Edited version of private advice

Authorisation Number: 1051821492081

Date of advice: 17 June 2021

Ruling

Subject: FBT - otherwise deductible rule

Question 1

Are the Per Diems provided byan employerto its International Rotational Employees (IREs) to cover food and incidentals Living Away From Home Allowances (LAFHAs) pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

(a)  For Category A IREs - No

(b)  For Category B IREs - Yes

Question 2

Is the provision of accommodation to the IREs a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

(a)  For Category A IREs - Yes

(b)  For Category B IREs - Yes

Question 3

If the answer to question 2 is yes, does the 'otherwise deductible rule' in section 52 of the FBTAA apply to reduce the taxable value of the accommodation in question 2 to nil?

Answer

(a)  For Category A IREs - Yes

(b)  For Category B IREs - No

Question 4

Is the provision of flights by an employer to its IREs a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer

(a)  For Category A IREs - No

(b)  For Category B IREs - Yes, except for 'relocation transport' flights

Question 5

If the answer to question 4 is yes, does the 'otherwise deductible rule' in section 52 of the FBTAA apply to reduce the taxable value of the flights provided to Category B IREs to nil?

Answer

No

This ruling applies for the following periods

Year ended 31 March 20XX

Year ended 31 March 20XX

Year ended 31 March 20XX

The scheme commenced on

1 April 20XX

Relevant facts

An Australian company employs IREs on a fly-in fly-out basis.

The IREs under consideration fall under one of two categories depending to their primary work location in Australia:

•         Category A - IREs based at an offshore facility

•         Category B - IREs based at the company's capital city head office.

Category A IREs work three weeks on-site at the offshore facility and three weeks off-site in their respective home country.

A Category A IRE transits through the capital city and then a regional centre before boarding on the offshore facility.

Other conditions and benefits provided to All IREs

While the IREs were on rotation, they were:

•         paid from their home country's payroll;

•         paid an additional amount from the employer's payroll in Australia to ensure that the total compensation is sufficient to meet Australian immigration requirements;

•         paid a Per Diem allowance to cover food, laundry and incidentals while they are scheduled to work on the Project;

•         not accompanied by their family unless specifically approved by the employer (it is noted Category B IREs have the option of being accompanied by family members);

•         maintaining their usual place of residence and living arrangements in their home countries;

•         provided with paid return flights from/to their home countries to/from Australia for the duration of their contract. Flights are booked and coordinated in accordance with the employer's Travel Policy;

•         paid for their travel time to and from Australia during the period they are required to work on the Project (paid at a base rate and with the maximum time capped at 10 hours per journey);

•         expected to only take annual leave during their 'off' weeks in their home country;

•         subject to the employer's Code of Conduct and Travel Policy during the Project, including on flights to and from the project location.

Assumptions

For the purpose of the private ruling, the employer has requested the Commissioner make the following assumptions in relation to the IREs and the benefits provided to them by the employer:

•         Category A IREs are to be considered non-residents for Australian income tax purposes for the duration of the Project;

•         IREs do not make a contribution to the cost of the accommodation; and

•         if the accommodation is not an exclusive employee residual benefit as defined under section 136 of the FBTAA, the IREs will provide to the employer a declaration in a form approved by the Commissioner in relation to the provision of the accommodation.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 30

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Subsection 47(7)

Fringe Benefits Tax Assessment Act 1986 Section 50

Fringe Benefits Tax Assessment Act 1986 Section 51

Fringe Benefits Tax Assessment Act 1986 Section 52

Fringe Benefits Tax Assessment Act 1986 Section 58F

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 143A

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Taxation Administration Act 1953 Section 12-35

Reasons for decision

Question 1

Are the Per Diems provided by an employer to its International Rotational Employees (IREs) to cover food and incidentals Living Away From Home Allowances (LAFHAs) pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

(a)  For Category A IREs - No

(b)  For Category B IREs - Yes

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA, which requires, inter alia, the following conditions to be satisfied:

(a) A benefit is provided at any time during the year of tax.

