Private ruling: Fringe Benefits Tax ~ Otherwise Deductible Rule
Date of advice: 27 May 2016
Published: August 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Does the airline travel provided by the taxpayer to its employees for flights between home location and the worksite satisfy the otherwise deductible rule pursuant to section 52 FBTAA and therefore result in the taxable value of the fringe benefit being zero? | A1: Yes. | Q2: Do the meals provided to employees by the taxpayer by use of a corporate credit card satisfy the otherwise deductible rule pursuant to section 44 FBTAA and subsequently result in the taxable value of the fringe benefit being zero? | A2: Yes.

Relevant facts and circumstances: • The taxpayer is a business which supplies their employees as labour to clients' worksites. • The worksites are located at various locations around Australia. • The employees live in different locations to the worksites and are required to commute from their home locations to the worksites. • The taxpayer organises, books and pays for airline flights for their employees to travel from their home locations to the worksites and return. • The costs of the flights are included in the hourly labour rate in the contract between the taxpayer and the client. • The employees are paid a flat hourly rate which begins at the time of the flight departure from the home location to the worksite. • The employees are not paid during their return flight from the worksite to their home location. • The employees are required to transport their tools of trade to and from the worksites in order to perform their duties. • The tools cannot be stored at the worksites because the clients' do not provide insurance. • The tools of trade are carried in a personal tool bag of up to 32 kilograms which includes spanners, sockets, screwdrivers, pliers, hammers, tool bag, hacksaws, test equipment, safety equipment (circuit breaker locking devices) and a battery drill. • An additional luggage allowance is purchased as part of the airline flight in order to transport the tools of trade. • The length of time the employees are required to reside at a worksite ranges from two to four weeks. • The employees usually return to the same worksite every three to four months to fill short term labour shortages. • The taxpayer provides the employees with a corporate credit card for the purchase of their meals during the period of employment at the worksite. • There is a limit of $100 a day set for meal purchases on the corporate credit card.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 40, | Fringe Benefits Tax Assessment Act 1986 Section 44, | Fringe Benefits Tax Assessment Act 1986 Section 45, | Fringe Benefits Tax Assessment Act 1986 Section 52, | Fringe Benefits Tax Assessment Act 1986 Section 136(1) and, | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: The taxpayer will not be liable to pay Fringe Benefits Tax (FBT) for the provision of airline flights to its employees. The travel provided by the taxpayer to its employees would have been fully allowable as a deduction for the employee pursuant to section 8-1 ITAA 1997 had the expense not already been paid for by the employer. Therefore, under the otherwise deductible rule in section 52 FBTAA, the taxable value of the benefit is reduced by the amount allowable to be deducted by the employees i.e. the taxable value is zero and no FBT is payable by the employer. | Detailed Reasoning - Detailed reasoning: FBT is a tax employers pay on certain benefits they provide to their employees. The provision of airline travel by the taxpayer to its employees will be a residual fringe benefit under section 45 FBTAA. | Detailed Reasoning - Otherwise Deductible Rule: The otherwise deductible rule in section 52 FBTAA provides that the taxable value of a benefit may be reduced in the event that the employee would have been entitled to claim and income tax deduction if the employer has not paid for the expense. An employee can claim a deduction under section 8-1 ITAA 1997 for the expense that is a loss or outgoing to the extent that it is incurred in gaining or producing assessable income. However, a deduction cannot be made for an expense that is of a capital, private or domestic nature, or relates to the earning of exempt income. 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. The cost of travel between home and work is generally incurred to put the employee in a position to perform duties of employment, rather than in the performance of those duties ( Taxation Ruling TR 95/34 paragraph 77). However, there are situations where it has been accepted that travel by employees from home to work is deductible. Taxation Ruling IT 2543 summarises these situations, to include, among other things: • the taxpayer has to transport by vehicle bulky equipment necessary for employment; • the taxpayer's employment is inherently of an itinerant nature. | Detailed Reasoning - Deductibility - Tools of trade transportation of "bulky equipment": TR 95/34 states the Commissioner's view on when a taxpayer may be entitled to a deduction for travel expenses between home and work where the taxpayer is required to carry bulky equipment. A deduction may be allowable if the transport costs can be attributed to the transportation of bulky equipment rather than to private travel between home and work. The transportation of