Edited version of private advice

Authorisation Number: 1012619987718

Ruling

Subject: Fringe benefits tax - expense payment fringe benefits - residual fringe benefits - the otherwise deductible rule

Question 1

Will you incur a fringe benefits tax liability for the reimbursement of expenditure on food incurred by the graduate during their placement?

Answer

No

Question 2

Will you incur a fringe benefits tax liability for the accommodation provided to the graduate during their placement?

Answer

No

Question 3

Will you incur a fringe benefits tax liability for the return flights to the overseas country provided to the graduate?

Answer

Yes

This ruling applies for the following period(s)

1/04/2012 to 31/03/2013

1/04/2013 to 31/03/2014

The scheme commences

In the fringe benefits tax year ended 31 March 2013.

Relevant facts and circumstances

An international business offers graduate programs. Graduates are employed by a company (home company) in a country outside Australia (home country). However, in some years there are not sufficient placement opportunities in the home company and so graduates are placed in an Australian company for a period of time. The graduate programs last for different periods of time depending on the type of program offered.

An employee in the graduate program was employed by the home company in a program that lasted for 3 years.

An Australian company agreed to host the graduate for approximately 6 months during the 3 year graduate program under the following conditions:

The graduate remained an employee of the home company while on assignment in Australia but the graduate's employment and benefits were suspended for the duration of the assignment with the Australian company.

The Australian company paid the graduate a salary while on assignment in Australia.

The Australian company and home company are associates within the meaning of subsection 136(1) of the FBTAA (with reference to section 318 of the Income Tax Assessment Act 1936).

The assignment with the Australian company required the graduate to work in multiple locations within Australia during the 6 month period.

The Australian company arranged, booked and paid for hotel accommodation in each of the Australian work locations.

The home company reimbursed the graduate for food expenses upon production of receipts.

The home company arranged, booked and paid for a return flight to the home country for a holiday period (return flight).

In the home country, the graduate lived with their family and was unaccompanied during the placement in Australia.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 20A

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 section 31C

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 subsection 47(5)

Fringe Benefits Tax Assessment Act 1986 section 47A

Fringe Benefits Tax Assessment Act 1986 section 52

Fringe Benefits Tax Assessment Act 1986 section 61A

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 143B

Fringe Benefits Tax Assessment Act 1986 section 143C

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

In general terms, you will incur a fringe benefits tax liability when a fringe benefit is provided to an employee unless the fringe benefit has a nil taxable value. The circumstances in which a fringe benefit will have a nil taxable value include the situation where the employee would have been able to claim an income tax deduction for the cost of the benefit if the benefit had not been provided.

Therefore, in considering whether you will incur a fringe benefits tax liability for the reimbursement of the cost of the food, the provision of accommodation and the provision of the return flight it is necessary to consider the following questions:

1. Did a fringe benefit arise from the provision of a benefit?

2. If a fringe benefit did arise from the provision of a benefit, did the fringe benefit have a nil taxable value?

1. Did a fringe benefit arise from the provision of a benefit?

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides the following definition of a 'fringe benefit':

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) …

in respect of the employment of the employee, but does not include:

…

(g) a benefit that is an exempt benefit in relation to the year of tax; or

…

In applying this definition, a fringe benefit will arise if the following conditions are met in relation to the reimbursement of the food costs or the provision of accommodation and return flight:

a) A benefit is provided.

b) The benefit is provided to an employee or an associate of an employee.

c) The benefit is provided by the employer or an associate of the employer.

d) The benefit is provided in respect of the employment of the employee.

e) The benefit is not an exempt benefit.

a) Is a benefit provided?

'Benefit' in this context is also defined in subsection 136(1) of the FBTAA as follows:

Benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

In addition, there are a number of sections that deem a benefit to have been provided when the relevant conditions are met. For example, section 20 of the FBTAA states:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

In applying this section, the reimbursement of the food expenses will be a benefit under paragraph 20(b) of the FBTAA. Where a benefit is deemed to arise by section 20, it is an expense payment benefit.

Although neither the accommodation, nor the return flight will be a benefit under section 20 of the FBTAA as the graduate does not incur an obligation, or expenditure, both are benefits as they come within the definition of 'benefit' in subsection 136(1) of the FBTAA. These benefits will be residual benefits under section 45 of the FBTAA which states:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

b) Is the benefit provided to an employee or an associate of an employee?

In accordance with the definitions of 'employee' and 'current employee' in subsection 136(1), the graduate will be an employee of the Australian company if they is entitled to receive 'salary or wages'.

The term 'salary or wages' is defined in subsection 136(1) to mean a payment from which an amount must be withheld under one of the provisions of Schedule 1 to the Taxation Administration Act 1953 (TAA) listed in the definition of 'salary or wages'.

Section 12-35 in Schedule 1 of the TAA provides that an entity must withhold an amount from, inter alia, salary it pays to an employee.

