Edited version of private advice

Authorisation Number: 1051540887037

Date of advice: 03 September 2020

Ruling

Subject: FBT otherwise deductible rule and provision of transport to employees working in remote location

Question 1

Are the provision of the ferry tickets to employees and the reimbursement of the ferry ticket expenses by the employer fringe benefits in accordance with the definition of 'fringe benefit' under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

If the provision of the ferry tickets to employees and the reimbursement of the ferry ticket expenses by the employer are fringe benefits, can the taxable value of the fringe benefits be reduced by the 'otherwise deductible' rule under subsection 52(1) of the FBTAA (for residual benefits) or section 24 of the FBTAA (for expense payment benefits)?

Answer

No

This ruling applies for the following periods:

FBT year ending 31 March 2020

FBT year ending 31 March 2021

FBT year ending 31 March 2022

The scheme commenced on:

1 April 2019

Relevant facts and circumstances

The employer operates part of its business at a facility on an island location in Australia, as well as at facilities at other remote and non-remote locations in Australia.

The employer sources its workforce from the mainland and their employees travel daily from their home on the mainland to their workplace on the island.

The employer has an agreement with its employees to pay for employees' ferry tickets to and from the workplace on the island and to treat time spent on the ferry to and from the island as work time, as a benefit to workers. This treatment is reflected in the master rostering which considers travel on the ferry as rostered work time.

As a condition of employment, employees must act in accordance with their employer's directions and adhere to their employer's code of conduct whilst travelling. Employees must also report to the ferry on time to commence their duties on the island and report non-attendance at the ferry terminal to their supervisor.

The employer is invoiced directly by the ferry service operator for the ferry tickets used by their employees.

In the very limited instances where employees need to purchase their own ferry tickets to travel to and from the island, the employer is required to reimburse the employee for the cost of the ferry ticket.

The employees are employed under an employment agreement that applies equally to any employee working at any of the locations operated by the employer throughout Australia. This agreement does not provide that travel to and from the ferry terminal each day forms part of the duties of the employment of the employees.

Similarly, the duty statements provided for the employees who work on the island apply equally to any other similar employee working at the locations operated by the employer throughout Australia. These duty statements do not contemplate that travel to and from the ferry terminal at the beginning and end of each roster period is part of the duties of employment.

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 40

Fringe Benefits Tax Assessment Act 1986 section 46

Fringe Benefits Tax Assessment Act 1986 section 47A

Fringe Benefits Tax Assessment Act 1986 section 52

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Under subsection 136(1) of the FBTAA, a fringe benefit will arise where:

·   a benefit is provided to an employee, an associate of an employee, or some other person at the direction of an employee or an associate of an employee;

·   the benefit is provided by the employee's employer, by an associate of the employer, or by a third party under an arrangement with the employer or with an associate of the employer; and

·   the benefit is provided in respect of the employment of the employee.

The term 'benefit' is widely defined in subsection 136(1) of the FBTAA as including any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility.

The employees are in receipt of benefits as defined by subsection 136(1) of the FBTAA, being the ferry tickets and the reimbursement of the employee's ferry ticket expenses provided to employees by their employer.

In addition, in terms of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA:

·   the relevant benefits, being ferry tickets and the reimbursement of the employee's ferry ticket expenses, are provided to employees;

·   the relevant benefits are provided by the employees' employer; and

·   the relevant benefits are provided 'in respect of' the employment of the employees, as they are provided by reason of, by virtue of or for or in relation directly or indirectly, to that employment (as per the definition of 'in respect of' in subsection 136(1) of the FBTAA).

As such, a fringe benefit arises under subsection 136(1) of the FBTAA when the ferry tickets are provided to employees or when the employees' ticket expenses are reimbursed by the employer.

The employer is invoiced directly by the ferry service operator for the ferry tickets provided.

A residual fringe benefit arises in these circumstances, for the payment by the employer of the ferry travel services provided by the ferry operator to the employees.

There are very limited instances where the employees need to purchase their own ferry tickets to travel to and from the island. In such instances, the employer is required to reimburse the employee for the cost of the ferry ticket.

