Ruling Compendium

In the event the two rulings are not combined, we suggest that it be considered whether there can be greater linkages in the draft Ruling to the recently finalised Taxation Ruling TR 2021/1 Income tax: when are deductions allowed for employees' transport expenses? In particular, we believe the ATO could consider the provision of specific linked examples which consider a variety of benefits covered under both Rulings to clarify consistency.

Footnote 6 has been added to the final Ruling to explain why this Ruling has been developed in addition to TR 2021/1. Where considered appropriate, references to TR 2021/1 have been inserted in the final Ruling in the form of footnotes.

There seems to be no conceptual difference between Example 1 and Example 4. In each case, the need to incur expenditure is triggered by the demands of their respective employment, which answers the positive test posed under section 8-1 of the ITAA 1997.

The reasons of Hill J in The Roads and Traffic Authority of New South Wales v Commissioner of Taxation [1993] FCA 445 (Roads and Traffic) appear to be the principal authority for the sleeping away from home requirement. The question of whether the otherwise deductible rule could apply to days when the workers returned home from their camp (that is, when there was no overnight stay) was not specifically addressed in the decision. Accordingly, his Honour's observations that an employee is taken to be travelling for work on a day that involves an overnight stay at the camp, should not be interpreted as meaning that such an employee might not, in the right circumstances, also be regarded as travelling on work where he or she is engaged in same day travel. This is potentially out of date and not reflective of modern-day working arrangements.

The decision of Commissioner of Taxation v. Cooper, R. J. [1991] FCA 190 (Cooper) is of limited assistance aside from confirming the unremarkable proposition that expenditure on food and drink is generally of a private or domestic nature. The Administrative Appeals Tribunal decision of Fardell and Commissioner of Taxation [2011] AATA 725 (Fardell) quotes Hill J in Roads and Traffic but adds nothing that is of precedential value.

The ATO should consider updating the draft Ruling to only exclude day travel where it is 'reasonably expected' that an employee will return on the same day. This qualification preserves the jurisprudence with respect of overnight travel, whilst not applying this as a threshold requirement leading to inequitable outcomes.

In Cooper's case, Hill J stated:

Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work related entertainment or expenditure incurred while away from home. No such circumstance, however, intervenes here.

In Roads and Traffic Authority, Hill J stated:

... Where a taxpayer is required by his employer, and for the purposes of his employer, to reside, for periods at a time, away from home and at the work site, and that employee incurs expenditure for the cost of sustenance, or indeed other necessary expenditure which, if the taxpayer had been living at home, would clearly be private expenditure, the circumstance in which the expenditure is incurred, that is to say, the occasion of the outgoing operates to stamp that outgoing as having a business or employment related character.

The camping allowance considered in Roads and Traffic was paid to compensate employees for the disadvantageous conditions of living in a camp and the additional costs of food beyond the cost of living in their own homes and perhaps other expenses caused to them by camping. It followed that the camping allowance would be a living-away-from-home allowance (LAFHA) benefit unless the additional costs of food would, if incurred by the employees, have been deductible expenses.

Accordingly, while the deductibility of food and drink while the employees were away from their home overnight was considered and based on the passage quoted from Roads and Traffic above, it was found to be otherwise deductible. As such, the camping allowance was not a LAFHA benefit.

It is clear that, based on the quotes above from Cooper and Roads and Traffic, the issue that was being considered was the deductibility of food and drink while an employee was away from their home overnight and in those circumstances, the cost of food and drink was found to be deductible. In relying on these leading cases, the decision in Fardell picks up on the point that it is only in circumstances where an employee is away from home overnight that expenditure on food and drink can be deductible.

Accordingly, there is precedent which indicates that food and drink is only deductible when an employee is away from their home overnight. Conversely, there is no authority for the proposition that an employee who travels for work and is not 'reasonably expected' to return home on the same day but does return home would be entitled to a deduction for the cost of meals and accommodation.

The term 'reasonably expected' is not defined and the use of that term would simply raise additional questions about when it is 'reasonably expected' that an employee would return home on the same day.

Further, in QT90/148 and Commissioner of Taxation [1991] AATA 346 and Carlaw and Commissioner of Taxation 95 ATC 2166 the term 'reasonableness' with regard to the deductibility of meals was discussed and rejected. In QT90/148 and Commissioner of Taxation, Deputy President Gerber rejected a claim for a deduction for the cost of meals by a police officer on duties away from home for up to 18 hours at a time. He stated:

"Reasonableness" has not yet, as far as I am aware, been used as a litmus test to determine "the extent to which (expenditures) are incurred in gaining or producing assessable income" or were of a private or domestic nature.

More recently, it has been used in TR 2021/1. where it is acknowledged that employees can have more than one regular place of work.

The term is simply a way of referring to the usual or normal place an employee starts and finishes their work duties. Footnote 44 of the final Ruling provides this explanation and refers to paragraph 26 of TR 2021/1 which provides further information about the concept.