As the Australian company pays a salary to the graduate in respect of the placement in Australia, and that salary is subject to withholding under one of the listed provisions, the graduate is an employee.

c) Is the benefit provided by the employer or an associate of the employer?

The definitions of 'employer' and 'current employer' in subsection 136(1) provide that the person who pays, or is liable to pay salary or wages will be an employer. As the Australian company is liable to pay salary or wages to the graduate it is their employer.

Therefore, as the Australian company provided the accommodation, the accommodation is provided by the graduate's employer.

The other benefits are provided by the home company. The home company is an associate of the Australian company within the meaning of subsection 136(1) of the FBTAA (which refers to the definition of associate in section 318 of the Income Tax Assessment Act 1936). Therefore, the reimbursement of the food costs and the return flights are provided by an associate of the graduate's employer.

d) Are the benefits provided in respect of the employment of the employee?

Subsection 136(1) of the FBTAA defines 'in respect of' as including:

… by reason of, by virtue of, or for or in relation directly or indirectly to, that employment

As the benefits are provided to the graduate under the terms and conditions of the assignment they are provided in respect of the employment as the employment is the reason for the benefits being provided.

e) Are any of the benefits exempt benefits?

Reimbursement of food expenses

Section 20A of the FBTAA provides that an expense payment fringe benefit that is covered by a no-private use declaration is an exempt benefit. In general terms, a no-private use declaration can be made in relation to a reimbursement of an expense which has a nil value as a result of the otherwise deductible rule.

Subsections 20A(2) and (3) of the FBTAA provide:

20A(2) [No-private-use declaration]

An employer may make a no-private-use declaration that covers all the employer's expense payment fringe benefits for an FBT year for which the employer will only pay or reimburse so much of the expense that is the subject of the benefit as would result in the taxable value of the benefit being nil.

20A(3) [Form of declaration]

The declaration must be in a form approved in writing by the Commissioner and be made by the declaration date.

Declaration date is defined in subsection 136(1) of the FBTAA as follows:

declaration date, in relation to an employer in relation to a year of tax, means the date of lodgment of the return of the fringe benefits taxable amount of the employer of the year of tax, or such later date as the Commissioner allows.

Does the otherwise deductible rule apply to reduce the taxable value of the expense payment benefit that arises from the reimbursement of the food expenses to nil?

Section 23 of the FBTAA provides that the taxable value of an external expense payment fringe benefit that is a reimbursement is the amount of the reimbursement reduced by any recipients contribution.

However, the taxable value of an expense payment fringe benefit can be reduced in certain circumstances by the use of the 'otherwise deductible rule' contained in section 24 of the FBTAA.

Section 24 of the FBTAA relevantly provides:

(1) Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the time when the recipients expenditure was incurred, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the same matter in respect of which the recipients expenditure was incurred, equal to:

(i) …; or

(ii) in the case of an external expense payment fringe benefit - the amount of the recipients expenditure;

a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and

(ba) the amount (in this subsection called the notional deduction) calculated in accordance with the formula:

GD - RD

where:

GD is the gross deduction; and

RD is:

(i) if there is no recipients portion in relation to the expense payment fringe benefit - nil; or

(ii) …;

exceeds nil; and

(c) in the case of an expense payment fringe benefit that is not an eligible incidental travel expense payment benefit or an eligible overtime meal expense payment benefit:

(ia) where the recipients expenditure is in respect of fuel or oil for a motor vehicle owned by, or leased to, the recipient:

(A) where the fringe benefit is an eligible small expense payment fringe benefit or an undocumentable expense payment fringe benefit - substitute documentary evidence of the recipients expenditure is maintained by or on behalf of the provider and, if the provider is not the employer, that documentary evidence, or a copy, is given to the employer before the declaration date; or

(B) in any case - documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date; or

(C) in any case - the recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients expenditure; or

(i) where subparagraph (ia) does not apply and the fringe benefit is an undocumentable expense payment fringe benefit or an eligible small expense payment fringe benefit:

(A) documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date; or

(B) substitute documentary evidence of the recipients expenditure is maintained by or on behalf of the provider and, if the provider is not the employer, that documentary evidence, or a copy, is given to the employer before the declaration date; or

(ii) in any other case - documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date; and

(d) where the expense payment fringe benefit is an extended travel expense payment benefit (other than an international aircrew expense payment benefit) - the recipient gives to the employer, before the declaration date, a travel diary in relation to the travel undertaken by the recipient to which the fringe benefit relates; and

(e) except where the expense payment fringe benefit is:

(i) an exclusive employee expense payment benefit; or

(ia) …; or

(ii) …; or

(iii) …; or

(iv) …; or

(v) …;

the recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients expenditure; and

…

the taxable value, but for Division 14, of the expense payment fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND

where:

TV is the amount that, but for this subsection and Division 14, would be taxable value of the expense payment fringe benefit in relation to the year of tax; and

ND is:

(g) if neither paragraph (ea) nor paragraph (f) applies and paragraph (l) does not apply - the notional deduction; or

…

Subsection 136(1) of the FBTAA defines recipients portion as:

recipients portion, in relation to an expense payment fringe benefit, means the recipients expenditure reduced by whichever of the following amounts is applicable:

(a) the amount of the payment referred to in paragraph 20(a) reduced by the amount of the recipients contribution;

(b) the amount of the reimbursement referred to in paragraph 20(b).

Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 (TR 2001/2) summaries the operation of the otherwise deductible rule. TR 2001/2 states at paragraph 112:

The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of either an airline transport fringe benefit, a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense…

Paragraphs 24(1)(c) to (f) of the FBTAA set out the substantiation requirements that are to be satisfied if the otherwise deductible rule is to apply to expense payment fringe benefits.

Would the graduate have been entitled to claim a deduction for the expenditure?

The general rules about deductions are found in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

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) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

(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.

The words 'incurred in gaining or producing your assessable income' mean in the course of gaining or producing such income. The occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if no assessable income is produced, what would have been expected to produce assessable income: Ronpibon Tin NL v FC of T (1949) 78 CLR 47 (Ronpibon Tin); Federal Commissioner of Taxation v Payne [2001] HCA 3; 2001 ATC 4027 (Payne).

In Federal Commissioner of Taxation v Day (2008) 236 CLR 163; 2008 ATC 20-064; [2008] HCA 53 (Day) at paragraphs 30 to 31, the Gummow, Hayne, Heydon and Kiefel JJ said:

30. Section 8-1(1)(a) is couched in terms intended to cover any number of factual and legal situations in which expenditure is incurred by a taxpayer. Its language and breadth of application do not make possible a formula capable of application to the circumstances of each case. Cases are helpful to show the connection found on the facts there present, but not always to explain how the search for the requisite connection is to be undertaken. Payne directs attention to the statement made in Ronpibon Tin, as to the question posed by a provision such as s 8 1(1)(a), as correct and appropriate to be applied. The question, as restated in Payne, is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?" That inquiry will provide a surer guide to ascertaining whether a loss or expenditure has been "incurred in [the course of] gaining or producing ... assessable income".

31. Essential to the inquiry is the determination of what it is that is productive of assessable income …

In Payne, Gleeson CJ, Kirby and Hayne JJ (the majority) at paragraph 13 explained the enquiry in the following way with reference to the decision in Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478 (Lunney):

… the majority in Lunney held that a taxpayer does not demonstrate that the first limb of s 51(1) is satisfied by demonstrating only that there is some causal connection between the expenditure and derivation of the income. What must be shown is a closer and more immediate connection. The expenditure must be incurred ``in the course of'' gaining or producing the assessable income.

In Day, Gummow, Hayne, Heydon and Kiefel JJ said at paragraph 22:

In Payne the majority confirmed that the words require more than a causal connection between the expenditure and the derivation of income; something closer and more immediate. The expenditure must be incurred "in the course of" gaining or producing the assessable income. Their Honours' reference to the words "in the course of" should not be taken to suggest a closer or more direct connection between expenditure and that which is productive of assessable income than the words of the provision themselves convey. Rather the words draw attention to the connection made necessary by the provision, which the majority considered on the facts of that case to be too remote.

Roads and Traffic Authority (NSW) v. Federal Commissioner of Taxation

(1993) 43 FCR 223; (1993) 26 ATR 76; (1993) 93 ATC 4508 (RTA) concerned whether a camping allowance paid to compensate for the disadvantageous conditions of living in a camp and as compensation for additional costs of food was a living-away-from-home allowance within the meaning of section 30 of the FBTAA. An allowance did not fall within the terms of section 30 of the FBTAA if paid to compensate for expenses incurred by the employee in respect of which a deduction is allowable under the income tax legislation. In that case the allowance was paid by the Authority to employees who were usually hired at a works office located in a city or town but when hired were told that they were required to camp at work sites where reasonable transport facilities were not available to transport them between their home and work site each day. Camp sites were established having regard to distance and availability of transport. The duration of stays at work sites varied from a few days to 12 months and employees were required to work at different sites according to the requirements of their employer.

In his decision in the RTA case, Hill J. referred to the decisions in FC of T v Cooper (1991) 29 FCR 177; (1991) 21 ATR 1616; (1991) 91 ATC 4396 (Cooper) and said the following at ATC 4521:

… The issue in that case was the deductibility of an amount said to be for the additional food and drink consumed by a footballer at the direction of his coach to build up the footballer's weight. It was held that that expenditure was not deductible, either because it was not expenditure incurred by the footballer in gaining or producing assessable income, or alternatively that it was expenditure of a private nature.