the equipment must not be done as a matter of convenience or personal choice as this is considered to be costs of a private nature and no deduction is allowable (TR 95/34, paragraph 63). In addition, a deduction will not be allowable if a secure area for the storage of equipment is provided at the workplace (TR 95/34, paragraph 64). The Court held in the case of Crestani v Federal Commissioner of Taxation 98 ATC 2219 that a toolbox of 27 kilograms was considered to be 'bulky equipment'. The aircraft engineer was required to transport the toolbox as there was no secure storage area provided by the employer and therefore the transport cost was deductible as it was attributable to the transportation of bulky equipment rather than private travel between home and work. Application to the taxpayer The tools of trade carried by the taxpayer's employees weigh approximately 32kg which is sufficiently substantial enough for them to be considered 'bulky equipment'. The transportation of the tools of trade is not a matter of convenience or a personal choice by the employee. The employees are required to carry their tools to the worksite in order to carry out their employment duties. In addition they are not able to leave the tools at the work site because there is not an adequately secure storage facility given the client does not insure any tools left on site. The employee would be entitled to claim an income tax deduction under section 8-1 on the basis they are required to carry bulky equipment. | Detailed Reasoning - Deductibility - Employees engaged in itinerant employment: A taxpayer can deduct the expense of travel between home and work when the taxpayer's employment is inherently of an itinerant nature. Taxation Ruling TR 95/34 states the Commissioner's view on when an employee is carrying out itinerant work. In the absence of a statutory definition, the Macquarie Dictionary defines "itinerant" as 'travelling from place to place' or 'one who travels from place to place especially for duty or business' (TR 95/34, paragraph 16). Characteristics of itinerancy include where travel is a fundamental part of the employment and is an essential feature of an employee's duties (TR 95/34, paragraph 22). This rule was established in Ricketts v Colquhoun [1926] AC 1 and was discussed by Lord Simon in Taylor v Provan [1975] AC 194 at 221 where he stated (TR 95/34, paragraph 22): T he obligation to incur the expenses of travelling in question must arise out of the nature of the office or employment itself and not out of the circumstances of the particular person appointed to the office or employed under contract of employment . Furthermore, it was considered in Taylor v Provan [1975] AC 194 that the very nature of an employee's work must make it necessary to carry out the duties in several places and it is not sufficient for an employee to choose to perform his or her duties in an alternative location for convenience such as a home office (TR 95/34, paragraph 22). | Detailed Reasoning - Application to the taxpayer: The taxpayer is a labour hire business which provides labour to a range of worksites which are located around the country. In order to perform their duties, the employees must be physically present at those worksites. That means they must travel from their home location to the work site, a requirement that is repeated for every worksite at which they are hired. The very nature of the job requires the employee to travel; it is not a matter of convenience or choice of the employees to travel. The employees are itinerant workers and would be entitled to a deduction under section 8-1 ITAA 1997 for the cost of the airline travel on the basis they are engaged in itinerant employment. | Detailed Reasoning - Question 2: Do the meals provided to employees by the taxpayer by use of a corporate credit card satisfy the otherwise deductible rule pursuant to section 44 FBTAA and subsequently result in the taxable value of the fringe benefit being zero? | Summary: The taxpayer will not be liable to pay FBT for the provision of meals to its employees. The meals provided by the taxpayer to its employees would have been fully allowable as a deduction for the employee pursuant to section 8-1 ITAA 1997 had the expense not already been paid for by the employer. Therefore, under the otherwise deductible rule in section 44 FBTAA, the taxable value of the benefit is reduced by the amount allowable to be deducted by the employees i.e. the taxable value is zero and no FBT is payable by the employer. Employee will not be required to provide an employee declaration to the taxpayer. | Detailed Reasoning - Detailed reasoning: A property fringe benefit will arise in circumstances where the employer incurs expenditure on food or drink that is provided to an employee or associate. A property benefit arises under section 40 FBTAA: Where, at a particular time, a person (in this section referred to as the provider) provides property to another person (in this section referred to as the recipient), the provision of that property shall be taken to constitute a benefit provided by the provider to the recipient at that time. The property benefit will be a property fringe benefit if the benefit is provided to an employee or an associate of the employer by the employer (section 136(1) FBTAA). Taxation Ruling TR 97/17 provides the Commissioner's view on when the