Some of the examples included in the draft Ruling could better reflect the relevant principles as indicated in paragraph 41 of the draft Ruling, as well as the ATO's historical practices in relation to the private binding rulings which have been issued in recent years.

Private binding rulings can only be relied on by the taxpayer who applied for the ruling as the decision is based on their individual circumstances.

However, each of the 'living at a location' examples do not clarify how the weighting has been applied. For example, based on our reading, it appears that Example 5 of the draft Ruling places greater emphasis on the extended period away from home, as well as the fact that the apartment is big enough to accommodate the family should they visit, however this is unclear. It would be beneficial to expand the 'living at a location' examples to signpost which factors are deemed of greater importance and why.

We also request that the final Ruling provides commentary on how to assess deductibility, specifically in a Fringe benefits tax (FBT) context, where the factors are unknown.

Specific web content was developed last year ( Quarantine expenses when travelling on work ) to address the deductibility of accommodation, food and drink where travel has been affected by COVID-19.

We appreciate the draft Ruling is written for general application across all industries, but the emphasis given to the duration an employee is away from their place of residence is a concern. Paragraph 50 of the draft Ruling seeks to provide limited assurance that employees who are away from their place of residence for an extended period may not be regarded as 'living' at such a location, but rather travelling on work. However, paragraph 10 of draft PCG 2021/D1 does not reflect the limited assurance provided in paragraph 50 of the draft Ruling. It would be beneficial to the live performance industry if paragraph 39 of MT 2030 Fringe benefits tax: living-away-from-home allowances (or words to the same effect/intent) could be incorporated into the draft Ruling and draft Guideline. The use of the words 'where travelling is a regular incident of the occupation' provides more certainty than the words presently used in paragraph 50 of the draft Ruling.

The terms 'travel allowance' and 'living-away-from-home allowance' have a particular meaning for taxation law purposes. Unless the allowances paid under the Award or Agreement meet those definitions, they will not be treated in that way.

The length of the overall period the employee will be away from their usual residence is just one factor to be considered. The other factors at paragraph 42 must also be considered.

Paragraph 51 of the final Ruling refers to employment that requires ongoing travel to multiple locations and prior to its withdrawal in 2017, paragraph 39 of MT 2030 referred to travelling being a regular incident of the occupation. We do not consider these statements to be very different or that the wording in MT 2030 provided more certainty to employees in the live performance industry.

This change is consistent with ATO practice over a number of years in relation to private binding rulings issued on the topic and no changes in case law have occurred that warrant diversion by the ATO from its previously accepted view.

Private binding rulings are based on the individual circumstances of the applicant and, for that reason, can only be relied on by that taxpayer.

Similarly, we suggest that the employees in this example have not changed their regular place of work or been away for a sufficiently lengthy period of time for the relevant costs to become living expenses. Also, we suggest that the reliance of living in apartment-style accommodation is over emphasised. Generally, such individuals on these types of employer-required work arrangements will be placed in serviced apartments, which in other parts of the draft Ruling is accepted as short-term style accommodation. Further, apartment-style accommodation is accepted as short-term accommodation in Example 10.

Finally, there is no element of choice for the employees in this example. They are at all times travelling to work locations as required by their employer.

We suggest the conclusion in Example 7 be changed to the relevant expenses being deductible travel expenses on the basis that the employees have not changed their regular place of work and they have not been away for a sufficient period of time for the relevant costs to become living costs.

This change is consistent with ATO practice over a number of years in relation to private binding rulings issued on the topic and no changes in case law have occurred that warrant diversion by the ATO from its previously accepted view.

Private binding rulings are based on the individual circumstances of the applicant and, for that reason, can only be relied on by that taxpayer.

Footnote 49 has been inserted and provides that Australia's double tax agreements may have application depending on the circumstances.

Consideration will be given to whether additional examples should be incorporated into changes being made to web content and Fringe benefits tax - a guide for employers.

Whether the employee is accompanied by their belongings needs elaboration as a factor. Does this assume all of some of the belongings and does that make a difference? Again, this is largely a matter of choice for the employee.

Whether the appointment is permanent or indefinite would suggest a relocation. Where the appointment is for a defined period, what is intended to occur after that period from an employment perspective should be an important factor. For example, if an employee is appointed to a position away from their usual place of residence (and usual place of work) for one year only, with no position on offer at their original location would generally be relocated in our view. However, if the employer is assigned to a position away for one year, after which their employer requires them to return to work at their original location, would generally be regarded as living away from home in our view.

Whether an employee has relocated is a question of fact. The factors at paragraph 80 are examples of the factors which may indicate that an employee has relocated and have been included in the final Ruling to assist employees to determine whether they have relocated.

Consideration will be given to whether further information or examples should be included in updates to web content.

