The Bechtel Appeal - Travel vs Living Away From Home (LAFH) argument

WHEN ARE TRAVEL EXPENSES “OTHERWISE DEDUCTIBLE”?

Travel VS Living Away From Home (LAFH): The age-old debate

Throughout the years, there has been extensive contention on what constitutes business travel versus Living Away From Home (LAFH), with regard to the work arrangements of mobile employees. It is important to distinguish between the two as the payments provided to employees during each may have different tax treatments and implications.

Per guidance released by the Australian Taxation Office (ATO), LAFH usually involves employees taking up temporary residence away from their usual place of residence, to carry out duties at a new temporary workplace (i.e. there is a change in job location, unlike with business travel). Employees can choose to be accompanied by their spouse and family (business travellers usually cannot) and are paid for longer periods compared to those on business travel.

The ATO considers business travellers as individuals who are travelling in the course of performing their duties. Where an employee is travelling, they are usually not away from their home for an extensive period of time, and the ATO’s Practical Compliance Guideline 2021/3 with respect to travel arrangements states that to be considered a traveller, the individual must be away at the same work location for no more than 21 calendar days at a time continuously, and no more than 90 calendar days in total in a Fringe Benefits Tax (FBT) year.

Further guidance on what constitutes business travel can be derived from John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC82 (“the John Holland case”). In this case, the employees were seen to be travelling on the basis that their possessions did not remain on-site, they were rostered and paid in the course of travelling to site, and they worked for a short period on-site before returning to their usual place of residence and usual place of employment.

The John Holland employees were also bound by a travel policy and code of conduct whilst in transit, making their facts and circumstances similar to fly-in fly-out (FIFO) employees in Bechtel Australia Pty Ltd v Commissioner of Taxation [2023] FCA 676 (“the Bechtel case”). However, due to several key distinguishing factors, each case received a different judgement on whether or not employees were “travelling in the course of performing their duties”.  

A closer look at the Bechtel Case

Bechtel was contracted for a large-scale LNG construction project on Curtis Island, near Gladstone in central Queensland. As the island is accessible only by sea or air, and many of the workers employed were not local residents, Bechtel incurred significant travel expenses (e.g. flights) in implementing FIFO arrangements to and from the island. The travel expenses were considered residual fringe benefits provided to employees, triggering FBT payable of around $13 million for the company.

Subsection 47(7) of the Fringe Benefits Tax Assessment Act 1986 (“FBTAA”) provides a specific exemption from FBT for FIFO transport to a remote location. Unfortunately, due to Curtis Island’s proximity to Gladstone, it does not meet the definition of a “remote area” under FBT legislation, and the tax exemption did not apply to Bechtel.

Bechtel argued the taxable value of the travel benefits should be reduced to nil by applying the "otherwise deductible" rule under section 52(1) of the FBTAA. This raised the question as to whether the FIFO employees would have been allowed a deduction under s 8-1 of the Income Tax Assessment Act 1997 (“ITAA 1997”) in their own individual income tax returns, had the employees themselves incurred the expenses of travelling to and from Curtis Island.

This argument was also seen in the John Holland case where the taxpayer successfully argued that the “otherwise deductible” rule could apply to FIFO travel benefits. However, it was ultimately concluded by Justice Logan the facts of the Bechtel case were not similar enough to those of the John Holland case, and consequently, Bechtel was unsuccessful in arguing the “otherwise deductible” rule would apply. Accordingly, Bechtel’s hefty FBT liability remains.

Justice Logan’s conclusion was based on the following main factors:

• The employment contracts for the relevant Bechtel employees outlined they were not rostered on for duty until starting work on Curtis Island. This differs to the John Holland case, where employees were rostered on for duty as soon as they arrived at their point of origin airport (airport muster point).
• The complicated route that Bechtel workers took to Curtis Island, involving multiple flights, ferries and bus trips did not demonstrate the employee was travelling in the course of work. Justice Logan viewed that it held the same non-deductible status as workers travelling from home to work. Even the argument of maintaining a residence on Curtis Island is not feasible for workers, was a dismissed factor in arguing the workers were travelling.
• Although Bechtel employees had to adhere to the company’s code of conduct during their company funded travel to or from their point of origin airport, Justice Logan did not find this as persuasive elements of the arrangement to demonstrate direction and control of employees. This conclusion was considered even where employees had no control over the timing and making of flights which was controlled and made by Bechtel.
• Justice Logan ruled the project allowance was paid in recognition of the inconvenience of having to work on Curtis Island and not in recognition of any travel to and from Gladstone. Accordingly, it could not be distinguished this was a payment made whilst the employee was in the course of travelling to Gladstone and therefore “paid” whilst travelling. This was a key factor in the decision in John Holland.
• Bechtel had a policy that on the last day of a ‘swing shift’, FIFO employees were not required to work all of the rostered hours for that day and therefore argued the employees were still technically being paid while travelling home. This was not determined to be conclusive and considered not felicitous in demonstrating the connection between the payment and the travel.

