In the worlds of the miners, mining services companies, transport companies and other businesses engaging fly-in-fly-out (FIFO) workers, a new crossroad has emerged following a recent decision by the Federal Court in Bechtel Australia Pty Ltd v Commissioner of Taxation.
Some businesses must now choose to pay their workers more (to cover the flights and other transport) or pay fringe benefits tax (FBT) on the transport costs. Affected businesses should review their employment practices and model the financial impact of this choice pending any appeal (one may be filed by 19 July 2023).
FIFO workers are a necessity dictated by the remote locations of mining, oil and gas operations.
When a FIFO worker is rostered from a major airport (say, Perth or Brisbane), the employer compensates the worker for the duration of the flight (and possibly even check-in and waiting time) to the work site, and similarly in reverse. However, when the FIFO worker is rostered at the work site, the employer avoids remunerating the worker for the flight from the major airport to the work site, resulting in significant cost savings.
Somewhat surprisingly, both cases fall within the FBT rules. The transport provided qualifies as either an expense payment fringe benefit or a residual fringe benefit, depending on how payment is made and the transport provided.
Obviously, practices will differ between employers and workers, so consideration will need to be given to whether these differences have an impact.
Deciphering the rostering riddle
The key to understanding the FBT consequences lies in where a worker’s roster commences and ends.
In this case, Bechtel chose the second approach, rostering its FIFO workers on and off at the Curtis Island LNG plant, off Gladstone, Queensland. This meant that it provided its FIFO workers flights from major airports to Gladstone airport, and then a series of bus and ferry rides to reach the temporary accommodation on Curtis Island, and then in reverse when workers left.
Bechtel argued that the “otherwise deductible rule” applied to reduce the taxable value of the fringe benefits to nil. The rule applies where, had the worker incurred the relevant expenditure themselves, the expenditure would have been deductible to the worker. Thus, the FBT treatment for Bechtel turned on whether its FIFO workers would be entitled to claim a tax deduction for the flights and ground transport costs if they had incurred those costs themselves.
The Court held that the workers would not be entitled to a deduction (and therefore Bechtel would be liable for FBT) because those costs were incurred before they commenced work, not during the course of income producing activities. Think about this like the bus or train or ferry you catch to work – the bus, train and ferry fares are not deductible because you have not yet commenced your working activities (even though you need to incur the expenditure to get to your work). This turned solely on where the FIFO workers were rostered on and off – at the work site.
By contrast, in a 2015 decision of the Federal Court in John Holland Group Pty Ltd v Commissioner of Taxation, the workers were rostered on and off when they arrived at the major airport closest to their usual place of residence. Thus, the travel from that airport to the relevant work site was in the course of their income producing activities – hence, the otherwise deductible rule applied to reduce the taxable fringe benefit to nil.
Importantly, in Bechtel, the Court also observed that the rules and policies that applied to FIFO workers during the course of their travel were not enough to displace the above conclusion.
Therefore, employers must carefully weigh up the financial costs associated with alternative rostering locations when choosing where to roster FIFO workers on and off.
Readers may be aware that there are exemptions within the FBT law for accommodation-related benefits and food provided to FIFO workers and their families. These exemptions do not extend to flights or other forms of transport. A specific exemption for travel must satisfy several conditions, one of which is that the travel be to enable the worker to get to his or her usual place of work at a "remote" location. Some businesses, like Bechtel, may not be able to satisfy this condition.
As the Court itself noted, this creates a gap between what appears to be a policy decision to provide exemptions for benefits provided to FIFO workers and what is in fact exempted. Depending on whether an appeal is filed (and if so, its outcome), there may be opportunity for industry bodies to lobby Government to seek changes to the FBT law to address this gap.
Disclosures: The author of this update is a member of a discussion group, of which the solicitor acting for the taxpayer is also a member. The author has also acted for the taxpayer from time to time in a previous role. However, the author has no particular knowledge about the matters before the Court other than what can be gleaned from the judgement.