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

(c) The benefit is provided by:

(i) their employer; or

(ii) an associate of the employer; or

(iii) a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

(iv) a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

(A) participates in or facilitates the provision or receipt of the benefit; or

(B) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

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

(e) The benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of a fringe benefit in subsection 136(1).

A benefit is provided

Subsection 136(1) of the FBTAA provides a broad definition of a 'benefit' as including:

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; ...

Application of section 30(1) of the FBTAA

Subsection 30(1) of the FBTAA provides that an employer provides a living-away-from-home allowance benefit to an employee where:

(a) at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

(b) it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:

(i) additional expenses (not being deductible expenses) incurred by the employee during a period; or

(ii) additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;

by reason that the duties of that employment require the employee to live away from his or her normal residence.

Connection to employment duties and activities

Several Court cases, including The Roads and Traffic Authority of New South Wales v Commissioner of Taxation [1993] FCA 445, (RTA case), Lunney v Commissioner of Taxation [1958] HCA 5, (Lunney case), Commissioner of Taxation v Payne [2001] HCA 3, (Payne case), and John Holland Group Pty Ltd v Federal Commissioner of Taxation [2015] FCAFC 82 (John Holland case) have considered expenses in travelling to work, and whether the expense was an essential prerequisite to the derivation of assessable income.

These observations point towards the Category A IREs' food and incidentals, being deductible because, due to the nature of their role, their expenses can be said to be incurred 'in the course of' earning their assessable income on the offshore facility; and Category B IREs' not being deductible because they are not incurred 'in the course of' earning their assessable income at the employer's capital city head office. As will be explained below, a Category B IREs' role, that is, their work activities, do not require them to incur expenditure on food, drink and incidentals. Furthermore, their expenses to go about their daily activities are living expenses, and thus, not deductible.

The employee does not incur the expenses due to their personal circumstances, because they are living at a location, or as a result of relocating

Personal circumstances

The IREs, being internationally sourced employees, must necessarily undertake international travel and sleep away from their usual residences in order to participate in their assignments in Australia.

Category A IREs' work requires them to stay overnight away from their usual residence at their workplace, the offshore facility, or on the nearby support vessel. Therefore, it is not only the fact they, as internationally sourced employees, must stay overnight in Australia (away from their usual residence) to earn their assessable income, it is their 'income-producing activities' or 'work activities' which require them to do so.

Category B IREs only incur travel expenses because they are internationally sourced employees. As such, their travel expenses more accurately reflect the choice they made in accepting an assignment to Australia and are a prerequisite to their earning their assessable income. Their work does not include or require them to travel and incur expenses accordingly, other than when they are required to work at the offshore facility.

Living at a location

Paragraph 41 of TR 2021/D1 states:

The following factors would support a characterisation of an employee as living at a location away from their usual residence:

•         there is a change in the employee's regular place of work

•         the length of the overall period the employee will be away from their usual residence is a relatively long one

•         the nature of the accommodation is such that it becomes the employee's usual residence

•         whether the employee is, or can be, accompanied by family or visited by family and friends.

Where an employee is living away from their usual residence, their accommodation and food and drink expenses are living expense and will not be deductible, even if the employee is living at a location due to their employment.

The application of each of the factors outlined in paragraph 42 of TR 2021/D1 to the facts in this case is considered below.

(a) Change in regular place of work

Where there is a change in the employee's regular place of work and the employee incurs accommodation and food and drink expenses to be closer to their new regular place of work, the employee will be living at that new location away from their usual residence. In these circumstances, the expenses incurred are living expenses and are not deductible.

In this case, the regular place of work for both Category A and Category B IREs changes to the offshore facility and the employer's capital city head office, respectively. As a result, the IREs would incur accommodation and food and drink expenses due to being close to their new regular places of work.

(b) Length of period away from their residence

The 'length of period away' means the overall period of time the employee spends living at a particular location for work. Where an employee is living at one location for work for an extended period, that period is not broken by short trips they take from that location, for example travelling back to their usual residence on weekends or when travelling on work from that location. Generally, the longer an employee spends away from their usual residence for work, the more likely the employee is living at the location.

