Federal Court of Australia

Bechtel Australia Pty Ltd v Commissioner of Taxation [2024] FCAFC 33

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    The appellant, Bechtel Australia Pty Ltd, appeals from the judgment of the primary judge in Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676 (PJ). The issue is whether the “taxable value” of certain “residual fringe benefits” in the form of travel arranged and paid for by the appellant for its employees is reduced to nil by reason of the “otherwise deductible rule” provided for in s 52(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA).

2    Section 52(1) of the FBTAA relevantly provides:

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 Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under that Act or the Income Tax Assessment Act 1936 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)     if there is a recipients contribution in relation to the residual fringe benefit equal to, or calculated by reference to, an amount of consideration paid by the recipient to the provider or to the employer in respect of the provision of the recipients benefit—the amount (if any) that would, or that would but for Divisions 28 and 900 of the Income Tax Assessment Act 1997 have been allowable as a once-only deduction to the recipient under that Act or the Income Tax Assessment Act 1936 in respect of so much of that consideration as was taken into account for the purposes of section 4-15 or 8-1 of the Income Tax Assessment Act 1997, if that consideration had been incurred and paid by the recipient at the comparison time;

exceeds nil;

…the taxable value…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:

…

—the notional deduction

3    The primary judge concluded that the travel expenses, had they been incurred by the employees, would not have been allowable as deductions to the employee under the Income Tax Assessment Act 1997 (Cth) (ITAA 97) or the Income Tax Assessment Act 1936 (Cth). Accordingly, there was no reduction in the taxable value of the residual fringe benefits provided by the appellant to its employees. The appellant contends the primary judge erred in reaching this conclusion.

4    It was common ground that s 8-1 of the ITAA 97 is the relevant section in considering whether the travel expenses, had they been incurred by the employees, would have been deductible. Section 8-1 relevantly provides:

(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;

…

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

….

(b)    it is a loss or outgoing of a private or domestic nature…

Factual background

5    The factual background is set out at PJ [1]–[12] and is not controversial. Travel expenses incurred by the appellant related to “field non-manual fly-in fly-out” (FNM FIFO) employees to take them:

(a)    from the high capacity airport nearest to the employee’s point of origin location to Gladstone Airport; and

(b)    from Gladstone Airport to the point of origin.

That is, the travel expenses in issue concerned travel booked as a return trip from and to Curtis Island.

6    Each of these trips was typically organised and paid for by the appellant. The appellant also organised, and paid for, bus transport from or to Gladstone Airport, to or from the ferry terminal and for ferry transfers to and from the ferry terminal to Curtis Island.

7    Australian National FNM FIFO employees were rostered on for shifts (or “swings”) on the Curtis Island Projects, which commenced at the project location for a number of weeks (generally four) and then rostered off for one week (Assignment Leave).

8    International FNM FIFO employees were rostered on for shifts of longer duration. They were entitled to:

(a)    during each 12-month period, Assignment Leave after 3, 6 and 9 months; and

(b)    Home Leave after 12 months.

International FNM FIFO employees were paid for travel days. On rostered days off outside of Assignment Leave or Home Leave, International FNM FIFO employees spent their time in or around Gladstone.

9    Clauses 4.1 and 4.2 of the appellant’s Travel Procedure CSO Curtis Island LNG Projects provided:

4.1    Assignment Leave – National: This travel is related to the rest and recreation roster time off from the Project that national non-local employees are entitled to take after working their approved roster cycle at the Project.

…

4.2    International Project Leave

A)    Assignment Leave – International: Assignment leave term for international employees refers to the entitlement to fly home for a rest and recreation period as applicable to their assignment conditions…

B)    Home Leave – International: Home leave for international employees refers to the annual leave that family or accompanied status employees are entitled to…

10    Travel schedules for Assignment Leave (for Australian National and International FNM FIFO employees) and Home Leave (for International FNM FIFO employees) were typically generated and managed by the appellant’s in-house Central Services Organisation Transport Department, including booking flights to each employee’s point of origin airport. Once made, such bookings could only be altered with managerial approval (PJ [28]).

11    The appellant organised travel arrangements from an employee’s point of origin to Curtis Island so that employees arrived at the Curtis Island Projects sites in time to commence their shifts, allowing time to check-in to their temporary accommodation.

12    Travel from Curtis Island to an employee’s point of origin usually commenced on the last day of a swing. Employees performed their duties at the project site for part of the day but were also given time to pack their belongings at their temporary accommodation, check-out and commence return travel, although they were paid for a full day. Employees required approval from their Project Manager or Director if they wanted their travel arrangements altered to fly to a location different from their point of origin.