In this situation, an expense payment benefit arises under section 20 of the FBTAA because the liability to pay the travel costs is incurred directly by the employee (not the employer) and the employer then reimburses the employee for expenses they incur.

Question 2

Under subsection 52(1) of the FBTAA, where a residual fringe benefit is provided to an employee, the employer can apply an 'otherwise deductible' reduction against the taxable value calculated for the fringe benefit, being the amount of a once-only deduction that would otherwise have been allowable to the employee, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), if the employee had themselves incurred and paid the expenditure.

Similarly, under section 24 of the FBTAA, where an expense payment fringe benefit is provided to an employee, the employer can apply an 'otherwise deductible' reduction against the taxable value calculated for the fringe benefit, being the amount of a once-only deduction that would otherwise have been allowable to the employee under section 8-1 of the ITAA 1997 if the employee had themselves incurred and paid the expenditure.

Thus, section 8-1 of the ITAA 1997 must be considered to determine whether, had the employees incurred the loss or outgoing in relation to the cost of ferry travel themselves, they would have been able to claim an income tax deduction for the travel benefits provided by the employer.

Relevantly, a loss or outgoing will be deductible to an employee under section 8-1 of the ITAA 1997 (and the otherwise deductible rule will apply to reduce the taxable value of the benefit provided) where the expense is:

·   incurred in gaining or producing the employee's assessable income; and

·   not of a capital, private or domestic nature.

Paragraph 9 and 10 of Draft Taxation Ruling TR 2019/D7 Income tax: when are deductions allowed for employees' transport expenses? (TR 2019/D7) explain the above principles in the context of transport expenses:

9. It has long been established that the term 'incurred in gaining or producing assessable income' is understood as meaning incurred 'in the course of gaining or producing' assessable income. Other ways that this has been expressed in the context of transport expenses, is that the employee is travelling 'on work', the travel is part of the employment or the travel is an incident of the employment.

10. Conversely, a close connection between a journey and the employee's private or domestic life is a strong indication that the journey occurs outside of the employee's income-producing activity and is not deductible. Where the employee is travelling between home and a regular place of work, the transport expenses are usually a prerequisite to, rather than being incurred in, gaining or producing the employee's assessable income, and are simply a necessary consequence of living in one place and working in another.

Paragraph 11 of TR 2019/D7 states that:

Determining whether a particular transport expense is incurred in gaining or producing assessable income will involve consideration of the proper scope of the particular employee's work activities to determine if the circumstances of the transport expense have a sufficiently close connection to earning the employment income. It is important to have regard not just to the duties in the contract of employment, but to the nature of the work as a matter of substance. The following factors may support a characterisation of transport expense as being incurred in producing assessable income:

·   the travel occurs on work time

·   the travel occurs when the employee is under the direction of the employer

·   the travel fits within the duties of employment

·   the travel is relevant to the practical demands of carrying out the work duties

·   the employer asks for the travel to be undertaken

Each of the factors in paragraph 11 of TR 2019/D7 (along with the relevant case law) has been considered in determining whether the loss or outgoing in relation to the cost of ferry travel for the employees would be deductible under section 8-1 of the ITAA 1997.

The travel occurs on work time

Paragraph 20 of TR 2019/D7 states most employees have a regular place of work, being a usual or normal place where the employee starts and finishes their work duties. In considering the deductibility of travel expenses of FIFO employees of a large rail construction and maintenance business, the Federal Court in John Holland Group Pty Ltd v. Federal Commissioner of Taxation [2015] FCAFC 82 (John Holland), contrasted the requirement to travel to a regular place of work, with the travel being required because of the specific demands of the employment. This in turn informed the decision of whether the expense was incurred in the course of gaining or producing the assessable income of the employee.

Pagone J., at paragraph 57 of John Holland, posed the question 'The answer to the question in dispute depended upon whether the travel undertaken by the employees between Perth Airport and Geraldton was within the employment of the employees.'

Pagone J. concluded that the facts such as:

·   the employees being rostered on from arrival at Perth airport,

·   the employees taking flights because they were directed to do so and required to do so as part of their employment obligations,

·   that travel was included in working time hours and employees being required to act in accordance with the directions from their employer during the travel, including observing codes of conduct,

all support a conclusion that the travel occurred in the course of employment.

