WA have signed up to approving modifications under VSB14 - per below.
In order to avoid inconvenience and unnecessary paperwork, applicants wishing to modify a vehicle are advised to refer to the national Code of Practice for Light Vehicle Modifications? (VSB14) before completing this application. This code was developed to assist owners to perform safe and legal modifications.
VSB14 states:-
SECTION LA - ENGINE
VERSION 2.0 JANUARY 2011
1 SCOPE
Section LA outlines the minimum design, installation and fabrication requirements for the following
light vehicle modifications involving engine substitutions and modifications.
1.1 BASIC MODIFICATIONS NOT REQUIRING CERTIFICATION
The following are
Basic Modifications that may be performed without certification providing the
modifications are carried out in compliance with the requirements detailed in Clause 2 General
Requirements:
Fitting a replacement new, used or reconditioned engine;
Fitting a manufacturer's optional engine together with any associated components as
supplied by the manufacturer for that same model vehicle;
Fitting replacement original equipment engine and exhaust components;
Fitting replacement original equipment, equivalent or better, components that have no
influence on engine performance or emissions (e.g. higher volume oil pump than original);
and
Fitting equivalent engines with an increase of up to 20% of original power.
I suggest you fix what you can and then go somewhere else as the WA DOT Employee you saw is clearly not of sufficent competence to interpret the rules correctly - FACT!
and go somewhere else as they hate to be told that... 
Did you get a copy of the 101 book? Should be sufficient evidence to show compliance to the above.
Good Luck.
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