In this case:

•         Category A IREs are not living away from their residence because they are only away from their usual residence for a short time.

•         Category B IREs are living away from their residence, as they are away from their usual residence for an extended period of time.

•         Neither category of IRE has relocated to Australia because they maintain, and return to, their home outside of Australia.

(c) The nature of the accommodation

The nature of an employee's accommodation is relevant but does not determine whether the employee is living at a location away from their usual residence. Generally, where an employee works away from home for a considerable period and, for that period, stays in accommodation generally used for longer term accommodation (such as a house, unit or apartment or caravan), this would support a view that they are living at a location away from their usual residence.

Having regard to the relevant tacts in this case, Category A IREs are not living away from their residence, while category B IREs, on the other hand, are living away from their residence in the provided accommodation.

(d) Whether the employee is or can be accompanied by family or visited by family or friends

An employee who is living at a location away from their usual residence can generally be accompanied or visited by their family and friends.

Having regard to the relevant facts in this case:

•         Category A IREs do not have the option of being accompanied by or visited by family or friends because their workplace and primary accommodation is offshore at the offshore facility.

•         Category B IREs stay in serviced apartments in a capital city, and, subject to approval, have the option of being accompanied by their family. The fact the serviced apartment and primary workplace (the employer's capital city head office) are located in a capital city also suggests family and friends are able to visit them.

Relocation

Where an employee has relocated for work, the cost of accommodation and food and drink will be living expenses; regardless of whether moving to the new location is required by the employer or the work.

There is no suggestion the IREs have relocated to Australia. Based on the information provided by the Employer, all IREs maintain a usual residence in their home country during the period of their assignment and return to that home at the end of their assignment (and, for Category A IREs, during their 'off' weeks).

Conclusion on whether the IREs are living away from their residence

Having had regard to the analysis above:

•         Category A IREs - are not living away from their usual residence.

•         Category B IREs - are living away from their usual residence.

Conclusion on whether the IREs' 'additional expenses' are deductible expenses

Having had regard to the analysis above, Category A IREs' additional expenses (meals, laundry and other incidentals) would be deductible expenses, while Category B IREs' additional expenses would not be deductible expenses because they are living away from their usual residence.

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

An employee is defined in subsection 136(1) of the FBTAA to include a current, future and former employee. Subsection 136(1) defines a 'current employee' to mean a person who receives, or is entitled to receive, salary or wages.

'Salary or wages', as defined in subsection 136(1) of the FBTAA, means payments from which an amount must be withheld under section 12-35 of Schedule 1 to the Taxation Administration Act 1953.

Therefore, this condition is satisfied.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The definition of 'provide' and 'provider' in subsection 136(1) of FBTAA are as follows:

provide:

(a) in relation to a benefit - includes allow, confer, give, grant or perform; and

(b) ...

provider, in relation to a benefit, means the person who provides the benefit.

The employer provides the IREs with a per diem allowance while in Australia. Therefore, this condition is satisfied.

Is the benefit provided in respect of the employee's employment?

In considering whether a benefit is provided to an employee 'in respect of' their employment, subsection 136(1) of the FBTAA defines 'in respect of', in relation to the employment of an employee, to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.'

In this case, the relevant employment of the IREs is their employment with the employer, not their employment with their home country employer. It is the IREs' employment with the employer which is relevant to considering whether the benefit of the provision of accommodation is in respect of the employees' employment for the purposes of the FBTAA.

There is no evidence that the IREs and the employer are dealing with each other in any other capacity than employees and employer. Therefore, it is considered that the provision of accommodation to IREs is sufficiently and materially connected to the IREs' employment, and as such, would be considered to be 'in respect of' their employment.

Therefore, this condition is satisfied.

Is the benefit excluded from the definition of a fringe benefit?

A benefit which comes within paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is excluded from being a fringe benefit.

Paragraph (g) of the definition of 'fringe benefit' excludes 'a benefit that is an exempt benefit'.

There is no evidence to suggest the benefit is an exempt benefit.