At paragraph 60 of John Holland, Pagone J. observed that whilst the extremes of distance between home and work alone are not sufficient to make the occasion of travel employment-related, remoteness of a project location may be a relevant factor:

A distant or remote location for the performance of employment duties may, however, be a relevant factor in determining whether travel is part of the employment. The location of the place at which work needs to be performed may occasion a need for travel to be part of the employment. The remoteness of the project location in this case provides the explanation for the travel being part of the employment. .....

Of relevance, Pagone J. distinguished (at paragraph 64) between the daily travel between home and the regular workplace of ordinary employees (identified in Lunney v FC of T (1958) 100 CLR 478 (Lunney)) and the travel undertaken by John Holland employees:

The case under consideration in Lunney was of 'ordinary people' paying fares 'to enable them to go day by day to their regular place of employment or business and back to their homes'; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. The employees in this case are required to travel as part of their employment to a remote location. ....

We note that for practical and economic reasons, employees based on the island are not required to live on the island. Moreover, as a benefit to employees based on the island, the employer has agreed to treat the travel time of employees on the ferry as work time. This treatment is reflected in the master rostering which considers travel on the ferry as rostered work time.

As was the case in Lunney (and observed by Pagone J. in John Holland), employees live on the mainland and commute to their regular work location on the island daily. The fact that the island is in a remote area is not to the point because employees live permanently within daily commuting distance of their regular work location on the island. The employees have only one regular place of work which is located on the island and while travel options to the island are limited, treating travel time as work time does not convert daily home to work travel as deductible expenditure.

The travel occurs when the employee is under the direction of the employer

In John Holland, Edmonds J. concluded that the travel undertaken by the employees was in the course of employment. Edmonds J. concluded that Perth airport was the point at which the employee's duties and remuneration for performance of those duties commenced and ceased. He found that from the time the relevant employees checked in at Perth airport, they were travelling in the course of their employment, and were subject to the direction of their employer. He also said that John Holland employees were being paid for their travel time.

However, direction and control is not always determinative, Hill J in Commissioner of Taxation v. Cooper (1991) 29 FCR 177 (Cooper), at 200 said:

... an employer may require an employee to travel to and from work by a particular mode of transport, but the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income-producing operations into a deductible outgoing. If it did, then, no doubt, employers would be besieged by employees with requests that the employer should require the particular expenditure to be incurred.

As a condition of employment, employees must act in accordance with their employer's directions and adhere to their employer's code of conduct whilst travelling. Employees must also report to the ferry on time to commence their duties on the island and report non-attendance at the ferry terminal to their supervisor.

Most if not all workers would have obligations to adhere to company policies while travelling to and from work on public transport. Similarly, an employer might provide their employee with a work vehicle and direct them to use that vehicle to travel to and from work. It would not necessarily follow that an employee travelling from home to work on public transport or in a work vehicle was travelling as part of their work duties.

Conditions such as those imposed by the employer on their employees are not uncommon to any other employee who regularly commutes to work on a daily basis and are not enough on their own to convert a loss or outgoing incurred in relation to travel from home to a regular place of work to deductible expenditure. Importantly, the provision of ferry travel by the employer to its employees is characterised in the agreement with the employees as a benefit and travel time is described as treated as work time.

The travel fits within the duties of employment

Expenses incurred in commuting between home and a place of work are generally not deductible where the travel is to start work or depart after work is completed. The majority of the High Court in Lunney said that it is not sufficient to establish that the travel was a necessary precondition to or prerequisite of performing the work that was productive of the assessable income, even though but for the travel, the work would not have been able to be performed. Specifically, at 501, the majority in Lunney stated:

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'.

The employees are employed under an employment agreement that applies equally to any employee working at any of the locations operated by the employer throughout Australia. This agreement does not provide that travel to and from the ferry terminal each day forms part of the duties of the employment of the employees. Similarly, the duty statements provided for the employees who work on the island apply equally to any other similar employee working at the locations operated by the employer throughout Australia. These duty statements do not contemplate that travel to and from the ferry terminal at the beginning and end of each roster period is part of the duties of employment.