In practice, projects will run for multiple years and individuals will be on site on rosters which require them there longer than three nights at a time, for example, for multiple weeks at a time is quite common.

As per 11.9 of Chapter 11 in Fringe benefits tax - a guide for employers, an employee is considered to be working on a fly-in fly-out or drive-in drive out (or equivalent) basis when all of the following apply:

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on a regular and rotational basis, the employee works for a number of days and has a number of days off which are not the same days in consecutive weeks (that is, following one week after another without interruption), such as a standard five-day working week and weekend

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the employee returns to the employee's normal residence during the days off

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it is customary in the industry in which the employee works for employees performing similar duties to work on a rotational basis and return home during days off - for example, miners - and the work duties continue to be undertaken by other employees on a rotational basis while any particular employee is on their days off

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it is unreasonable to expect the employee to travel to and from work and the normal residence on a daily basis, given the locations of the employment and their home, and

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it is reasonable to expect that the employee will resume living at the normal residence when the employment duties no longer require them to live away from home.

As the employee in Example 12 of the final Ruling works five days a week every week apart from the four weeks a year he takes annual leave, he does not meet the definition of a fly-in fly out employee.

Employers currently face some uncertainty in relation to these types of scenarios, such as whether to continue to treat an allowance as a travel allowance or whether to start treating it as a LAFHA from a certain point in time. Employers with large numbers of such employees need a practical way to interpret the rules.

Footnote 46 has also been inserted in paragraph 52 to signpost reference to Example 8.

While it is acknowledged that changed circumstances provide some issues for employers, PCG 2021/3 can also be used as a way for employers to deal with this issue.

In our view, there is no justification to add in a timeframe to a scenario virtually identical to John Holland as this is not consistent with the John Holland principles which were established, and any time reframe should not change the outcome. In our view, Example 12 should not have a fixed timeframe nor do the timeframes assist with the determinations in the examples.

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Drive-in drive-out travel scenarios, including consideration as to whether the reimbursement of actual expenses and/or a cents per kilometre reimbursement are deductible.

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Scenarios under which a domestic employee is requested by their employer to take a secondment to another role with a different group entity on a part-time basis (being two weeks per month) with travel required interstate.

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Scenarios where a traveller is based outside Australia and undertakes work both inside Australia and outside Australia in different roles within the same group of entities.

Consideration will be given to whether these issues should be addressed in the updated web content and changes to Chapter 11 of Fringe benefits tax - a guide for employers.

Example 5 from TR 2017/D6 will not be replicated in the final Ruling because it demonstrates the principle of 'special demands' travel. This concept is not used in the final Ruling. Refer to our response to Issue 28 of this Compendium.

Accommodation and food and drink expenses will only be deductible where the occasion of the outgoing is the income-producing activity. If the duties of employment require an employee to stay away overnight from their home, then the expenses will be deductible.

Changes were made to the example because it demonstrated the principle of 'co-existing work locations travel'. This concept is not used in the final Ruling. Refer to our response to Issue 28 of this Compendium.

There is no requirement to follow the guidance in PCG 2021/3 but if it is not followed, then as per paragraph 44 of this Ruling, all the factors outlined in paragraph 42 of this Ruling must be considered and applied to the facts of an employee's individual circumstances to determine whether they are travelling on work or living at a location.

Paragraph 140 of the final Ruling also indicates that Roy's employer may choose to apply the compliance approach in PCG 2021/3 instead of working out whether the allowance paid is for travelling or living away from home.

It is not considered necessary to include an example to demonstrate the point that PCG 2021/3 does not apply as a set threshold.

As such, Example 13 from TR 2017/D6 or something similar will not be replicated in the final Ruling. It was included as Example 7 in TR 2021/1.

No guidance exists to assist employers as to how they should be treating fly-in fly-out and drive-in drive-out arrangements in the draft Ruling with the exception of one example (which more closely resembles the fact pattern of Hancox rather than that of John Holland). Given the ATO has specifically chosen not to address fly-in fly-out and drive-in drive-out arrangements, the deductibility treatment of such costs remains ambiguous for employers.

The issue considered in John Holland was whether the cost of flights (transport expenses) from Perth Airport to Geraldton was otherwise deductible for fly-in fly-out and drive-in drive-out employees engaged under very specific terms of employment.

The Commissioner's view on the decision in John Holland is set out in the Decision Impact Statement on John Holland Group Pty Ltd & Anor v Commissioner of Taxation [2015] FCAFC 82, which relevantly states under the ATO view of decision:

This was a case of well settled law being applied to a new factual situation. Such matters can involve questions of fact and degree and different facts may result in different conclusions as to deductibility.

The ATO will continue to approach travel deduction cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts.

Where similar factual situations to the John Holland case arise, the decision of the Court would obviously apply.

It also states that the decision has no impact for ATO precedential documents or Law Administration Practice Statements.

The law applies to all employees equally so employees in certain industries cannot be treated differently.