What’s emerging? Deductibility of transport expenses: Federal Court decision qualifies approach from John Holland

On 22 June 2023, the Federal Court handed down judgement in the matter of Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676 (Bechtel), which dealt with the deductibility (otherwise-deductible rule in a Fringe Benefits Tax (FBT) context) of transport benefits provided to relevant employees in relation to the company’s work projects. The taxpayer’s appeal was dismissed by Logan J who concluded that the relevant transport costs in relation to the projects were not otherwise-deductible. 

This decision is the first matter heard in the Federal Court since John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 (John Holland), which was the catalyst for the Australian Taxation Office to revise its public guidance provided through Taxation Ruling TR 2021/1 - Income tax: when are deductions allowed for employees' transport expenses? (TR 2021/1). Furthermore, since Logan J who considered the Bechtel matter was part of the Full Bench that decided John Holland, the Bechtel decision could be considered as building upon the conclusions from John Holland. 

The Bechtel decision principally arose from what His Honour perceived as an important factual difference from John Holland, being that the employees were not rostered on to duty upon arrival at the point of origin airport. His Honour noted that he had arrived at this decision despite his “initial impression” being that these costs were incurred in, or in the course of, gaining or producing assessable income. 

This article summarises the main reasons for the decision, analyses these in the context of John Holland and notes the key takeaways for taxpayers. 

Summary of latest decision

In Bechtel, similar to the circumstances in John Holland, the taxpayer conducted a number of short-term projects (two to three years) in the remote (albeit not “remote” per the FBT definition of that term) location of Curtis Island. 

As was the typical fact-pattern in John Holland, skilled employees required for these projects were mobilised on Fly-in-Fly-Out (FIFO) arrangements, where all the transportation was organised by the taxpayer - this generally involved a flight from a point of origin airport to Brisbane airport, a flight then to Gladstone airport, a bus to the Gladstone ferry terminal, a ferry to the Curtis Island project ferry terminal, and finally a bus to the temporary accommodation on the island (which was maintained and operated by the taxpayer).

Similar to the “staff” employees in John Holland, the taxpayer’s relevant employees were paid a project allowance and the individuals were subject to the organisation’s Drug and Alcohol Policy, Code of Conduct for the temporary accommodation, and a written Project Work Rules and Code of Conduct document which also applied during travel-time.

In relation to the project allowance, the purpose of the payment was not clearly articulated in documentation and, in evidence, one of the taxpayer’s Human Resources employees accepted that the purpose of the payment may have been more in recognition of the project inconveniences (remote location, camp living) rather than in recognition of any travel to and from Curtis Island. 

Employees generally travelled to Curtis Island the day before their roster commenced (that is, they were not rostered on from the point of origin airport). Return travel usually commenced on the last day of the roster where, mid-shift, the individual would leave to the temporary accommodation to pack and check-out and commence their journey. However, the payment of the remainder of the shift did not necessarily tie into the return travel time (that is, where the individuals were rostered-on for the return leg). 

In assessing the question of deductibility, Logan J concluded that “(u)nlike in John Holland, none of the employees were rostered on to duty as soon as they arrived at their point of origin airport. The travel between there and Curtis Island was not travel between two places of employment”. Given this, in His Honour’s view, all income earnings (including the project allowance) occurred at Curtis Island and, therefore, the transport is regarded as “a prerequisite to the earning of the employee’s income, not expenditure incurred in or in the course of gaining or producing such income”.

Furthermore, His Honour noted that the application of policies (Drug and Alcohol, Code of Conduct, etc.) to the travel time was not inconsistent with this conclusion. That is, it is possible for an employer to impose disciplinary sanctions in relation to conduct occurring otherwise than in the course of their gaining or producing assessable income. 

Finally, Logan J also observed that, allowing employees to only work part of the last day (whilst being paid for a whole shift) did not convert the return trip into being in the course of employment. His Honor drew parallels to a situation of an employer allowing salaried employees to go home early on a given day, noting that, in that situation, the return journey does not convert to deductible costs simply because the employer has allowed for early departure without forfeit of pay. 

Key Takeaways

Broadly, the facts in Bechtel were similar to those of John Holland, with Logan J concluding that the key difference was that in John Holland, employees were rostered on from the time of arrival to the point of origin airport and, as such, it was viewed that the travel was between two places of employment (point of origin airport and the work location in Geraldton). In fact, His Honour noted that “if it so chose, Bechtel might, by a change in place of rostered start time, have made such expenses meet the “otherwise deductible” test”. 

As such, the key takeaway in the context of such travel is that, in Logan J’s view, the decision in John Holland did not necessarily turn on the remoteness and distance of the work location but, rather, on the fact that travel was between two places of employment during rostered-on time. 

Notwithstanding the above, in our view, some confusion remains. Specifically, in John Holland, there were two different groups of employees and relevantly, “staff” employees were not paid on a waged basis (i.e. paid for travel time once rostered-on) but on a salaried basis. These individuals were paid a project allowance for the Midwest Project in Geraldton which similarly compensated for project location and other disabilities, rather than travel.  

Given these factual similarities for the employees in Bechtel and the “staff” employees in John Holland, arguably, Logan J’s conclusion that Bechtel’s transport is non-deductible on the basis that the John Holland travel was on rostered-on time, between two places of employment, may have been based on a factual assumption.

For organisations reviewing their particular facts and circumstances, this apparent contradiction poses challenges in clearly concluding on their arrangements, particularly where the arrangement is structured such that travel is not during rostered-on time. 

Notwithstanding, we note that, as flagged by Logan J, to the extent that it is a requirement of deductibility for travel to occur during rostered-on time between two places of employment, organisations should review their existing or planned arrangements to understand the associated taxation implications. 

We note that the taxpayer in Bechtel has 28 days to appeal the decision, should it seek to pursue that course of action. We also await the Commissioner of Taxation’s perspective in relation to the impact of this decision and, in particular, whether there will be any alterations/qualification to TR 2021/1, noting that taxpayers have relied on this public guidance to organise and assess their travel arrangements for a significant period of time now. 

If you have any questions regarding the Bechtel decision, or would like to understand how this will impact you, please reach out to your PwC Employment Taxes specialist for assistance.