As explained in paragraph 22 of TR 2019/D7, limited travel options, such as the lack of public transport or a regular place of employment only being accessible by boat, does not change the classification of non-deductible private home to work travel to deductible expenditure. The decision of the employer to provide a benefit to their employees to treat travel time on the ferry as work time does not lead to a conclusion that daily travel on the ferry fits within the work duties of employees who work on the island.

The travel is relevant to the practical demands of carrying out the work duties

In comparing the circumstances in John Holland with those in Cooper, Pagone J. states at paragraph 59 that:

The conclusion in [Cooper] that the consumption of food was not part of the income producing activities of playing football and training was not based upon a narrow view of the income producing activity but upon the fact that the income producing activity did not include eating, however essential that might be as a prerequisite to playing football or training or to perform those activities. In this case, in contrast, the employment necessitated that travel be part of the activities productive of assessable income. It was the remoteness of the project location that caused there to be a need for travel to be part of that for which employees were employed. There is no suggestion of the obligation to travel being created other than by the demands of the nature of the employment, or as device to clothe what would be a private journey before the derivation of income with the appearance of a journey as part of the employment.

After the weighing of several factors, the court in John Holland concluded that travel expenses from Perth airport to the project location were accepted as being incurred in gaining or producing the employee's assessable income. In the present case, the costs incurred by the employer transporting their employees from the mainland to work can be differentiated from the specific circumstances in the John Holland case. In John Holland, employees were employed on discrete projects for a specific relatively short period of time. In contrast, the employees here have a single, regular place of work, located on the island. Transport on the ferry is a routine commute required to attend a regular place of work to undertake duties of employment.

The employer employs staff at various locations throughout Australia. The position descriptions provided for the employees that work on the island are the same as any other employee at any other of the employer's locations in Australia.

The agreement between the employer and its employees working on the island specifies that the travel time to and from the island is treated as work time as a benefit to workers. Providing a benefit to employees by treating travel time on the ferry as work time is analogous to Cooper as a prerequisite to work commencing. Treating time on the ferry as work time is not the same as travel fitting within the income producing activities of the employee or a conclusion that necessitates that travel be part of the activities productive of assessable income, as was the case in John Holland.

The employer asks for the travel to be undertaken

The practicalities of living on the mainland and working on the island dictate that, in order to be at the ferry terminal on time to commence work, employees need to be on time to catch the ferry to the island. It is acknowledged that the employer asks their employees to report to the ferry on time to travel to the island and asks their employees to inform their supervisor if they will not be at the terminal to catch the ferry. This factor alone is not conclusive - as stated in Cooper (at 200), an employer may require their employee to travel to work using a particular mode of transport, but this is not sufficient to 'convert expenditure that is not incurred in the course of the income producing operations into a deductible outgoing'.

Conclusion

We recognise that there are some unique circumstances in the employer's situation that have been identified in support of its position that a deduction should be allowable to employees for any loss or outgoing in relation to the cost of ferry travel under section 8-1 of the ITAA 1997, specifically:

1.    the agreement between the employer and employees whereby travel to and from the island is treated as being on work time;

2.    the longstanding informal practice of including travel to and from the island as paid work time within the master roster system for employees; and

3.    an advertisement for a position that stated that travel to and from the island is counted as work time.

We have weighed and assessed all these factors. However, on balance we have come to the conclusion that that there is nothing in the role the employees perform at the employer's facility at the island which requires the regular travel be undertaken as a necessary part of the employment and undertaken in, and as part of the employment for which the employee is remunerated. Rather, employees have a regular place of work at the island and must travel from their home location to their work location on the island to undertake their duties of employment.

In respect of the provision of ferry tickets and the reimbursement of the employees' ferry ticket expenses by the employer to its employees, the costs are private in nature and would not have been deductible to the employee under section 8-1 of the ITAA 1997. Therefore, the taxable value of the residual fringe benefits and the expense payment fringe benefits cannot be reduced by the otherwise deductible rule under subsection 52(1) of the FBTAA (for residual fringe benefits) or section 24 of the FBTAA (for expense payment fringe benefits).