a new ducted air-conditioning system, valued at $7,836 is a significant improvement which would assist in attracting tenants and is likely to increase the value of the property. These factors suggest that the replacement of the ducted air-conditioning system is also a capital improvement, and not a repair.
Consequently, the Tribunal finds that these items were not permissible deductions which could be applied to reduce the Applicant’s rental income for the purpose of satisfying the income test for a PPS. This is because they amounted to capital improvements, as opposed to repairs, and are not permissible as general deductions.
CONCLUSION
In order to successfully claim for a PPS as at 15 February 2016, the Applicant is required to satisfy both the income test and the assets test at that time. It is not in dispute that the Applicant satisfied the assets test. As the Tribunal has found (at paragraph 63 above) that there are no permissible deductions which could be applied to reduce the Applicant’s fortnightly rental income from $2,612.92 to below $2,044.60, the Applicant fails to satisfy the income test and his claim for a PPS cannot succeed.
DECISION
For the reasons outlined above, the Tribunal finds that the Applicant’s claim for a PPS was correctly rejected.
Accordingly, the AAT Tier 1 Decision of 16 May 2017 is affirmed.

I certify that the preceding 66 (sixty-six) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr M Evans, and Member L M Gallagher

.....[sgd]...................................................................
Associate
Dated: 15 May 2018

Dates of hearing: 7 March and 18 April 2018

Applicant: By telephone: self-represented

Representative for the Respondent: Mr Jonathon Tsianikas

[2018] AATA 1290

15 May 2018

Key Legal Topics

Areas of Law

Administrative Law

Statutory Interpretation

Legal Concepts

Appeal

Jurisdiction

Procedural Fairness

Statutory Construction

Dates of hearing:	7 March and 18 April 2018
Applicant:	By telephone: self-represented
Representative for the Respondent:	Mr Jonathon Tsianikas