“Otherwise Deductible”

13    The question which s 52(1) requires to be answered is in the nature of a statutory hypothetical. That hypothetical is constructed on the assumption that an employee had himself or herself incurred the travel expenditure. On that hypothesis, the question posed by s 52(1) is: would the employee have been entitled to a deduction for that expenditure?

14    It has long been established that the expenses of travelling from home to work or business and back again are not deductible. For expenditure to be regarded as incurred in gaining or producing assessable income, it must have been incurred in the course of gaining or producing the assessable income. As was said in Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93 at [9]:

…The subsection does not speak of outgoings incurred ‘in connection with’ the derivation of assessable income or outgoings incurred ‘for the purpose of’ deriving assessable income. It has long been established that ‘incurred in gaining or producing’ is to be understood as meaning incurred ‘in the course of’ gaining or producing. What is meant by being incurred ‘in the course of’ gaining or producing income was amplified in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation where it was said that:

‘to come within the initial part of [s 51 (1)] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.’

    (Footnotes omitted).

15    Thus, to be deductible, the expenditure must be incidental and relevant to the operations or activities which are carried on to produce income. The focus is not on the purpose of the expenditure but whether the occasion of the outgoing is to be found in whatever is productive of actual or expected income: Payne at [11].

16    In the context of travel expenses, the essential character of expenditure is not determined by reasoning which asserts that “because expenditure on fares from a taxpayer’s residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as ‘incidental and relevant’ to the derivation of such income” (Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478 at 498). To say that expenditure is a pre-requisite to the earning of income is “not to say that such expenditure is incurred in or in the course of gaining or producing his income”: Lunney at 499. Rather, such expenditure is a consequence of living in one place and working in another: Lunney at 501. It is thus not sufficient to show a causal connection between the expenditure and the derivation of income: Payne at [13].

17    Employee expenditure on travel will be incurred in gaining or producing assessable income where travel occurs in the course of performing employment duties. In that case, the costs of travel are incurred in the process of deriving assessable income. Thus, in John Holland Group Pty Ltd v Federal Commissioner of Taxation [2015] FCAFC 82; (2015) 232 FCR 59 the cost of travel from Perth Airport to the project site was an outgoing that would have been incurred by an employee in gaining or procuring assessable income because the employees’ employment duties commenced at Perth Airport. It was at Perth Airport that the employees in that case came under their employer’s direction and control.

18    By contrast, expenditure incurred before an employee commences, or after they cease, to perform their employment duties is not incurred in gaining or deriving assessable income: Payne at [14].

19    The question is determined by identifying the point at which an employee commences or ceases to perform their employment duties.

20    Here, by the terms of employment, each employee was assigned to work at Curtis Island. It was at Curtis Island that each employee performed their employment duties: PJ [71].

21    Bearing in mind that the travel outgoings were for travel booked as return trips from Curtis Island to the point of origin and back to Curtis Island, the travel between Curtis Island and the point of origin airport was not undertaken in performance of an employee’s duties as an employee. Rather, the travel is undertaken in the course of (and if relevant, for the purpose of) an employee commencing or concluding their Assignment Leave or Home Leave and outside of their performance of their employment duties. The primary judge correctly concluded that the expenses were not incurred in gaining or producing the employee’s income.

22    The appellant contended that the primary judge erred in his understanding of the decision in John Holland and in concluding that the present case was distinguishable. It was submitted that contrary to PJ [71], [73] and [75], John Holland did not require employees to be “rostered on” while travelling in order for the otherwise deductible rule to be satisfied. The employees here were paid a salary and were not on a “roster”. The salary was paid for the performance of all employee obligations.

23    We do not accept that the primary judge erred in his understanding of John Holland. His Honour correctly identified the distinction between expenditure on travel which is a pre-requisite to the earning of income and expenditure on travel incurred in or in the course of producing such income. His Honour found that the earning of employee’s income occurred at Curtis Island: PJ [71]. The reference in PJ [71] to “rostered on to duty” is no more than an euphemism for commencing to perform employment duties. In any case, the appellant’s own travel procedure document referred to “rest and recreation roster time off from the Project” to which employees were “entitled to take after working their approved roster cycle at the Project”. It was not disputed that the “roster cycle” commenced after arriving on Curtis Island.

