John Holland Group Pty Ltd & Anor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (DIS NSD 1397/2014 and NSD 1398/2014)
Judgment date: 11 June 2015
Date published: 15 December 2015

Summary of decision:
Outlines the ATO's response to this case which concerns the 'otherwise deductible rule' in section 52 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | The employers organised and paid for their employees to be flown from Perth airport to Geraldton and back again to work on a project on a rostered basis. The exemption available under subsection 47(7) of the FBTAA did not apply in this instance. The taxable value of the residual fringe benefits would be nil where the costs of the flights, under the statutory hypothesis, would be deductible to the employees under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). | The issue for consideration by the Court was whether, under the statutory hypothesis, the amounts, if they had been incurred by the employees would be allowable deductions or not under section 8-1 of the ITAA 1997.

Overview of facts:
John Holland Group has a rail business; JH Rail. JH Rail is a major participant in the industry of rail construction and maintenance in Australia. In Western Australia, many of the rail construction projects in which JH Rail was involved were connected with the requirements of mining projects. | In order to carry out its rail projects, JH Rail needed to be able to deploy skilled people to projects in different areas as those projects came on line. John Holland Group was an employer of employees who were skilled in carrying out rail construction projects. | Between May 2011 and September 2012, John Holland Group employees worked on the Midwest Project. The employer paid for their employees to be flown from Perth to Geraldton, near where the Midwest Project was located, and back again on a rostered basis. | Most employees lived in Perth. Most of the John Holland rail projects in Western Australia were in remote and regional areas. Most projects lasted about a year. Most areas in which a project was located did not have sufficient accommodation available to function as permanent accommodation for employees and their families. | For the Midwest Project, the accommodation used was a resort in Geraldton which provided apartment style group accommodation, suitable for employees but not for partners and families. Partners and families were not generally permitted to stay at the employee accommodation. | The Fly-in Fly-out (FIFO) arrangements for the Midwest Project involved the following: • Employees were designated as either 'workforce' or 'staff'. Staff employees were subject to individual employment contracts and workforce employees were subject to the John Holland Pty Limited and RTBU - Rail Maintenance Agreement - 2009-2012. • Employees travelled at their own expense to Perth airport. Perth airport was designated by John Holland as the 'point of hire'. • John Holland would pay for the employees' flights from Perth to Geraldton, the nearest airport to the Midwest Project. Most flights were chartered by the employer. • Generally, employees worked on the project during their rostered on period which was for a duration of two to four weeks (although some staff employees worked a five day week, Monday to Friday, and were flown in Monday morning and out Friday night). • At the end of their rostered on period, the employees would be transported back to Geraldton airport and would catch a flight back to Perth, at the cost of the employer. • The employees would make their way home from Perth airport at their own expense for one week of rest and recreation at home. • All flights to and from Perth to Geraldton occurred while the employees were rostered on. That is, the flight was undertaken on the time of the employer. • The 'workforce' employees commenced their rostered-on employment duties from the time of their arrival at Perth airport and took the flights because they were directed to do so and were required to do so as part of their employment obligations. These employees were remunerated at an applicable hourly rate for travelling time on the flight from Perth airport to Geraldton and the return flight, which occurred during rostered-on work time. • In accordance with the standard terms of employment, 'staff' employees travelled to the project location when required by the employer. These employees were provided with a project allowance based on their annual salary for working at the project site. • Employees, travelling on the employer's time, were bound to comply with all employer directives and policies, and disciplinary action could result if an employee breached any such requirement during a flight. | • Employees were designated as either 'workforce' or 'staff'. Staff employees were subject to individual employment contracts and workforce employees were subject to the John Holland Pty Limited and RTBU - Rail Maintenance Agreement - 2009-2012. • Employees travelled at their own expense to Perth airport. Perth airport was designated by John Holland as the 'point of hire'. • John Holland would pay for the employees' flights from Perth to Geraldton, the nearest airport to the Midwest Project. Most flights were chartered by the employer. • Generally, employees worked on the project during their rostered on period which was for a duration of two to four weeks (although some staff employees worked a five day week, Monday to Friday, and were flown in Monday morning and out Friday night). • At the end of their rostered on period, the employees would be transported back to Geraldton airport and would catch a flight back to Perth, at the cost of the employer. • The employees would make their way home from Perth airport at their own expense for one week of rest and recreation at home. • All flights to and from Perth to Geraldton occurred while the employees were rostered on. That is, the flight was undertaken on the time of the employer. • The 'workforce' employees commenced their rostered-on employment duties from the time of their arrival at Perth airport and took the flights because they were directed to do so and were required to do so as part of their employment obligations. These employees were remunerated at an applicable hourly rate for travelling time on the flight from Perth airport to Geraldton and the return flight, which occurred during rostered-on work time. • In accordance with the standard terms of employment, 'staff' employees travelled to the project location when required by the employer. These employees were provided with a project allowance based on their annual salary for working at the project site. • Employees, travelling on the employer's time, were bound to comply with all employer directives and policies, and disciplinary action could result if an employee breached any such requirement during a flight. | The employers lodged objections against the relevant assessments and sought to rely on the 'otherwise deductible rule' to reduce the taxable value of the residual fringe benefits to nil. The Commissioner disallowed the objections and the employers appealed to the Federal Court. | Decision at First Instance | The Federal Court at first instance (Justice Jagot) found that whilst the features identified might be sufficient to conclude, hypothetically, that the cost of flights was incurred in the course of each employee gaining or producing their assessable income within the meaning of section 8-1 of the ITAA 1997, other considerations emphasised by the authorities did not permit her Honour to reach that conclusion. 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, and accordingly no deduction was available. | The employers appealed to the Full Court. | Issues Decided by the Full Federal Court | The Full Federal Court agreed with the employers contentions and set aside the decision at first instance. | The Full Court found that the employees' arrival at Perth airport from their homes was not travel in the employees' derivation of income, and any expenditure incurred by the employees from their homes to Perth airport would not have been deductible, but, the employees were relevantly at work from arrival at Perth airport and were deriving income from that point. Accordingly the employees would be, on the statutory hypothesis put forward, entitled to a deduction for the cost of air travel from Perth airport to Geraldton and return. | In discussing Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166 (Lunney), the Full Court noted that the cost of travel for which Mr Lunney claimed a deduction, and which the court did not allow, was not the travel from the company's office at No. 11 Darling Harbour to the various ports to carry out his work, but from his domestic residence in Narraweena to his employer's office at No. 11 Darling Harbour. | The employers contended that the equivalent outgoing in this case (which the employees would not be able to deduct) would be the cost of travelling from the employees' individual residences to Perth airport, but that the employees' arrival at Perth airport was equivalent to the arrival of Mr Lunney at the office of his employer at No. 11 Darling Harbour. | In other words that arrival by the employees at Perth airport was the employees' arrival at work from which they then travelled to Geraldton to undertake other tasks. The employees were 'in' their employment from the time they were required to present themselves at Perth airport to embark on a specified flight. They were not travelling 'to' their employment at Geraldton. | The Full Court found that the employment necessitated that travel be part of the activities productive of assessable income. It was the remoteness of the project location that caused there to be a need for travel to be part of that for which employees were employed. There is no suggestion of the obligation to travel between Perth and Geraldton being created other than by the demands of the nature of the employment, or as device to clothe what would be a private journey before the derivation of income with the appearance of a journey as part of the employment. | It was also noted by the Full Court that the distance between an employee's home and place of work is, of course, not sufficient to make deductible the expense of travel from one place to the other. The criteria for deductibility is 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. | The case under consideration in Lunney was of 'ordinary people' paying fares 'to enable them to go day by day to their regular place of employment or business and back to their homes'; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. The employees in this case were required to travel as part of their employment to a remote location. | The Full Court also found that there is no reason why Perth airport should not be a point at which the employees duties and remuneration for performance of those duties both commenced and ceased. The contract of employment so provided. The fact that Perth airport is not an area or premises owned or leased by John Holland, is irrelevant. In this respect, there is, it was held no difference between Perth airport and No. 11 Darling Harbour in Lunney's case. | The Full Court found that from the time the employees, both workforce and staff, checked in at Perth airport as directed by their employer they were travelling in the course of their employment, subject to the directions of the employer and being paid for it. That situation subsisted until they disembarked the plane at Perth airport at the end of their rostered-on work time. At no time during that period were they travelling to work; they were travelling on work and the cost of doing so under the statutory hypothesis in subsection 52(1) of the FBTAA would be an allowable deduction to them under section 8-1 of the ITAA 1997.