…

Turning to the question of whether the expenditure was private, I said, inter alia (at ATC 4415; FCR 201):

``For the Commissioner, it was submitted that, except in a rare case, the essential character of food was always private. Exceptions for the cost of entertainment... and for meals taken while the taxpayer was away from home on a business activity, were acknowledged...

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.''

Wilcox J, who dissented in Cooper, was of the view that there was a close connection between the outgoings of the taxpayer and his employment as a footballer. However, in referring to living-away-from-home expenses, his Honour said (at ATC pp 4404-4405; FCR 187-188):

``Take the instance of a taxpayer visiting another city for business purposes. The taxpayer incurs expenditure for meals at his or her hotel. On one view, the essential character of the expenditure is the sustenance of the taxpayer. Such a purpose has no connection with the derivation of assessable income; other than in the broad sense - irrelevant because it is applicable to everyone - that one must eat to live and, therefore, to work and to earn assessable income. However, the expenditure may also be characterised as being the cost of sustenance incurred by the taxpayer because of his or her absence from home on business. The difference between the two characterisations is that the latter takes account of the occasion of the expenditure. When this characterisation is adopted, a work-connection immediately appears and a deduction is granted.''

With respect, the same is true in the present case. 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.

In the RTA case, Hill J. distinguished the situation being considered from that which existed in Federal Commissioner of Taxation v Toms 89 ATC 4373. Hill J said at 4522:

The case of FC of T v Toms, to which reference has been made, clearly depended upon its own particular facts. The taxpayer in that case was a self-employed forest worker. During his working week he lived in a caravan in a bush camp approximately 108 kilometres from his family home. The caravan was also used by him for storing logging equipment and as a temporary shelter when work was interrupted by bad weather. One of the questions before the Administrative Appeals Tribunal and, on appeal, this Court was whether the taxpayer was entitled to a deduction for the cost of maintaining the caravan and other living expenses, such as additional costs involved in providing food at the camp site. The principal issue, however, was the deductibility of expenditure of travel between the home and the caravan. In holding that the taxpayer was not entitled to the deduction, Burchett J (at 4376) placed emphasis upon the fact that the caravan was rendered necessary:

``... as much by the taxpayer's choice of the place of his residence in Grafton as by his choice of employment in the State forest, and its purpose was to enable him to retain his residence at Grafton although employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary.''

The facts of the present case are quite different. First, each of the persons deemed hypothetically to have incurred the expenditure are employees. They are not carrying on their own business. Second, they are required, as an incident of their employment, by their employer and for the purposes of the employer to live close by their work site for relatively short periods of time. No question arises of their choosing to live in these places. Each of the persons in question has a permanent house in which he lives when not in camp. None of the employees spend inordinate periods of time in the camps so that the camp becomes their home. Their house is retained and the employees in question travel home at weekends. They do not remain in the camps. The costs in question here are an incident of the employment. The costs in Toms were not.

The application of the decision in RTA was considered in Taxation Determination TD 96/7 Fringe benefits tax: is fringe benefits tax (FBT) payable on meals and accommodation provided to employees who work at remote construction sites, where the accommodation is not the usual place of residence of the employee? (TD 96/7)

Paragraphs 4 of TD 96/7 set out the situations in which meal expenses will be considered to be deductible expenses in situations where employees are not travelling for work. Paragraph 4 of TD 96/7 states:

4. Guidance as to whether the 'otherwise deductible' rule will apply to reduce to nil the taxable value of meals provided to employees who are not travelling for work purposes is found in paragraph 5 of Taxation Ruling TD 93/230. Relevant factors to take into account include whether the employee:

• is required to live close by work;

• has a permanent residence away from the work site;

• lives away from home for a relatively short period of time; and

• has any choice as to the location of the accommodation provided.

Again, the 21 day period mentioned … will be accepted as a relatively short period of time for the purpose of these tests.

The application of the decision in RTA to an employee employed on a fly-in fly-out arrangement was considered by the Federal Court in Hancox v FC of T [2013] FCA 735; 2013 ATC 15100 (Hancox). The case concerned an electrician who had a permanent place of residence in SA and was employed on a permanent full time basis in Port Hedland, WA. The employer flew the employee into and out of Port Hedland every four weeks and paid the employee an allowance while he lived in temporary accommodation in Port Hedland in lieu of providing him with food and board.

In considering whether the cost of accommodation, food and sustenance was deductible during the period the taxpayer was in Port Hedland, Besanko J said at ATC 15109:

… There are two factual matters which distinguish The Roads and Traffic Authority of New South Wales v Commissioner of Taxation from this case. First and importantly, in that case the employees were required to live in the camp. In this case, the applicant chose to live in South Australia and to travel (and stay) in Port Hedland for the purpose of his employment. Secondly, the additional expenses in that case were relatively modest additional costs of food "beyond the cost of living in [the employees'] own homes and perhaps other expenses caused to them by camping". In this case, the "additional expenses" are the cost of accommodation and food and sustenance.

