2024 FBT Series: FBT treatment of travel expenses in a shifting workplace context
29 May 2024
Share this article
Today’s global workforce today is more flexible and mobile than ever before. While some of this shift is associated with employee choice, part is also attributable to working arrangements encompassing more inherent or unique travel requirements, as part of the job description.
There remains a long-standing position on the classification of home-to-work travel as being private travel for tax purposes, with any such travel expenses borne by an employer attracting Fringe Benefits Tax (FBT). However, what has emerged more recently, is the need to closely review working arrangements to determine whether the outcome is clear cut.
More specifically, many employers may be approaching their FBT compliance with a level of uncertainty around how travel expenses should be treated for FBT following the Federal Court decision in Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676 (Bechtel) in June 2023 and the subsequent appeal to the Full Federal Court in Bechtel Australia Pty Ltd v Commissioner of Taxation [2024] FCAFC 33 (Bechtel FFC). We have considered the impact of the Bechtel decisions on working arrangements below.
What you need to know — the basics
The long-standing principal when assessing the deductibility of travel expenses is that where travel is undertaken as a pre-requisite to gaining or producing of assessable income, it will not be deductible. That is, travel while performing work duties may be deductible, but travel to attend work is not. This determination is relevant both for individuals for income tax purposes, as well as for employers that considering the application of FBT to travel expenses and the potential for the “otherwise deductible” rule to apply.
For a number of years, the Federal Court decision in John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 (John Holland) was the leading authority on the circumstance where transport expenses, particularly in a fly-in fly-out (FIFO) context, would be travelling on work, rather than travelling for work, and therefore deductible. The John Holland case, handed down in 2015, triggered the ATO’s publication of Tax Ruling 2021/1 - Income tax: when are deductions allowed for employees’ transport expenses? (TR 2021/1), which provided practical guidance for taxpayers on the income tax and FBT treatment of employee travel arrangements.
The interpretation of how the John Holland case, and TR 2021/1 guidance, applied to travel expenses was disrupted in June 2023 when the Federal Court handed down judgement in the matter of Bechtel. Last month, the taxpayer lost its appeal of this decision, requiring employers to review any positions adopted which had been based on the John Holland decision (read more here).
What you need to know — the challenges
FIFO and DIDO arrangements
The Australian outback has served as the landscape to foster a number of strong industries in Australia, including mining and minerals, agriculture and tourism. One consistent challenge in all industries operating in regional areas is the ability to attract and utilise a talented workforce.
The geographic vastness of Australia has led to many industries adopting common working patterns and arrangements to mobilise employees to worksites. In recognition of the need for businesses to appropriately operate in remote areas across the country, FBT exemptions and concessions are available across a range of benefits that help to attract and retain workforces in these areas.
These exemptions and concessions include the provision or subsidising of permanent housing, support with utility expenses and holiday transportation to capital cities. In addition, for temporary workforces working on a rotational basis to a remote area, commonly referred to as a FIFO or drive-in drive-out (DIDO) arrangement, FBT exemptions and concessions are available for the transport, accommodation and meals provided to employees in these cases.
The challenge arises in instances where the definition of ‘remote’ for tax purposes is not met. Many areas across Australia are geographically distant from metropolitan areas, and the burgeoning population and infrastructure that comes with this, yet do not fall within the definition of ‘remote’ for tax purposes.
The test of what is remote for FBT purposes is largely determined based on population density figures from the 1981 census. Areas that have populations below the prescribed population levels at that point in time are considered remote, and accordingly don’t require much further examination from employers. In these cases, the transport expenses, as well as accommodation and board in majority of cases, will not attract FBT.
However, several locations in Australia fall within an emerging category, being regional but not remote for tax purposes. In John Holland, Geraldton in Western Australia presented the initial challenge, as the remote area FBT exemptions and concessions could not be claimed for travel to this non-remote location. Practically however, a FIFO workforce was required due to the geographic distance from Perth. Based on the facts of John Holland, the Federal Court determined the expenses incurred to transport John Holland employees would have been deductible as the travel by employees when travelling to and from site was largely part of the employees’ duties. Accordingly, the otherwise deductible rule could apply for FBT purposes.
Similarly, Bechtel engaged a FIFO workforce for its operations in Curtis Island, 474 kilometres northwest of Brisbane, presumably driven by the fact that Curtis Island is a national park and is only accessible by sea or air. Like Geraldton, the closest city Gladstone does not have the existing population or infrastructure to support the skilled workforce required and its workforce operated on a FIFO basis.