Conclusion on whether the IREs are provided with a LAFHA 'fringe benefit'

For all IREs, the benefit of the per diem allowance is provided to them in respect of their employment and is in the nature of compensation for additional expenses they might incur by reason that the duties of their employment require them to live away from his or her normal residence while they are in Australia.

However, for Category A IREs, their additional expenses are deductible expenses. Therefore, the per diem allowances paid to them while in Australia in the nature of compensation for these additional expenses are not, for the purposes of section 30 of the FBTAA, a living-away-from-home allowance fringe benefit.

For Category B IREs, their additional expenses are not deductible expenses. Therefore, the per diem allowance paid to them by the employer while rostered 'on' in Australia in the nature of compensation for these additional expenses is a living-away-from-home allowance fringe benefit under section 30 of the FBTAA.

Question 2

Is the provision of accommodation to the IREs a fringe benefit as defined in subsection 136(1) of the FBTAA?

(a)  For Category A IREs - Yes

(b)  For Category B IREs - Yes

A benefit is provided

In this case, the employer either pays for the IREs' accommodation directly or reimburses the IRE for the accommodation expenses they have incurred. Both constitute a 'benefit'. Therefore, this condition in the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is satisfied.

For simplicity, the remainder of the 'fringe benefit' analysis will refer to these benefits as the benefit of 'the provision of accommodation'.

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

The IREs are 'employees', as defined under subsection 136(1) of the FBTAA.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The benefit, being the provision of accommodation to the IREs is provided by EPMA. As such, this condition in the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is satisfied.

Is the benefit provided in respect of the employee's employment?

This condition in the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is satisfied for the reasons outlined above under Issue 1.

Is the benefit excluded from the definition of a fringe benefit?

A benefit which comes within paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is excluded from being a fringe benefit. Paragraph (g) of the definition of 'fringe benefit' excludes 'a benefit that is an exempt benefit'.

There is no evidence on the information provided that the benefit of accommodation provided by the employer to the IREs is specifically excluded under any of the other paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

Conclusion on 'fringe benefit'

All of the conditions in the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA are satisfied. Therefore, the benefit of accommodation is, therefore, a 'fringe benefit' per the definitions of those terms in subsection 136(1).

Question 3

If the answer to question 2 is yes, does the 'otherwise deductible rule' in section 52 of the FBTAA apply to reduce the taxable value of the accommodation in question 2 to nil?

(a)  For Category A IREs - Yes

(b)  For Category B IREs - No

A benefit provided by an employer (or associate or third party, in certain circumstances) to an employee in respect of the employee's employment that is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 of the FBTAA is called a 'residual benefit'

The valuation of a residual fringe benefit is dependent upon whether the residual benefit is an:

(a) in-house non-period residual fringe benefit

(b) in-house period residual fringe benefit

(c) external non-period residual fringe benefit, or

(d) external period residual fringe benefit.

Broadly, an 'in-house residual fringe benefit' is a residual benefit provided by an employer or associate of the employer as part of their business activities. An 'external residual fringe benefit' is a benefit that is not an in-house residual fringe benefit.

The distinction between a 'period' and a 'non-period' residual fringe benefit depends on the definition of 'period residual fringe benefit' in subsection 136(1) and section 149 of the FBTAA. A 'period residual fringe benefit' is defined as a residual fringe benefit that is provided during a period. Under subsection 149(1), a benefit is taken to be provided during a period if, and only if, it is provided and subsists during a period of more than one day and is not deemed to be provided at a particular time or on a particular day. The effect of this is that, generally, where a residual fringe benefit is provided and subsists for more than one day, it is a period residual fringe benefit.

In this case, the employer facilitates the provision of accommodation to its employees, the IREs, onsite at the offshore facility or the support vessel, or in serviced apartments in a capital city. The employer does not provide accommodation to members of the public, and the benefit is provided in relation to a period exceeding one day. There is no evidence the IREs and the employer are dealing with each other in any other capacity than as employees.

