Will deductions by employees for home to work travel fly?

In brief

A recent Federal Court decision means 'fly-in fly-out' workers cannot claim tax deductions for the cost of transport to and from work. Given the weight of High Court authority, it is perhaps unsurprising that the Federal Court ruled in the way that it did. However, the interesting question will be whether the taxpayers appeal, and if so, whether the higher courts will use this as an opportunity to reshape the application of a very old principle of law to new and emerging business practices. Partner Sarah Bernhardt and Senior Associate Shaun Cartoon report.

Background

John Holland's rail business revolves around rail construction and maintenance in Australia. To carry out its rail projects, John Holland employs, trains and maintains a mobile skilled labour force available for deployment on a project-by-project basis. The facts of this decision relate to a rail upgrade construction project on a railway line near Geraldton in Western Australia (the Midwest Project).

Most of John Holland's employees involved in the Midwest Project lived in Perth and chose not to relocate to Geraldton (which was offered). Instead, those employees chose to work on a rostered-on basis of two to four weeks followed by at least one week when they were rostered off. John Holland arranged and paid for the return flights from Perth to Geraldton. The flights were undertaken on the employer's time and the employees were bound to comply with all of John Holland's directives and policies during the flights.

The issue considered in this case was whether John Holland was entitled to reduce the FBT payable by it on the value of the return flights by the 'otherwise deductible rule'. This necessarily required consideration of whether the employees would have been entitled to a tax deduction for the return flights had they been required to pay for those flights. We note that there is an exemption from FBT for employer provided transport to remote locations (s47(7) of the FBT Act). As the case does not deal with this exemption, we assume it was not available on the facts here (eg perhaps the Midwest Project was too near to Geraldton to be considered remote for these purposes). As the case does not consider the operation of the FBT exemption for transport to remote areas, it should not have any direct bearing on arrangements that are currently in place which seek to rely on that exemption.

The decision

As indicated above, the issue considered in this case was whether John Holland was entitled to reduce the FBT payable on the value of the return flights by the 'otherwise deductible rule'. That rule operates so that the taxable value of the flights can be reduced to nil for FBT purposes if the cost of the flights would have been deductible to the employees under s8-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) if the cost had been incurred by the employees instead of the employers.

The test in subsection 8-1(a) of the 1997 Act requires an expense to have been incurred in gaining or producing assessable income. In this decision, Justice Jagot placed considerable weight on the leading case of Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478, in which the High Court held that bus fares from home to work were not tax deductible. The Commissioner contended that FIFO employees are simply undertaking another form of journey to and from work and there was no basis on which to depart from the existing course of authority. The Commissioner stated that the matter called for an exercise of the same restraint shown by Chief Justice Dixon in Lunney when his Honour said (at 485-486):

Both in Australia and in England the view has always prevailed that expenses of travelling from home to work or business and back again are not deductible. An explanation of how this came about in England is given by Denning L.J. in Newsom v. Robertson [(1953) Ch. 7, at pp. 15, 16; (1953) ; 33 Tax Cas. 452, at pp. 463, 464]
…
The question having been agitated it became necessary to turn to the Australian authorities by which it was settled long ago. It was surprising to find how few they were and that they depended rather upon their persuasive authority than their imperative character. But the judgment of Judge Murray in Re Adair [(1898) 4 A.L.R. (C.N.) 42] was pronounced sixty years ago and the dicta of a'Beckett and Hodges JJ. in the Victorian Supreme Court in Re Income Tax Acts [(1903) 29 V.L.R. 298; 25 A.L.T. 110] implied the same view over fifty years ago. These views have remained unquestioned up till this case. The relevant provisions of the English Income Tax Acts are not in the same terms as those of the Australian law, but the whole course of English authority involves a like conclusion. To escape from the course of reasoning on which the decisions proceed requires the taking of refined and rather insubstantial distinctions. I confess for myself, however, that if the matter were to be worked out all over again on bare reason, I should have misgivings about the conclusion. But this is just what I think the Court ought not to do. It is a question of how an undisputed principle applies. Its application was settled by old authority long accepted and always acted upon. If the whole subject is to be ripped up now it is for the legislature and not the Court to do it. I therefore would answer the questions in the special cases that the sums respectively mentioned are not deductible either wholly or in part.