Appeal to the Federal Court

Bechtel accepted the travel expenses were residual fringe benefits but objected on the basis the taxable value thereof should be reduced to nil because the expenses satisfied the “otherwise deductible” rule. When the Commissioner disallowed the objection and Bechtel’s initial appeal to the Federal Court was dismissed, Bechtel appealed to the Full Federal Court, contending that its circumstances were not materially distinguishable from those of John Holland.

Bechtel submitted that:

• It wasn’t practical or possible for all employees to live on Curtis Island (referring to paragraph 60 of the closing decision in John Holland);
• Travel costs to Curtis Island were not daily travel costs (Lunney vs FCT (1958) HCA 5 (“the Lunney case”);
• Flights were arranged and paid for by Bechtel – employees were thus required to travel on flights determined by Bechtel;
• Whilst travelling, employees were subject to Bechtel’s code of conduct; and
• It made no sense to refer to salaried employees as being ‘rostered on’. Bechtel argued that the primary judge erred in his understanding of the decision in John Holland and in concluding that the current case was distinguishable. Bechtel argued that John Holland did not require employees to be ‘rostered on’ while travelling for the otherwise deductible rule to be satisfied. The employees were paid a salary and were not on a ‘roster’. The salary was paid for the performance of all employee obligations.

Derrington, Downes and Hespe JJ rejected Bechtel’s submissions, finding in favour of the Commissioner. Applying Lunney and distinguishing from John Holland, they unanimously held that:

• The employee’s respective ‘points of origin’ were reflective of their personal circumstances and not a requirement imposed by Bechtel;
• Employees were not paid by Bechtel for the time travelled;
• Bechtel’s assistance in the administration of travel arrangements didn’t amount to a direction to travel;
• The fact that Bechtel had policies directed at employee conduct outside of Curtis Island did not mean they were performing employment duties while travelling; and
• Just because Bechtel’s employment contracts recognised an entitlement of employees to travel to and from their point of origin to enjoy their assignment leave entitlements, this didn’t elevate that travel to make it part of an income producing activity.

Considerations for employers going forward

Once again, the argument of ‘Travel versus LAFH’ has been flipped on its head, this time by the Bechtel case, which concluded with a narrower than expected interpretation of the John Holland case i.e. there is less room to deviate from the core fact pattern outlined in John Holland to argue direction and control in other ways.

Employers with mobile workforces will now need to carefully consider where their employees’ rosters commence and end, in order to determine the FBT implications for their business. Employers will need to increase scrutiny in assessing their risk if adopting an “otherwise deductible” position for transport, and other benefits like accommodation and food, where employees are not explicitly said to be rostered nor paid during their travel time.

Moreover, employers must now reassess and weigh up the financial costs associated with paying their workers a travel allowance (to cover the flights and other transport) versus directly covering travel expenses (i.e. providing residual fringe benefits) which may, due to the Bechtel case, now bring about a higher FBT than previously expected.

Employers may also need to have a closer look at alternative rostering locations when choosing where to roster FIFO workers, if they would like to resolve the above issues by being eligible for transport exemptions going forward, applying the otherwise deductible rule to benefits provided or treating allowances paid as in relation to travel. Our recommendations:

1. Undertake a review of existing arrangements

In light of now having the outcomes from the Bechtel case concluded, it is evident there is inconsistency by employers between the determination of someone as LAFH or travelling in the course of employment. Companies are also risking additional penalties by not having detailed positions documented and taking reasonable care in determining whether particular arrangements are LAFH or travel. As demonstrated in the Bechtel case, costs associated with remote working arrangements can be exorbitant, exposing employers to hefty additional FBT and penalties if reasonable care and appropriate positions are not adopted.

Therefore, we recommend reviewing existing arrangements to determine any exposure to your organisation. It is important to ensure positions are well documented and working arrangements and policies demonstrate the intention of travelling arrangements as being undertaken in the course of employment. Interestingly, in the Bechtel case, Justice Logan actually suggested the detail of Bechtel’s policies, as well as the sophistication of the execution, would be ‘envied by the militaries of many advanced countries’, yet inevitably, they were still found to be non-compliant. Thus, it is important employers perform a detailed analysis of these cases against their fact patterns, both historically and for any new project arrangements, as policies alone may not address risk and demonstrate travelling in the course of employment. Employers may need to consider adjustments to existing arrangement’s working rosters and adopting payments for travel to sites to limit additional tax exposures.

2. Obtain a review of new arrangements

Extending on our comments from above, it is important that businesses engage with advisors upon entering into a new arrangement to ensure the tax implications are considered, and where possible optimised. There are a number of ways to structure arrangements effectively but as always the devil is in the detail. In addition to the above, it may be worth completing cost projection calculations based on various scenarios to ensure that all possibilities are examined. It would be prudent to create a checklist of factors which align with the original John Holland case to form a basis of whether any new Project arrangements would create exposures to FBT. This checklist should be communicated with key personnel responsible for budgeting new or existing projects including HR, Project Managers, Finance Managers and Procurement.

3. Document your positions

For any subjective positions, it would be important for employers to clearly document their position and their reliance on arguments in appropriate case law and rulings. A well-documented position can facilitate reducing the risks of penalties being applied by the ATO in the event of any positions/arguments being challenged.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.