What’s emerging? Deductibility of transport expenses: Full Federal Court decision clarifies key principles

9 May 2024

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On 15 March 2024, the Full Federal Court handed down its decision in Bechtel Australia Pty Ltd v Commissioner of Taxation [2024] FCAFC 33 (Bechtel FFC). In dismissing the taxpayer’s appeal, the Court concluded that relevant Fly-In-Fly-Out (FIFO) transport expenses, incurred for employees’ travel to Curtis Island, from each employee’s high-capacity airport nearest to their point of origin location, were not otherwise-deductible (and therefore, were subject to Fringe Benefits Tax).

The employer taxpayer was engaged to complete a number of short-term infrastructure projects (2-3 years) at Curtis Island. To resource these projects, and to comply with the project conditions which restricted the relocation of employees to the site, the employer mobilised a relevant skilled workforce under FIFO arrangements. This generally involved a flight from a relevant point of origin airport to Brisbane Airport, a following flight 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.

The case concerned the travel arrangements for its FIFO Field Non Manual (FNM) employees. FNM employees based in Australia (National FNM Employees) were paid a salary and project allowance. Internationally based FNM employees (International FNM Employees) were also paid travel days in addition to their salaries. All FNM employees would travel the day before the commencement of their roster period to arrive Curtis Island for the commencement of their roster period. On the last day of the period, employees would perform their duties for part of the day and would pack up and travel for the rest of the day. They would be paid for the full day.

At first instance, Logan J, found that the travel costs were not otherwise deductible and determined that the facts were different from the FIFO arrangement considered in John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 (John Holland). Specifically, His Honour noted that, on the basis that Bechtel employees were not rostered on to duty upon arrival at the relevant airport closest to their point of origin, the transport was a “prerequisite to the earning of the employee’s income” (at Curtis Island), rather than “incurred in or in the course of gaining or producing such income”.

Relevantly, the Court noted that Pagone J’s articulation of the relevant test (i.e. which is satisfied where the travel is “part of their employment”), when read in isolation, may support Bechtel’s case, however, the important factual difference (in His Honour’s view) was that John Holland employees commenced rostered duties at Perth Airport (their “point of hire”). For completeness, Edmonds J expressed the test as whether the employees were travelling “in the course of their employment” (at [41], [45]).

The Court focused on the “Project Allowance” paid to employees, which could be read as suggesting that deductibility of travel expenses requires specific payment for travel time. It was noted that the purpose of the “Project Allowance” was determined to be in the nature of compensation for inconvenience, instead of a lump sum payment for travel time (noting the project allowance in John Holland was paid for “the project location and disabilities associated with the projects”).

This was relevant because the Bechtel employees were salaried employees and, therefore, were not paid specifically for the time travelled (e.g. at an hourly rate). Some confusion arose from the fact that the decision in John Holland’s also included a proportion of salaried employees (i.e. ‘Staff’ employees), who were similarly not paid any specified amount for travel time (see [63] of John Holland).

Bechtel FFC – Key principles

The Full Court determined that the test for deductibility remains that the transport costs must be incurred “in the course of performing employment duties” (at [17], [25]). It concluded that the travel expenses are therefore not deductible because the employees were “assigned to work at Curtis Island” and it was “at Curtis Island that each employee performed their employment duties” [20].

The Full Court commented that any “reliance” on the articulation of the test from Pagone J in John Holland “… is misplaced … The phrase “part of employment” is not a substitute for the language of s 8-1 (of the Income Tax Assessment Act 1997), 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”.

To identify if a cost is incurred “in the course of performing employment duties” (i.e. in the course of producing or gaining assessable income), this is to be determined “by identifying the point at which an employee commences or ceases to perform their employment duties”.

For Bechtel’s employees, it was concluded that employment duties commenced and ceased at Curtis Island. The Full Court referred to the appellant’s travel procedure document which provided that rostered time off (i.e., back at the point of origin location) was “rest and recreation time off from the Project … after working their approved roster cycle at the Project”.

Importantly, the Full Court noted that matters such as distance between the home and project location, or the impracticality of sourcing local workers (necessitating FIFO mobilisation), does not transform the character of the expenditure. Similarly, the fact that Bechtel organised, paid and issued an itinerary, for the travel did not amount to an employer direction to travel, nor was it influential that Bechtel had policies directed at employee conduct outside of Curtis Island. That is, these factors do not result in a conclusion that the employees were travelling in the course of performing employment duties.

With respect to being paid for travel time, the Court appeared to indicate that, if the Project Allowance was determined as being payment for travel time, this may have suggested that employees had in fact commenced employment duties at the relevant point of origin airport – “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”. For completeness, we note that the Travel Days paid to International FNM Employees was not addressed in the reasoning of the Full Court decision.

Key takeaway for employers

The Bechtel FFC decision confirmed that the deductibility assessment remains a “in the course of gaining or producing assessable income” test and, in particular, John Holland did not introduce an alternate “part of employment” test relevant to remote-type FIFO transport.

The Full Court in Bechtel distinguished the facts in John Holland but did not overturn its reasoning. Notably, in a travel context, the tests appear to be articulated in two similar, but different, terms for the determination of the otherwise deductible rule as it relates to FIFO travel; whether the travel is undertaken “in the course of employment” or “in the course of performing employment duties”.

Relevantly, it appears that being rostered on and paid for travel time will be an important indicator that an employee is travelling “in the course of performing employment duties”. However, again, this may require clear evidence of the purpose of relevant compensation, particularly in the context of general allowances.

Given the above, we recommend employers review their current travel arrangements for employees, particularly in circumstances where FIFO employees incur travel expenses to determine whether the employees are rostered on (and, noting this is a likely requirement, paid for the travel undertaken to project locations), therefore giving rise to the performance of their employment duties. Additionally, future travel projects should also be scrutinised to ensure the supporting documentation (contracts, assignment letters, policies, procedures, etc.) reflects where an employee commences and ceases their employment.

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