Private ruling: Fringe Benefits Tax - Otherwise deductible rule
Date of advice: 1 August 2016
Published: September 2016
Ruling period: Fringe benefits tax year ending 31 March 2015
Date scheme commenced: 1 April 2014

Ruling: Q1: Can Company A reduce the taxable value of external non-period residual fringe benefits ("the flights") to nil, under the otherwise deductible rule pursuant to subsection 52(1) of the Fringe Benefits Tax Assessment Act 1986 ("FBTAA")? | A1: Yes

Relevant facts and circumstances: Employees working on a fly-in-fly-out ("FIFO") basis, travelled from their home location airports in various Australian capital cities to a designated state ("X"). The work cycle commenced from the moment the employees checked into their relevant home location airport, and continued until they disembarked the plane at their respective home airports. Company A organised and paid for the flights between X and the employee's home airport location. The employees were required to fly to site on the first morning of the first day of their roster to perform their duties. The employees made their own travel arrangements to get to (and return from) their home airports, and met the cost of this travel. The employees returned to their home locations at the end of their rotations. The employees were also covered by Company A's workers compensation policy from the time they arrived at the airport terminals and during the flights. Additionally, employees engaged on a FIFO basis were subject to Company A's corporate travel policy. Company A also provided the employees with shared accommodation in X, and family members were not permitted to accompany them to their place of employment.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 52 | Income Tax assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - External non-period residual fringe benefits: Subsection 136(1) FBTAA defines an external non-period residual fringe benefit to mean a non-period residual fringe benefit other than an in-house residual fringe benefit. Subsection 136(1) of the FBTAA defines a period residual fringe benefit to mean a residual fringe benefit that is provided during a period, and subsection 149(1) of the FBTAA provides that a benefit shall be taken to be provided during a period if it is provided for a period of more than one day and is not deemed by a provision of the FBTAA to be provided at a particular time, or on a particular day. The term non-period residual fringe benefit is not defined in section 136(1) of the FBTAA; therefore it is taken to be a residual fringe benefit provided over a period of one day or less. The provision of flights by Company A to the employees was the provision of an external non-period residual fringe benefit because it was neither an in-house residual fringe benefit nor a period residual fringe benefit as per the definitions in subsection 136(1) of the FBTAA. Further, the flights are considered to be the provision of external non-period residual fringe benefits, whose taxable value under section 50 of the FBTAA would be reduced to nil, by the operation of the otherwise deductible rule in section 52 of the FBTAA. On the basis that Company A pays for the air travel provided to its employees by an airline provider, and each journey takes less than one day, it is considered that each flight constitutes an external non-period residual fringe benefit. | Detailed Reasoning - Section 50 - Taxable value of external non-period residual fringe benefits: The taxable value of an external non-period residual fringe benefit is determined by section 50 of the FBTAA and by operation of subsection 52(1) of the FBTAA where applicable. In Company A's case subsection 50(a) of the FBTAA applies in respect of the cost of the flights, on the basis that Company A purchased the flights under an arm's length transaction. | Detailed Reasoning - Section 52 - Reduction of taxable value - otherwise deductible rule: Section 52(1) relevantly provides: (1) Where: (a) the recipient of a residual fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and (b) if the recipient had, at the comparison time, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure ), in respect of the provision of the recipients benefit, equal to the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the residual fringe benefit in relation to the year of tax - a once-only deduction (in this subsection called gross deduction ) would, or would if not for section 82A of the Income Tax Assessment Act 1936 , and Divisions 28 and 900 of the Income Tax Assessment Act 1997 , have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and ... Subject to various conditions, section 52 of the FBTAA reduces the taxable value of a residual fringe benefit (determined under section 50 of the FBTAA) by the amount the employee would have been entitled to claim as an income tax deduction if they had incurred and paid (without reimbursement) the expense in respect of the provision of the benefit themselves. In other words, the taxable value is reduced by the hypothetical income tax deduction (under section 8-1 of the ITAA 1997), to which the employee would have been entitled had the employee incurred the expense. In Company A's case the provision of flights to the employees was the provision of an external non-period residual fringe benefit under section 136 of the FBTAA. The otherwise deductible rule in section 52 of the FBTAA provides that the taxable value of the residual fringe benefit is nil, where the costs of the flights would have been deductible by the employees under section 8-1 of the ITAA 1997 had the employees paid for the flights themselves. The issue to determine therefore is whether deductions for expenditure hypothetically incurred by the employees would have been allowed to the employees under section 8-1 of the ITAA 1997. | Detailed Reasoning - Section 8-1 General deductions and the John Holland Case: In general terms, section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. In considering the deductibility of travel expenses, a distinction is made between travel to work and travel on work. It is only if the duties of the job require a taxpayer to travel that the taxpayer's expenses can be deducted. When an employee is travelling on business on behalf of an employer, expenses of travel are incidental to the proper carrying out of the employment function and accordingly do not have the character of being private or domestic expenses. A deduction is generally not allowable for the cost of travel by an employee between home and their normal workplace as it is considered to be a private expense. A Decision Impact Statement ("DIS") was issued on 15 December 2015 in respect of the John Holland case. Briefly, the ATO view contained in the DIS is that where similar factual situations to the John Holland case arise, the decision of the court would apply. Briefly, the John Holland case involved particular FIFO employment arrangements, and addressed the question of the deductibility of travel expenses. For this reason the John Holland case is presently relevant. John Holland arranged and paid for its employees return flights from Perth to Geraldton. The employees travelled in accordance with arrangements made by the employer. 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. Employees travelled at their own expense both to and from Perth airport, which was designated by John Holland as the point of hire. Accommodation was provided for the employees and partners and families were not generally permitted to stay at the employee accommodation. The provision of flights by John Holland to the employees was the provision of an external non-period residual fringe benefit under sections 136 and 45 of the FBTAA. The Full Court found that from the time the employees checked in at Perth Airport as directed by their employer, they were travelling in the course of their employment, subject to the directions of John Holland 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 s 52(1) FBTAA would be an allowable deduction to them under s 8-1 of the ITAA 1997. | Detailed Reasoning - Conclusion: It is considered that Company A's case is factually comparable to the John Holland case. The employees in this case were required by Company A, as part of their employment duties, to travel each way between their home location airports and X. This travel occurred during work time while the employees were rostered on and paid. The travel did not include the private travel between the employee's home and home location airport. As such it is possible to conclude than on the facts of the case, an income tax deduction would have been allowable to Company A's employees in respect of the cost of the flights (the external non-period residual fringe benefits), if the recipient had incurred unreimbursed expenditure in respect of the provision of the benefit. On this basis, the otherwise deductible rule in section 52 of the FBTAA will apply and the taxable value of the external non-period residual fringe benefits would be reduced to nil.