However, unlike in John Holland, the particular facts in Bechtel led the court to find that employees were traveling to work. On this basis, the transport expenses paid by Bechtel were not otherwise deductible and FBT would apply. We discuss the key differences between the facts in the Bechtel FFC and John Holland decisions in our article here.
With the timing of the Bechtel decision being so recent, any taxpayers operating a FIFO or DIDO workforce, or with any significant operations in regional areas throughout Australia will need to review the facts of travel arrangements closely for the 2024 FBT return.
Other than the cost impost that would arise from FBT if travel in a FIFO was not deductible, the other consideration relevant to both employers and employees where travel expenses are not deductible and are subject to FBT, is the inclusion of transport costs in the reportable fringe benefit amount (RFBAs) for individuals.
International FIFO arrangements
With many Australian operations expanding into new global areas, the increase in FIFO travel to workplaces outside of Australia is becoming more common place.
As with any travel expenses incurred for travel undertaken by employees, employers are required to assess the circumstances of the travel to determine the FBT outcome.
Like FIFO transport to remote areas in Australia, eligible FIFO travel to remote areas internationally can also attract a FBT exemption. With the list of accepted international remote areas being continually updated, taxpayers should be cognisant of where overseas projects are based to ensure the international location satisfies the FBT exemption for transport provided to employees.
If Australian resident employees are operating on a FIFO roster to an international location that is not remote, these arrangements should be assessed in the context of the Bechtel decision to appropriately consider any FBT impact.
Inter-city and interstate commuters
Another common employment arrangement that has presented challenges in recent years is employees travelling on a routine and regular basis between cities. An example would be an employee living in Sydney and commuting to work routinely to Melbourne. While commuting to work in general has been reshaped by the explosion of working from home following the Covid-19 pandemic, flexible working arrangements that cross State boundaries are becoming more common across a range of employers and industries.
While TR 2021/1 provides guidance on the ATO’s interpretation of the classification of travel between a transit point and a work location like the case of an inter-city or interstate commuter, workplaces have in many ways evolved since 2021, and there are a range of non-traditional working patterns which the examples in TR 2021/1 may not provide clarify over.
The recent Bechtel FFC decision did not provide direct assistance for such non-traditional working patterns, however, the decision reaffirms that the test for deductibility remains that the transport costs must be incurred “in the course of” performing employment duties. Notably, some had previously interpreted the John Holland decision to have applied a test of whether transport costs were incurred “as part of employment”; the Bechtel outcome clarifies this was not intended to expand the test beyond the traditional "in the course of" analysis. As such, businesses will need to demonstrate travel expenses are incurred “in the course of” performing employment duties, which in an inter-city or interstate commuter context, may be more challenging, particularly where travellers are salaried employees and not subject to formal rostering.
In instances where travel costs are paid or reimbursed to employees routinely travelling from home locations to intercity and interstate work locations, taxpayers should continue to focus efforts on good data collection processes to ensure FBT positions around the deductibility of travel expenses for employees can be substantiated.
Key takeaways
As more businesses in Australia continue to seize opportunities to grow in areas outside the main metropolitan hubs or in overseas hot spots, it will be important that travel requirements are carefully planned to ensure FBT is appropriately managed.
This is also the case where the barriers of State borders or not having interstate business premises have now become less of an issue in recruiting and retaining talent given the normalcy of working from home.
One of the key takeaways from the Bechtel FFC decision is the need for employment contracts and travel policies to be clear and complete in representing the arrangements at hand. Travel arrangements and associated costs also sit within different data sets within most organisations, which can present further challenges in trying to collate the appropriate data to make determinations on the FBT outcome. As the FBT impost on travel expenses can be sizable, taxpayers should ensure that sufficient governance is in place to track and analysis travel expenses in their organisations.
The ATO is yet to advise if a decision impact statement or amendments to TR 2021/1 are warranted from the Bechtel FFC decision. For the 2024 FBT year, employers will need to be cognisant of the need to assess the deductibility of travel expenses within the view expressed in the Bechtel decision. Businesses should also be aware of the impact of the uncertain FBT position operating in these areas, particularly where planning or tendering for future projects are concerned.
If you have any questions regarding the Bechtel decision or would like to understand the framework needed to assess your travel expenses for the 2024 FBT year, please reach out to your PwC Employment Taxes specialist for assistance.