In concluding that the flights would not have been deductible under s8-1 had the cost been incurred by the employees directly, her Honour stated (at 28-34):

I find much in the applicants’ submissions persuasive. In particular, unlike the circumstances in Lunney, the employees are paid for the time during which they travel. As such, they are travelling not only for the purpose of, but also in the course of their employment. They are also directed to travel in a particular way and at particular times by their employer. Their travel, unlike the case in Lunney, is not at their discretion. To the extent that the Commissioner suggested that the employees, at their election, could control their own travel arrangements, the evidence is to the contrary. The employers arranged the flights and the transport to and from the airports. Although an employee could request some special arrangement (on one occasion, an employee drove to the project location), the general arrangement was that employees travelled in accordance with arrangements the employers made.
…
Untrammelled by authority, it is likely that I would find the features identified above sufficient to conclude that cost of flights was incurred in each employee gaining or producing their assessable income within the meaning of s 8-1. Other considerations emphasised by the authorities do not permit me to reach this conclusion.
…
Fourth, while Lunney is not exhaustive, the fact that the travel is undertaken on a periodic rather than a daily basis does not seem a relevant distinguishing feature. The important distinguishing features are that in the present case the travel is undertaken at the employer’s direction and the employee is paid for the period of travel. But the character of the outgoing, assuming that the employees had paid for their own flights, remains the same. To the employee the cost of the flights would be incurred because they had chosen to live away from their place of work, the project location. If, as Northrop J said in Genys, the question is the 'essential character' of the outgoing, then, on the hypothesis of payment by each employee, the character of the outgoing is too similar to that in Lunney to reach a different conclusion, particularly when regard is had to the caution of Dixon CJ in that case. While I do not consider the important distinctions in this case to be 'refined and rather insubstantial', as his Honour referred to in Lunney at 486, I also do not consider them sufficient to reach a different conclusion from the view which, as Dixon CJ put it (at 485), 'has always prevailed that expenses of travelling from home to work or business and back again are not deductible'.

As Justice Jagot concluded that the employees would not have been entitled to a deduction had they incurred the travel cost themselves, it followed that John Holland was not entitled to reduce its FBT liability on the flights by the 'otherwise deductible rule'.

Implications of the decision

Chief Justice Dixon stated in Lunney that:

Times have changed; the incidence of income tax greatly differs now in scope and weight from its incidence in the days when the law was settled; possibly, the justice of the traditional legal view is a little more open to question and certainly its financial significance supplies a motive for questioning it.

In the more than 50 years that have passed since the above was articulated, we have seen further significant changes in the way employees work. In particular, the work force has become increasingly mobile and flexible. For example, given significant changes in the ease of travel, and an increase in the number of project-based assignments, more employees are now travelling significant distances to work in domestic and foreign locations that may be considered unsuitable for them (and their families) to live. Further, given significant technology changes, more employees (and non-executive directors) are now able to work from home and travel to meetings, which is also blurring the traditional boundary between what may be considered 'home to work' travel.

These changes in the way people now work, coupled with:

• the 2009 law changes that restricted the tax exemption for residents earning foreign employment income; and
• the 2012 law changes that limited the 'living away from home' concessions in the FBT Act,

means that there is currently a lack of clarity (and very likely not a level playing field) when it comes to the Australian tax treatment of work-related travel costs. This makes the whole area of the tax treatment of work-related travel costs 'ripe for review' as part of the Tax White Paper process. In the absence of such a review with related law changes, we think it is likely that there will be more cases in the years ahead testing the traditional boundaries between the distinction that case law currently draws between an employee's costs of 'travelling to work' and 'travelling for work'.