The taxable value of the external period residual fringe benefit calculated in accordance with section 51 of the FBTAA will be reduced where the 'otherwise deductible rule' in subsection 52(1) applies. The 'otherwise deductible' rule operates to reduce the taxable value of a residual fringe benefit where the employee would have been entitled to a once-only deduction under section 8-1 of the ITAA 1997 (or where a specific provision of the tax laws applies to provide the deduction) for the expense had the employee personally incurred and paid the unreimbursed expense.

Category A IREs

At Question 1 it was determined that Category A IREs' food and incidental expenses would be deductible under section 8-1. For the same reasons, their accommodation expenses would also be deductible. Therefore, the taxable value of the external period residual fringe benefits provided to Category A IREs is reduced to nil by the otherwise deductible rule under section 52 of the FBTAA.

Category B IREs

At Question 1 it was determined that Category B IREs' food and incidental expenses would not be deductible under section 8-1 because their expenses would not be incurred in the course of gaining or producing their assessable income and they would also be of a private or domestic nature because Category B IREs are living away from their usual residence in accommodation in a capital city. For the same reasons, their accommodation expense would also not be deductible.

For these reasons, the otherwise deductible rule under section 52 of the FBTAA does not operate to reduce the taxable value of the external period residual fringe benefits provided to Category B IREs to nil.

Question 4

Is the provision of flights by an employer to its IREs a fringe benefit as defined in subsection 136(1) of the FBTAA?

(a)  For Category A IREs - No

(b)  For Category B IREs - Yes, except for 'relocation transport' flights

The provision of flights by an employer to Category A IREs are an exempt benefit under subsection 47(7) of the FBTAA.

The provision of 'relocation transport' flights by an employer to Category B IREs are an exempt benefit under section 58F of the FBTAA.

The provision of non-relocation transport flights by an employer to Category B IREs are an "external non-period residual fringe benefit" under section 45 of the FBTAA.

Application of section 47(7) of the FBTAA to the flights provided to Category A IREs

A residual benefit will be provided to an employee where the employer arranges or facilitates, and pays for, the employee's transportation. In this case, all travel bookings and subsequent changes must be made through an employer's Travel Management Company (TMC), and all bookings made through the TMC are paid via a central account (a virtual credit card system that can consolidate payments for all airfares, accommodation and vehicle rental to a central account for reconciliation and payment).

The definition of fringe benefit in subsection 136(1) of the FBTAA excludes at paragraph (g) a benefit that is an exempt benefit in relation to the year of tax.

The provision of transport between the usual place of residence of an employee and their usual place of employment in a remote area or on an oil rig or other installation at sea is an exempt residual benefit under subsection 47(7) of the FBTAA where all of the conditions are met.

The following paragraphs consider the application of subsection 47(7) to the travel arrangements of Category A IREs.

(A) Is the employee's usual place of employment at a remote location in Australia or overseas, or on oil rigs or other installations at sea?

The offshore facility, the employee's usual place of employment during their assignment period is considered an installation at sea (and the regional centre is not situated in or adjacent to an eligible urban area for the purposes of section 140 of the FBTAA; it is a remote area).

(B) Are the employees provided with accommodation at or near the worksite on working days by the employer, an associate of the employer or an arranger?

The employees are provided with accommodation either on the offshore facility itself (the worksite) or on the support vessel on working days pursuant to a Services Agreement between it and the employer.

(C) Do the employees, on a regular basis, work for a number of days followed by a number of days off, and return to their usual place of residence on their days off?

On completion of their work weeks, the employees travel from the offshore facility back to their usual place of residence in their home country. On completion of their weeks off, the employee returns from his or her usual place of residence in their home country to the offshore facility.

(D) Is the employee regularly provided with transport between their usual place of residence and place of employment?

The employee is provided with flights from their usual place of residence in their home country to a regional centre onto the offshore facility on a regular basis by their employer for the duration of their assignment.

(E) Having regard to the location of the two places, is it unreasonable to expect the employee to travel to and from work on a daily basis?

It would be unreasonable to expect the employee to travel on a daily basis on work days between the employee's usual place of employment and their usual place of residence.

Conclusion on the application of subsection 47(7)

As the requirements of subsection 47(7) are met, the provision of the fly-in fly-out travel (flights) between a Category A IRE's home country and their work site (the offshore facility) is an exempt benefit.