provision of food and drink to employees will be a fringe benefit. In the circumstances where an employer provides meal entertainment to an employee, the benefit, whether it is provided as an expense payment benefit or a property fringe benefit, is subject to FBT. Furthermore, food and drink provided that it is a property fringe benefit, but not meal entertainment will also be subject to FBT (TR 97/17, paragraphs 26 and 38). TR 97/17 paragraphs 57 and 58 state: When is the cost of food or drink provided to employees and/or their associate, on premises that are not the employer's business premises (e.g. in a restaurant), subject to FBT? The food or drink provided to employees and their associates in these cases generally amounts to meal entertainment and is subject to FBT. A reduction in the taxable value may be available under the "otherwise deductible" rule but only in respect of the benefit provided to an employee". Further, paragraph 128 and 129 state: What are the taxation consequences when an employee pays for meal entertainment with the employer's corporate credit card? When an employee is provided with meal entertainment and uses the employer's corporate credit card to pay for the meal entertainment, a property benefit arises…' As illustrated above, the provision of food and drink to the employee of the taxpayer which is not at the employer's business premises will result in a property fringe benefit. In addition, paragraph 129 also provides that in such circumstances, the employer is " liable to pay FBT on the taxable value of the property fringe benefit to the employee" and "may claim an income tax deduction for the cost of meal entertainment to the employee … under section 8-1 because of the operation of section 32-20 of the ITAA". | Detailed Reasoning - Otherwise Deductible Rule: The otherwise deductible rule in section 44 FBTAA provides that the taxable value of a benefit may be reduced in the event that the employee would have been entitled to claim and income tax deduction if the employer has not paid for the expense. An employee can claim a deduction under section 8-1 ITAA 1997 for the expense that is a loss of outgoing to the extent that it is incurred in gaining or producing assessable income. However, a deduction cannot be made for an expense that is of a capital, private or domestic nature, or relates to the earning of exempt income. 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 do not have the nature of being private and domestic expenses ( Taxation Ruling MT 2030 paragraph 36 and Case No. B84, 2 TBRD 390 ). Therefore, where meals are provided, and it is concluded that the employees is travelling in the course of their employment, the taxable value of the benefit will be reduced to nil under the 'otherwise deductible' rule (section 44 FBTAA, Taxation Determination TD 96/7 paragraph 3). The criteria for determining whether an employee is travelling in the course of performing their job are set out in paragraphs 35-43 of Taxation Ruling MT 2030. These criteria include: - the nature of the duties performed; - whether the employee is accompanied by dependants; and - the length of time spent away from home (TD 96/7, paragraph 3). As a practical general rule, where the question of whether or not the employee is travelling cannot easily be determining and the period away does not exceed 21 days, the employee may be accepted as travelling (TD 96/7 paragraph 3, MT 2030 paragraph 41). MT 2030 also provides the following guidance: • travelling allowances are often paid for short periods, exceptions being allowance paid where the employment is itinerant in nature or where travelling is a regular incident of the occupation (MT 2030 paragraph 39). • an employee travelling in the course of employment ordinarily would not be accompanied by his or her spouse and family (MT 2030 paragraph 42). Where the taxable value of meals is reduced to nil by the 'otherwise deductible' rule, no employee declaration is requires as the benefits are exclusive employee benefits (section 44(c)(i), TD 96/7 paragraph 5). Application to the taxpayer The provision of meals by the taxpayer to employees by way of a corporate credit card will be a property fringe benefit under section 40 FBTAA. The taxable value of the property fringe benefit will be reduced to zero under the otherwise deductible rule in section 44 FBTAA as it is concluded the employees are travelling in the course of their employment. The period of time spent at the worksites by employees is between 2 to 4 weeks; the actual time will vary and be dependent on the clients' needs. The general rule is that when the period does not exceed 21 days the employee will be considered to be travelling. However, in the case where an employee of the taxpayer is away for longer than 21 days they will still be considered travelling given the very nature of the employment is itinerant and requires travel. In addition, the employees do not travel with spouses or family. The employees are travelling for their employment and would be entitled to a deduction under section 8-1 ITAA 1997 for the cost of meals. The taxpayer does not need to obtain an employee declaration as the benefits are exclusive employee benefits.

ATO view documents: Taxation Ruling No.IT 2543 | Miscellaneous Taxation Ruling MT 2030 | Crestani v Federal Commissioner of Taxation 98 [1998] ATC 2219 40 ATR 1037]