Issues decided:
The Full Federal Court agreed with the employers contentions and set aside the decision at first instance. The Full Court found that the employees' arrival at Perth airport from their homes was not travel in the employees' derivation of income, and any expenditure incurred by the employees from their homes to Perth airport would not have been deductible, but, the employees were relevantly at work from arrival at Perth airport and were deriving income from that point. Accordingly the employees would be, on the statutory hypothesis put forward, entitled to a deduction for the cost of air travel from Perth airport to Geraldton and return. In discussing Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166 (Lunney), the Full Court noted that the cost of travel for which Mr Lunney claimed a deduction, and which the court did not allow, was not the travel from the company's office at No. 11 Darling Harbour to the various ports to carry out his work, but from his domestic residence in Narraweena to his employer's office at No. 11 Darling Harbour. The employers contended that the equivalent outgoing in this case (which the employees would not be able to deduct) would be the cost of travelling from the employees' individual residences to Perth airport, but that the employees' arrival at Perth airport was equivalent to the arrival of Mr Lunney at the office of his employer at No. 11 Darling Harbour. In other words that arrival by the employees at Perth airport was the employees' arrival at work from which they then travelled to Geraldton to undertake other tasks. The employees were 'in' their employment from the time they were required to present themselves at Perth airport to embark on a specified flight. They were not travelling 'to' their employment at Geraldton. The Full Court found that the employment necessitated that travel be part of the activities productive of assessable income. It was the remoteness of the project location that caused there to be a need for travel to be part of that for which employees were employed. There is no suggestion of the obligation to travel between Perth and Geraldton being created other than by the demands of the nature of the employment, or as device to clothe what would be a private journey before the derivation of income with the appearance of a journey as part of the employment. It was also noted by the Full Court that the distance between an employee's home and place of work is, of course, not sufficient to make deductible the expense of travel from one place to the other. The criteria for deductibility is 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. The case under consideration in Lunney was of 'ordinary people' paying fares 'to enable them to go day by day to their regular place of employment or business and back to their homes'; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. The employees in this case were required to travel as part of their employment to a remote location. The Full Court also found that there is no reason why Perth airport should not be a point at which the employees duties and remuneration for performance of those duties both commenced and ceased. The contract of employment so provided. The fact that Perth airport is not an area or premises owned or leased by John Holland, is irrelevant. In this respect, there is, it was held no difference between Perth airport and No. 11 Darling Harbour in Lunney's case. The Full Court found that from the time the employees, both workforce and staff, checked in at Perth airport as directed by their employer they were travelling in the course of their employment, subject to the directions of the employer and being paid for it. That situation subsisted until they disembarked the plane at Perth airport at the end of their rostered-on work time. At no time during that period were they travelling to work; they were travelling on work and the cost of doing so under the statutory hypothesis in subsection 52(1) of the FBTAA would be an allowable deduction to them under section 8-1 of the ITAA 1997.

