Editors --- "Family tax benefit debt: net rental property loss; special circumstances waiver" [2006] SocSecRpr 46; (2006) 8(4) Social Security Reporter, Article 3

• SECRETARY TO THE DFaCS and VARELA
• Background
• The law
• Formal decision

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Family tax benefit debt: net rental property loss; special circumstances waiver

SECRETARY TO THE DFaCS and VARELA

Decided: 7th July 2006 by P.E. Hack

Background

Varela received family tax benefit in the year ending 30 June 2005 in respect of her two children. During that financial year Varela and her family lived in New Zealand. Varela and her husband both worked and earned income in New Zealand and paid taxes to the New Zealand government. This income was declared to Centrelink. Varela and her husband did not pay any income tax in Australia during this period.

Varela and her husband bought a property in Australia in August 2004. The property was rented out from September 2004. The property’s borrowing expenses, interest and other outgoings exceeded the rental income. In the 2004/05 income year the total rental property loss was $19,375.00.

Varela did not inform Centrelink that she was incurring rental property losses.

In September 2005 a reconciliation was undertaken by Centrelink of Varela’s family tax benefit entitlement during the 2004/05 income year and an overpayment of $2,073.20 was raised. The SSAT decided to waive recovery of this debt. The Secretary to the DFaCS appealed to the AAT.

The law

According to s.58 of theA New Tax System (Family Assistance) Act 1999 a person’s annual rate of family tax benefit is to be calculated in accordance with the Rate Calculator in Schedule 1 to that Act. That Schedule in turn refers to clause 2 of Schedule 3 for the method by which an ‘individual’s adjusted taxable income’ is to be worked out. Clause 2 of Schedule 3 relevantly states that individual’s adjusted taxable incomefor a particular income year includes the individual’s net rental property loss for that year.

Section 101 of the A New Tax System (Family Assistance)(Administration) Act 1999 provides for the waiver of recovery of debts in special circumstances.

Consideration

The Tribunal considered the purpose of the adjustments made to a person’s taxable income by Clause 2. The Tribunal remarked that the fact that target foreign income and tax free pensions and benefits are added to a person’s taxable income suggests that the purpose of the concept of ‘adjusted’ taxable income was to determine the entirety of the financial resources available to a family. In relation to the inclusion of net rental property losses as income, the Tribunal considered that such losses are usually treated as legitimate deductions for the purposes of working out a person’s taxable income according to Australian income taxation law. The reason that net rental property losses are added to a person’s taxable income for the purpose of the family assistance law is because otherwise some of the family’s income would not be factored into the family’s financial resources.

The Tribunal decided that Centrelink was correct to calculate Varela’s entitlement to family tax benefit, taking her family’s net rental property losses into account. The Tribunal then went on to consider whether the debt should be waived under s.101 of the Family Assistance (Administration) Act 1999.

In relation to the term ‘special circumstances’ the Tribunal stated that the term requires that there be ‘something different to distinguish [Varela’s] case from others, to take it out of the usual or ordinary case’. The Tribunal found that two features of Varela’s case made her circumstances special. The first was that at no time was Varela made aware by Centrelink of the need to declare rental property losses. During the relevant period the only letters that were sent to her referring to this requirement were sent to the wrong address, even though Varela had advised of her actual address.

The second feature of Varela’s case that was considered ‘special’ was that her family did not in any way benefit from the relevant net rental property losses. She did not have any taxable income in Australia that could be reduced by the losses and they were not an allowable deduction from her New Zealand income. The Tribunal found that the strict application of the definition of ‘adjusted taxable income’ in Varela’s case produced a result that was artificial and unintended.

Formal decision

The Tribunal decided to affirm the SSAT’s decision.

[D.A.]