…

… As far as food and sustenance is concerned, although the deductibility of expenditure on food can pose difficult questions, I do not think it does in this case. The income producing activities of the applicant were those associated with his work as an electrician. To adopt the approach of Lockhart J in Commissioner of Taxation v Cooper, the applicant was employed to perform the functions of a leading hand maintenance electrician at Downer EDI's Port Hedland site, not to consume food and drink. The decision in The Roads and Traffic Authority of New South Wales v Commissioner of Taxation is distinguishable. The food expenditure in that case was the additional cost of food by reason of living in the camp and the employees had no choice but to live away from home. In this case, the applicant could have had his usual place of residence in Port Hedland.

The application of the test of whether the occasion of the expenditure on accommodation and food and sustenance is to be found in the applicant's activities as a leading hand maintenance electrician leads to the same result. The occasion of the expenditure is the applicant's choice to live in South Australia rather than in Port Hedland.

While guidance can be obtained from cases, each case must be decided on its own particular facts having regard to whether the occasion of the outgoings can be found in whatever is productive of the assessable income: Ronpibon Tin; Payne; Day.

As was recognised by Hill J in the RTA case, a consideration of the occasion for the outgoing can result in expenditure that has private or domestic qualities (e.g. accommodation, food and drink) being found to be deductible.

When the occasion of the outgoing operates to characterise the expenditure as a working expense the expenditure will not be of a private or domestic nature: Hill J in Cooper at ATC 4415 and cited with approval by the High Court in Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443; [2010] HCA 40; 2010 ATC 20-221.

Application to the graduate's circumstances

The graduate was employed as a graduate by the home company and in the course of undertaking the graduate program offered by the international business was required to work in Australia for a period of approximately 6 months in the Australian business as an employee of the Australian company. The requirement to undertake placement in overseas parts of the international business rather than the home country arose where there were insufficient placement opportunities for graduates in the home country. The placement undertaken by the graduate was for a relatively short period of time having regard to the full graduate program of 3 years. The graduate remained a participant in the graduate program before, during and after their placement with the Australian company. The graduate remained an employee with the home company while on placement in Australia.

The graduate was required to work in multiple work locations in Australia. When working in each location they stayed in hotel accommodation arranged, booked and paid for by the Australian company. The reimbursement for food expenditure was paid on production of receipts provided to the home company by the graduate.

The graduate lived with family in the home country and was unaccompanied on the placement in Australia.

There is no question of the occasion of the outgoing being the employee's choice to live in a location away from their place of employment rather than close to the work location as was the case in Hancox. The occasion of the outgoings can be found in the graduate's employment in the graduate program. In the course of participation in that program the graduate was required to undertake a short term placement in the Australian business as an employee of the Australian company. Their duties were required to be performed in multiple work locations in Australia.

If the graduate was not reimbursed for food expenditure while undertaking the placement that expenditure would have been deductible under section 8-1 of the ITAA 1997.

Therefore, the otherwise deductible rule in section 24 of the FBTAA will operate to reduce the taxable value of the expense payment fringe benefit to nil, subject to any applicable substantiation requirements, because:

• the recipient of the benefit, the graduate, is an employee of the Australian company;

• if the graduate had incurred and paid unreimbursed expenditure in respect of food (gross expenditure), equal to the amount of the actual expenditure incurred, a once-only deduction (gross deduction) ignoring Division 900 of the ITAA 1997 would have been allowable to the graduate;

• as there is no recipient's portion the notional deduction is equal to the gross deduction and exceeds nil; and

• the taxable value, being the amount of the reimbursement (and equal to the actual expenditure) reduced by the notional deduction, is nil.

Substantiation for the otherwise deductible rule to apply

Paragraph 24(1)(c) of the FBTAA requires documentary evidence of expenditure to be obtained by the recipient and provided (or a copy) to the employer before the declaration date. We accept that the graduate has provided documentary evidence of their expenditure to the employer as required by paragraph 24(1)(c) of the FBTAA.

Paragraph 24(1)(d) of the FBTAA applies to an extended travel expense payment benefit and requires the recipient of the benefit to give the employer a travel diary before the declaration date.

Extended travel expense payment benefit is relevantly defined in subsection 136(1) of the FBTAA as follows:

extended travel expense payment benefit means an expense payment fringe benefit where:

(a) …; or

(b) the following conditions are satisfied:

(i) the recipients expenditure is in respect of travel by the recipient within Australia that involves the recipient being away from the recipient's usual place of residence for a continuous period including more than 5 nights;

(ii) the travel was not undertaken exclusively in gaining or producing salary or wages of the recipient in respect of the employment to which the fringe benefit relates;

but does not include a car expense payment benefit.

However, if the provision of the expense payment benefit is covered by an annual 'no private use declaration', the requirement to obtain a travel diary is waived: Chapter 9.5 of the Fringe Benefits Tax - Guide for Employers.

