Over the years, Fly-In-Fly-Out (FIFO) arrangements have become increasingly prevalent in Australia, particularly within the resource industry. In light of the enormous costs associated with the transportation of staff, employers argue that a tax deduction should be made available for such fringe benefits.

In Australia, the view has prevailed that the expenses of traveling from home to work and back are not deductible expenses for tax purposes. However, recent developments in common law, specifically the case of John Holland Pty Ltd v Commissioner of Taxation [2015] FCAFC 8, clarify where deductions can be made. This article will outline available statutory exemptions and historical developments in their application through common law.

Statutory Exemptions

Pursuant to s47(7) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA), employers paying for the travel of employees will generally be permitted to make a deduction for such costs where:

  • the employee’s usual place of business is a remote location or an oil rig or other installation at sea;
  • it would be unreasonable to expect the employees to travel to and from work on a daily basis; and
  • staff are provided with residential accommodation as part of their employment in the remote location.

Although this exemption attempts to ‘cover the field’ there still remain several instances where companies do not qualify for this exemption; usually because they fail to satisfy what is meant by a ‘remote location.’

If the aforementioned exemption is not satisfied, employers are able to potentially rely on the ‘otherwise deductible’ rule pursuant to section 52(1) FBTAA. This rule applies where the expenditure which constitutes a fringe benefit would be available as a tax deduction to the employee had the employee incurred the expense him or herself under the general deduction provisions of s 8-1 of the Income Tax Assessment Act 1997 (ITAA). In order to claim a general deduction under s 8-1 ITAA97, an individual must demonstrate the expenditure was incurred in gaining or producing assessable income. The courts have applied this rule on several occasions.

Common Law Case Authorities

The case of Newsom v Robertson (1952) 33 TC 452 is a historical precedent that has paved the way for the common law application of the ‘otherwise deductible’ rule with respect to work related travel. This English case was concerned with whether railway fares between the home and chambers of a barrister constituted money wholly and exclusively laid out or expended for the purpose of his profession. It was held that the object of both journeys (to and from work) was not to enable the taxpayer to do his work but to live away from it and thus was not incurred in gaining or producing assessable income.

This rationale was reinforced in the case of Lunney v Commissioner of Taxation 100 CLR 478 which held that traveling from home to work or business is, at most, a necessary consequence of living in one place and working in another.

John Holland v Commissioner of Taxation [2015] FCAFC 82

The John Holland Group operates a consortium of various construction, rail, building and services companies. One of the companies is a business which provides railway construction and maintenance services all throughout Australia. In doing so, the business requires a mobile skilled workforce available for deployment on a project to project basis. In the facts of this case, John Holland required its workforce to fly in and out from Perth to Geraldton in Western Australia.

In this instance, the ATO determined that exemptions under s47(7) FBTAA did not apply because the railway project near Geraldton was not considered a ‘remote location.’ Consequently, the question before the Full Court of the Federal Court was whether John Holland was entitled to rely upon the 'otherwise deductible' rule in order to obtain a reduction to fringe benefits tax under s52(1) FBTAA. From a fringe benefits tax perspective, the fundamental question is whether the employee is travelling to work, or travelling in the course of work.

John Holland claimed (pursuant to employee employment contracts and the 2009 Rail Agreement) that because the employees were ‘on the clock’ and engaged in a specific activity at the employer’s risk from the time they arrived at the airport, the travel was within the scope of the employees’ employment and therefore productive of assessable income. In the first instance, the trial judge did not accept John Holland’s argument and decided the case on earlier common law principles - that home to work travel is not deductible.

On appeal, The Full Federal Court unanimously held that if John Holland’s employees had incurred the expenditure on the flights, the expenditure would have been deductible to them because the employees were required to travel as part of their employment. Accordingly, from the time the employees checked in at Perth Airport, they were travelling in the course of their employment and not to their employment.

Justice Edmond’s decision hinged on the fact that John Holland’s employees were paid and held to workplace standards from the moment they arrived at the Perth Airport:

“From the time the John Holland employees checked in at Perth Airport they were travelling in the course of their employment, subject to the directions of John Holland and being paid for it. That situation subsisted until they disembarked the plane at Perth Airport at the end of their rostered-on work time. At no time during that period were [the employees] travelling to work; they were travelling on work…"

Consequently, the cost of travel under the statutory hypothesis in s52(1) FBTAA was deemed to be an allowable deduction to the employees as an expense incurred in gaining or producing their assessable income.