Application of Division 12 of Part III to the FBTAA to flights provided to Category B IREs which are not 'in respect of relocation transport'

Subsection 136(1) of the FBTAA relevantly provides that "external non-period residual fringe benefit" means "a non-period residual fringe benefit other than an in-house residual fringe benefit".

It is considered that the first and last flight provided to a Category B IRE (and their spouse and children, if relevant) from their home country to an Australian state capital city during their assignment are in respect of 'relocation transport' and are therefore, exempt benefits under section 58F of the FBTAA.

The provision of flights by the employer to Category B IREs which are not 'in respect of relocation transport' is the provision of an "external non-period residual fringe benefit" because it was not an "in-house residual fringe benefit" nor a "period residual fringe benefit" as these phrases are defined in subsection 136(1) of the FBTAA.

The taxable value of a "external non-period residual fringe benefit' is worked out under section 50 of the FBTAA.

In this case, the taxable value of the non-relocation flights provided to Category B IREs is the amount of the employer's expenditure on such flights per paragraph 50(b) of the FBTAA. There is no information to suggest the IREs contribute to the cost of the flights, and as such, this amount is not reduced by any recipients' contributions.

Question 5

If the answer to question 4 is yes, does the 'otherwise deductible rule' in section 52 of the FBTAA apply to reduce the taxable value of the flights provided to Category B IREs in question 4 to nil?

Having determined the provision of flights to Category A IREs is an exempt benefit under subsection 47(7), and flights provided to Category B IREs which are in respect of relocation transport are an exempt benefit under section 58F, we now turn to the treatment of the flights provided to Category B IREs which are not in respect of relocation transport (i.e. return flights during their assignment), and whether any reduction in the taxable value of those flights (non-exempt residual fringe benefits) is available.

The 'otherwise deductible' rule in section 52 of the FBTAA operates to reduce the taxable value of a residual fringe benefit where the employee would have been entitled to a once-only deduction under section 8-1 of the ITAA 1997 (or where a specific provision of the tax laws applies to provide the deduction) for the expense had the employee personally incurred and paid the unreimbursed expense.

Taxation Ruling 2021/1 Income tax: when are deductions allowed for employees' transport expenses? (TR 2021/1) sets out when an employee can deduct transport expenses under section 8-1 of the ITAA 1997.

An expense is only deductible under paragraph 8-1(1)(a) of the ITAA 1997 if it is incurred by an employee "in the course of" gaining or producing assessable income. TR 2021/1 explains that '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.

Before considering whether the flights provided to Category B IREs during their assignment, which are not in respect of relocation transport, would be incurred in (or in the course of) gaining or producing their assessable income, it is worth restating the 'assessable income' of all IREs, irrespective of their residency status, is the renumeration paid to them by the employer, including the per diem allowance(s). Unless a Category B IRE is an Australia resident for tax purposes, their assessable income does not include their ordinary income which has a foreign source, that is income which has a source in their home (or another) country. As outlined above, it is considered Category B IREs are not, in the ordinary course, Australian residents for tax purposes. In any case, the relevant assessable income for present purposes, is their assessable income from the employer.

In undertaking the flights, the Category B IREs are travelling to their regular place of work as a Category B IRE must be present in Australia to undertake the duties of employment for which they are remunerated in Australia. Therefore, the flights would not be taken by a Category B IRE 'in the course of gaining or producing' their assessable income. This supports a conclusion that the flights are a prerequisite to a Category B IRE's employment.

Conclusion - deductibility of travel expenses

Category B IREs are not undertaking travel in the course of their employment duties when they travel to/from Australia during their assignment. Having regard to the relevant law and to the principles encapsulated in TR 2021/1, the Category B IREs would not be able to claim a deduction under section 8-1 of the ITAA 1997 if they had incurred and paid the unreimbursed travel expenditure on the basis that the expense was incurred in gaining or producing their assessable income.

Therefore, the otherwise deductible rule under section 52 of the FBTAA does not operate to reduce the taxable value of these external residual fringe benefits to nil.