Paragraph 24(1)(e) of the FBTAA requires the recipient to give the employer, before the declaration date, a declaration regarding the recipient's expenditure in a form approved by the Commissioner. However, an exclusive employee expense payment benefit is excluded from this requirement: subparagraph 24(1)(e)(i).

An exclusive employee expense payment benefit is defined in subsection 136(1) of the FBTAA as follows:

exclusive employee expense payment benefit means an expense payment fringe benefit where the recipients expenditure is exclusively incurred in gaining or producing salary or wages of the recipient in respect of the employment to which the fringe benefit relates and is not expenditure in respect of interest.

The benefit provided by the graduate in respect of expenditure on food is an exclusive employee expense payment benefit as the expenditure on food is exclusively incurred in gaining or producing their salary from the Australian company.

Accordingly, the graduate is not required to provide an employee declaration in respect of the expense payment benefit under paragraph 24(1)(e) of the FBTAA.

Therefore, the substantiation requirements for the otherwise deductible rule to apply have been satisfied.

Conclusion

The reimbursement of the graduate's food expenses by the home company is an expense payment benefit.

The expense payment benefit will be an expense payment fringe benefit unless the Australian company makes a no-private-use declaration by the declaration date under section 20A of the FBTAA, in which case it will be an exempt benefit. It is noted that the declaration date for the year ended 31 March 2013 has passed. However, if a declaration has not been made, the definition of declaration date provides the Commissioner with a discretion to extend the declaration date. In the circumstances, this discretion will be exercised if the declaration was not made by the date of lodgment of the return.

Therefore, the reimbursement of the graduate's food expenses will be an exempt benefit on which a fringe benefits tax liability will not arise.

Provision of Accommodation and Return Flights

Are the residual benefits exempt benefits?

In certain circumstances, living-away-from-home accommodation residual benefits are exempt pursuant to subsection 47(5) of the FBTAA. From 1 October 2012, to be eligible for the exemption an employee who lives away from his or her normal residence is required to satisfy section 31C of the FBTAA about maintaining a home in Australia (subject to certain transitional rules).

The graduate commenced living away from their normal residence when their assignment in Australia commenced on 12 October 2012. As the graduate does not satisfy section 31C of the FBTAA, the accommodation provided cannot be exempt under subsection 47(5) of the FBTAA.

Subsection 47A(1) of the FBTAA provides that a residual fringe benefit that is covered by a no-private-use declaration is an exempt benefit. Subsections 47A(2) and (3) of the FBTAA provide:

47A(2) [No-private-use declaration]

An employer may make a no-private-use declaration that covers all the employer's residual fringe benefits for an FBT year that are covered by a consistently enforced policy in relation to the use of the property that is the subject of the benefit that would result in the taxable value of the benefit being nil.

47A(3) [Form of declaration]

The declaration must be in a form approved in writing by the Commissioner and be made by the declaration date.

It is noted that the declaration date for the fringe benefits tax year ended 31 March 2013 has passed.

Does the otherwise deductible rule apply to reduce the taxable value of the residual fringe benefits to nil?

Where an employer or associate of the employer purchased the residual fringe benefit under an arms-length transaction, the taxable value is the cost price to the provider less any recipient's contributions: Chapter 18.5 of the Fringe Benefits Tax - Guide for Employers.

The taxable value of a residual fringe benefit can be reduced in certain circumstances by the use of the otherwise deductible rule contained in section 52 of the FBTAA.

Section 52 of the FBTAA relevantly provides:

52 Reduction of taxable value - otherwise deductible rule

(1) Where:

(a) the recipient of a residual fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the comparison time, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the provision of the recipients benefit, equal to the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the residual fringe benefit in relation to the year of tax - a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and

(ba) the amount (in this subsection called the notional deduction calculated in accordance with the formula

GD - RD

Where:

GD is the gross deduction; and

RD is:

(i) if there is no recipients contribution in relation to the residual fringe benefit - nil; or

(ii) …;

exceeds nil; and

(c) except where the fringe benefit is:

(i) an exclusive employee residual benefit; or

(ii) …; or

(iii) …; or

(iv) …;

the recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients benefit; and

(d) where the fringe benefit is an extended travel residual benefit (other than an international aircrew residual benefit) - the recipient gives to the employer, before the declaration date, a travel diary in relation to the travel undertaken by the recipient to which the fringe benefit relates; and

…

the taxable value, but for Division 14, of the residual fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND

where:

TV is the amount that, but for this subsection and Division 14, would be the taxable value of the residual fringe benefit in relation to the year of tax; and

ND is:

(f) if neither paragraph (da) nor paragraph (e) applies and paragraph (k) does not apply - the notional deduction; or

…

Consistent with similar provisions in other Divisions, section 52 of the FBTAA applies to reduce the taxable value of a residual fringe benefit to the extent to which any expenditure that has been, or would otherwise have been, incurred by the employee in acquiring the relevant benefit would have been immediately deductible for income tax purposes.