ATO view of decision:
This case involved particular FIFO employment arrangements which meant that the air travel provided by the employer was not exempt under subsection 47(7) of the FBTAA. This was because the usual place of employment was adjacent to an eligible urban area as defined (see section 140 of the FBTAA). | The decision of the Full Court clarifies the law regarding the deductibility of travel expenses. As concluded by the Full Court, the case under consideration in Lunney was of 'ordinary people' paying fares 'to enable them to go day by day to their regular place of employment or business and back to their homes'; it was not about the specific demands occasioned by employment that required, as part of the employment, travel to a remote place. | The employees in this case were required by their employer, as part of their employment duties, to travel each way between Perth airport and the project accommodation at a remote location. This travel occurred during working time while the employees were rostered-on, and paid. This travel did not include the private travel between the employee's home and Perth airport. | This was a case of well settled law being applied to a new factual situation. Such matters can involve questions of fact and degree and different facts may result in different conclusions as to deductibility. | The ATO will continue to approach travel deduction cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts. | Where similar factual situations to the John Holland case arise, the decision of the Court would obviously apply.

Administrative treatment:

Legislative references: Fringe Benefits Tax Assessment Act 1986 45 47 52 136 140 Income Tax Assessment Act 1936 51(1) Income Tax Assessment Act 1997 8-1
Case references: Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation [1956] HCA 77 (1956) 95 CLR 344 (1956) 11 ATD 147 (1956) 6 AITR 379 Commissioner of Taxation of the Commonwealth of Australia v Day [2008] HCA 53 (2008) 236 CLR 163 2008 ATC 20-064 (2008) 70 ATR 14 Commissioner of Taxation of the Commonwealth of Australia v Payne [2001] HCA 3 (2001) 202 CLR 93 2001 ATC 4027 (2001) 46 ATR 228 Commissioner of Taxation v Cooper [1991] FCA 190 (1991) 29 FCR 177 91 ATC 4396 (1991) 21 ATR 1616 Commissioner of Taxation v Genys [1987] FCA 20 (1987) 17 FCR 495 87 ATC 4875 (1987) 19 ATR 356 Lodge v Federal Commissioner of Taxation [1972] HCA 49 (1972) 128 CLR 171 72 ATC 4174 (1972) 3 ATR 254 Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation (1958) 100 CLR 478 (1958) 11 ATD 404 (1958) 7 AITR 166 Newsom v Robertson (Inspector of Taxes) [1953] 1 Ch 7 Roads and Traffic Authority of New South Wales v Commissioner of Taxation [1993] FCA 314 (1993) 43 FCR 223 93 ATC 4508 (1993) 26 ATR 76 Ronpibon Tin No Liability; Tongkah Compound No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 (1949) 8 ATD 431 (1949) 7 AITR 236