24    The appellant sought to rely heavily on the phrase “part of their employment” as appears in John Holland at [56] and [60]:

[56]    A consideration of the hypothesis in this case requires the conclusion that the employees would have been entitled to a deduction for the cost of travel from Perth airport to Geraldton because the travel between those two locations was part of their employment.

…

[60]    …The criteria for deductibility is thus not that there is a great distance to travel from home to work but that the travel is a part of the employment. 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 in contrast to the need to incur the ‘living expense’ of the kind considered in Newsom.

It also relied upon connections between the fact of an employee’s employment and the employee’s travel to demonstrate that the employee travel was “part of their employment”.

25    The reliance on the quoted sentences from John Holland is misplaced. As explained above, expenditure is not incurred in gaining or producing assessable income by pointing to a causal connection between travel and employment. Nor is it established by pointing to the remoteness of the project location. The phrase “part of employment” is not a substitute for the language of s 8-1, but reflects the conclusion of the Court in John Holland that the travel occurred in the course of performing employment duties, unlike the present case.

26    The appellant sought to distinguish Lunney and demonstrate that the facts were more akin to those in John Holland by relying on the following:

(a)    it was not practicable or possible for all employees to live on Curtis Island or indeed in Gladstone. The practical remoteness of Curtis Island made travel essential;

(b)    the travel costs in issue here are not daily travel costs;

(c)    the flights were arranged for and paid for by the appellant. Employees were thus required to travel on flights determined by the appellant employer;

(d)    whilst travelling, employees were subject to the appellant’s policies governing behaviour and codes of conduct;

(e)    it makes no sense to refer to salaried employees as being “rostered on”.

27    Neither the fact that an employee lives a long distance from Curtis Island nor the fact that the appellant could not, as a practical matter, source a workforce from Curtis Island or Gladstone transforms the character of the expenditure. The travel costs are incurred because the employees live at a distance from their employment base “and this is so, whether [they have] a choice in the matter or not”: Newsom v Robertson (Inspector of Taxes) [1953] Ch 7 at 15–16, cited with approval in Lunney at 500. The “point of origin” for each employee is reflective of the employee’s personal circumstances and not the requirement imposed by the employer.

28    The fact that the employees were FIFO workers and therefore did not travel between home and work on a daily basis is similarly not to the point. It is the relationship between the performance of income producing activities and the travel which is critical and not the frequency of the travel.

29    The fact that the employer facilitated the travel arrangements and provided in-house travel co-ordination does not mean that employees were travelling at the direction of their employer or by travelling were performing employment duties. Part of the inducement or benefit provided to FIFO workers was travel to and from home for recreational leave. Travel was described in the appellant’s policy documents in the language of entitlement. Employees could choose not to take the travel entitlement and have a cash sum paid instead.

30    Employees were not paid for the time travelled. Although employees were paid allowances in recognition of the remoteness of the location of Curtis Island, such allowances did not result in employees performing employment duties when not on Curtis Island.

31    An incident of the travel benefit provided is that the employer arranges the travel. Travel was generally arranged to accord with the preferred times and dates expressed by employees. The employer’s assistance in the administration of travel arrangements does not amount to a direction to travel. The fact that an itinerary was provided and sent to an employee with the confirmed flight details did not amount to a direction to travel in the course of performing employment duties.

32    The fact that the appellant had policies directed at employee conduct outside of Curtis Island does not mean employees were performing employment duties when away from the location of their assignment. It is no more than recognition of the fact that employee conduct outside of the performance of their employment duties can reflect upon and harm the reputation of the employer. It is hardly surprising that the appellant should have a policy that states “[b]ehaviour in the local community that adversely affects [the appellant’s] reputation will not be tolerated and will be treated as misconduct or serious misconduct”. Employers can and do seek to regulate conduct outside of work.

33    The fact that the employment contracts recognised an entitlement of employees to travel to their point of origin in order to enjoy their leave entitlements did not elevate the travel to and from their point of origin to the performance of an employment obligation or make the travel part of an income producing employment activity.

CONCLUSION

34    The appellant has not demonstrated that the primary judge erred in concluding that the employees did not commence to perform employment duties prior to arrival at Curtis Island. Such duties were performed on and only on Curtis Island. The travel to and from Curtis Island, and in particular to and from Gladstone, did not occur in the course of gaining or producing assessable income. The costs would not have been deductible under s 8-1 of the ITAA 97 and therefore not otherwise deductible for the purposes of s 52(1) of the FBTAA.

35    The appeal must be dismissed.

Associate:

Dated:    15 March 2024