Would the graduate have been entitled to claim a deduction for the expenditure on accommodation?

For the same reasons that expenditure on food was found to be deductible, the occasion of the expenditure on accommodation can be found in the graduate's employment in the graduate program and specifically as an employee of the Australian company on short term placement in Australia undertaking duties in multiple work locations within Australia.

If the graduate had incurred expenditure on accommodation while undertaking the placement that expenditure would have been deductible under section 8-1 of the ITAA 1997.

Therefore, the otherwise deductible rule in section 52 of the FBTAA will operate to reduce the taxable value of the accommodation residual fringe benefit to nil, subject to any applicable substantiation requirements, because:

• the recipient of the benefit, the graduate, is an employee of the Australian company;

• if the graduate had incurred and paid unreimbursed expenditure in respect of accommodation (gross expenditure), equal to the amount of the actual expenditure incurred by the Australian company, a once-only deduction (gross deduction) ignoring Division 900 of the ITAA 1997 would have been allowable to the graduate;

• as there is no recipients contribution the notional deduction is equal to the gross deduction; and

• the taxable value, being the amount of the expenditure incurred by the Australian company reduced by the notional deduction, is nil.

Substantiation for the otherwise deductible rule to apply

The substantiation requirements for the otherwise deductible rule to apply to residual fringe benefits are in paragraphs 52(c) to (e) of the FBTAA.

The requirement to obtain a travel diary is waived if the provision of the residual benefit is covered by an annual 'no private use declaration': Chapter 18.8 of the FBT - Guide for Employers.

An employee declaration is not required for an exclusive employee residual benefit defined in subsection 136(1) of the FBTAA as follows:

exclusive employee residual benefit means a residual fringe benefit where, if the recipient had incurred expenditure in respect of the provision of the recipients benefit, that expenditure would have been exclusively incurred in gaining or producing salary or wages of the recipient in respect of the employment to which the fringe benefit relates.

The accommodation benefits provided to the graduate are exclusive employee residual benefits because if the graduate had incurred the expenditure it would have been exclusively incurred in gaining or producing their salary from the Australian company.

Accordingly, the graduate is not required to provide to the Australian company an employee declaration in respect of the residual fringe benefits under paragraph 52(1)(c) of the FBTAA.

Therefore, the substantiation requirements for the otherwise deductible rule to apply have been satisfied.

Conclusion in respect of accommodation

The provision of accommodation benefits to the graduate by the Australian company are residual benefits.

The residual benefits will be residual fringe benefits unless the Australian company makes a no-private-use declaration by the declaration date under section 47A of the FBTAA, in which case they will be exempt benefits. It is noted that the declaration date for the fringe benefits tax year ended 31 March 2013 has passed. However, if a declaration has not been made, the definition of declaration date provides the Commissioner with a discretion to extend the declaration date. In the circumstances, this discretion will be exercised if the declaration was not made by the date of lodgment of the return.

Therefore, the residual benefits will be exempt benefits on which a fringe benefits tax liability will not arise.

Would the graduate have been entitled to claim a deduction for the expenditure on the return flight?

As stated earlier in these reasons, in order to ascertain whether a loss or expenditure has been incurred in (the course of) gaining or producing assessable income, the enquiry requires consideration of whether the occasion of the loss or outgoing is to found in whatever is productive of the assessable income: Ronpibon Tin; Payne; Day.

In Lunney the High Court held (McTiernan J dissenting) that the costs of an employee travelling to and from his or her place of employment, or the costs of a business proprietor travelling to and from his or her place of business, were not losses or outgoings incurred in gaining or producing the assessable income, or were not necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Williams, Kitto and Taylor JJ said at pages 498 and 499:

It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in these activities from which their respective incomes are derived.

and at page 501: -

Expenditure of this character is not by any process of reasoning a business expense; indeed, it possesses no attribute whatever capable of giving it the colour of a business expense. Nor can it be said to be incurred in gaining or producing a taxpayer's assessable income or incurred in carrying on a business for the purpose of gaining or producing his income; at the most, it may be said to be a necessary consequence of living in one place and working in another. And even if it were possible - and we think it is not - to say that its essential purpose is to enable a taxpayer to derive his assessable income there would still be no warrant for saying, in the language of s.51, that it was 'incurred in gaining or producing the assessable income' or 'necessarily incurred in carrying on a business for the purpose of gaining or producing such income'".

Payne concerned a deer farmer travelling regularly from his farm to Sydney airport to conduct his occupation as a pilot. After consideration of the authority of Lunney, the majority said at paragraph 14:

…The expenditure was, as the majority of the Full Court rightly said, ``not incurred in the course of his employment as a pilot, nor in the course of his deer farming business''. The taxpayer's travel occurred in the intervals between the two income-producing activities. The travel did not occur while the taxpayer was engaged in either activity. To adopt and adapt the language used in Ronpibon, neither the taxpayer's employment as a pilot nor the conduct of his business farming deer occasioned the outgoings for travel expenses.

These outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived. In this respect they were no different from expenses incurred in travelling from home to work.

As stated earlier in these reasons, the majority in Payne explained that the connection required between the expenditure and the gaining or production of assessable income is a closer and more immediate connection than that provided by a causal connection. We consider that the general principle established in Lunney, that expenditure on travel between home and work is not deductible, is applicable to the return flight. Exceptions to the general principle where a closer and more immediate connection can be found are discussed in Taxation Ruling IT 112 Deductibility of travelling expenses between residence and place of employment or business. Those exceptions are not applicable in this case.

In this case, had the graduate incurred expenditure on the return flight it would not have been incurred in gaining or producing assessable income. The occasion for the expenditure was not the graduate's employment in Australia with the Australian company but private considerations regarding where they would spend the holiday period.

Do any other provisions reduce the taxable value of the return flights?

Fringe benefits in respect of overseas employment holiday transport receive concessional treatment under section 61A of the FBTAA.

Pursuant to section 143C of the FBTAA, if the following relevant conditions are satisfied residual fringe benefits will be in respect of overseas employment holiday transport:

(1) the employee is an overseas employee as defined in subsection 143B of the FBTAA;

(2) the residual benefits consist of the provision of transport or accommodation in connection with transport: subparagraph 143C(1)(a)(iii);

(3) the transport or accommodation is for a family member (defined in subsection 136(1) of the FBTAA to include an employee): subsection 143C(1)(b);

(4) the transport is provided wholly or principally to enable the employee to have a holiday on not less than 3 days: subsection 136(1) of the FBTAA; 143C(1)(c);

(5) immediately before the holiday travel, the employee's posting was for a period not less than 28 days: subsection 143C(1)(d);

(6) the transport is provided while the employee is on recreation leave of not less than three working days, and after the period of leave the employee resumes duties at the place that was the employee's overseas employment place immediately before the commencement of the travel: subsection 143C(1)(e)

(7) the transport is between a place at or near the employee's overseas employment place immediately before the commencement of travel and another place: paragraph 143C(1)(f)(i) of the FBTAA;

(8) the benefit is not in respect of remote area holiday transport: paragraph 143C(1)(j); and

(9) the benefit is provided pursuant to the provisions of an industrial instrument or it is customary in the industry to provide the same kind of benefits and in similar circumstances: paragraph 143C(1)(m).

Section 143B of the FBTAA explains some of the terms relevant to section 61A of the FBTAA and 143C of the FBTAA. Pursuant to section 143B of the FBTAA:

(1) an employee will be an overseas employee during the overseas posting period where:

• an employee's usual place of residence is in a particular country (the home country);

• the employee performs duties of employment at a place or places outside the home country; and

• the employee is required to live outside the home country to perform the duties.

(2) the overseas positing period starts when the employee commences duties at the place (or first place) and ends when the employee performs duties at the place (or last place); and

(3) the place, or each of the places, at which the employee performs duties outside the home country is taken to be an overseas employment place.

Where the travel is not to the home country, the concession is limited to 50% of what is called the benchmark travel amount. The benchmark travel amount is normally the cost of a return economy airfare, determined at the commencement of the employee's holiday: paragraph 143C(1)(p) of the FBTAA and Chapter 19.3 of the Fringe Benefits Tax - Guide for Employers.

Where the travel is to the home country (benefits are home country fringe benefits), the 50% applies to the actual cost of travel even if the cost exceeds the benchmark travel amount: subsection 61A(3) of the FBTAA and Chapter 19.3 of the Fringe Benefits Tax - Guide for Employers.

If an employee is provided with more than one overseas holiday trip during an FBT year, the concession is determined by using the highest discount concession: Chapter 19.3 of the Fringe Benefits Tax - Guide for Employers Chapter 19.3.

The term 'home country fringe benefit' applies to fringe benefits where the transport consists wholly of transport in respect of a family member by the most direct practicable route between a place at or near the overseas employment place immediately before the commencement of the travel and the home country: paragraph 143C(1)(q) of the FBTAA.

The graduate is an overseas employee within the meaning of section 143B of the FBTAA as their usual place of residence is in the home country, they performed the duties of their employment in Australia and in doing so were required to live outside the home country.

Therefore, where the relevant conditions of overseas employment holiday transport are satisfied, the Australian company will be eligible for the concession available under section 61A of the FBTAA.

As the graduate's made one holiday trip to their home country, provided the travel was by the most direct practicable route, the concession available is 50% of the actual costs of the travel pursuant to subsection 61A(3) of the FBTAA.

Conclusion in respect of the return flight

The provision of the return flight to the graduate is a residual benefit.

The residual benefit will be residual fringe benefit and a fringe benefits tax liability will arise.

The taxable value of the residual fringe benefit may be reduced by the concessional treatment under section 61A of the FBTAA.

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