FEDERAL COURT OF AUSTRALIA John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 Citation: John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82 Appeal from: John Holland Group Pty Ltd v Commissioner of Taxation [2014] FCA 1332 Parties: JOHN HOLLAND GROUP PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: NSD 1397 of 2014 Parties: JOHN HOLLAND PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: NSD 1398 of 2014 Judges: EDMONDS, LOGAN AND PAGONE JJ Date of judgment: 11 June 2015 Catchwords: TAXATION – fringe benefits tax – residual fringe benefits – "otherwise deductible" rule – cost of flights paid by employer for employees to travel to remote project location – "fly in, fly out" employees – employees commenced "rostered on" employment duties upon arrival at airport – employees required to act in accordance with employer's directions and observe codes of conduct during travel to project location – whether employees would be entitled to deduction for cost of flights upon hypothesis that employees had paid for the flights – whether travel to project location occurred "in" the employment of the employees – whether employee would not be entitled to deduction by reason that travel to project location was travel from home to work – whether travel to project location within scope of employees' employment and productive of assessable income Legislation: Fringe Benefits Tax Assessment Act 1986 (Cth) ss 45, 47, 52, 136, 140 Income Tax Assessment Act 1936 (Cth) s 51(1) Income Tax Assessment Act 1997 (Cth) s 8-1 Cases cited: Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 cited Commissioner of Taxation of the Commonwealth of Australia v Day (2008) 236 CLR 163 followed Commissioner of Taxation of the Commonwealth of Australia v Payne (2001) 202 CLR 93 cited Commissioner of Taxation v Cooper (1991) 29 FCR 177 cited Commissioner of Taxation v Genys (1987) 17 FCR 495 cited Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171 cited Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation (1958) 100 CLR 478 distinguished Newsom v Robertson (Inspector of Taxes) [1953] 1 Ch 7 distinguished Roads and Traffic Authority of New South Wales v Commissioner of Taxation (1993) 43 FCR 223 cited Ronpibon Tin No Liability; Tongkah Compound No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 cited Parsons RW, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (Law Book Company, 1985) Date of hearing: 6 May 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 64 Counsel for the Appellant: Mr BJ Sullivan SC with Mr CJ Peadon Solicitor for the Appellant: PricewaterhouseCoopers Counsel for the Respondent: Mr AH Slater QC with Mr DFC Thomas Solicitor for the Respondent: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1397 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND GROUP PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: EDMONDS, LOGAN AND PAGONE JJ DATE OF ORDER: 11 JUNE 2015 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be allowed. 2. Orders 2 and 3 made on 10 December 2014 in NSD 357 of 2014 be set aside. 3. The respondent's objection decision (objection reference number 1012582872751) be set aside and the appellant's objection against the fringe benefits tax assessments issued to it for the years ended 31 March 2012 and 31 March 2013 be allowed in full. 4. The respondent pay the appellant's costs both before the primary judge and on this appeal, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1398 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: EDMONDS, LOGAN AND PAGONE JJ DATE OF ORDER: 11 JUNE 2015 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be allowed. 5. Orders 1 and 2 made on 10 December 2014 in NSD 358 of 2014 be set aside. 6. The respondent's objection decision (objection reference number 1012582388256) be set aside and the appellant's objection against the fringe benefits tax assessments issued to it for the years ended 31 March 2012 and 31 March 2013 be allowed in full. 7. The respondent pay the appellant's costs both before the primary judge and on this appeal, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1397 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND GROUP PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1398 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: EDMONDS, LOGAN AND PAGONE JJ DATE: 11 JUNE 2015 PLACE: SYDNEY REASONS FOR JUDGMENT EDMONDS J: Introduction 1 The issue in these appeals arises under the Fringe Benefits Tax Assessment Act 1986 (Cth) ("FBTAA") in relation to residual fringe benefits (s 45 FBTAA) provided by the appellants in flying employees from Perth to Geraldton and back for a rail upgrade construction project on a railway line east of Geraldton ("Midwest Project"). Specifically, the issue is whether if the employees had themselves incurred and paid the expenditure in respect of the provision of those benefits, a deduction would have been allowable to the employees in respect of the expenditure under the general deduction provisions of s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") so that the "otherwise deductible rule" in s 52(1) FBTAA was invoked to reduce the taxable value of the residual fringe benefits to nil. 2 There is no issue here other than the deductibility of the travel expenditure to the employees under the statutory hypothesis in s 52(1) FBTAA. 3 I have had the great advantage of reading the reasons for judgment of Pagone J in draft. I agree with his Honour's conclusion and his Honour's reasons. The reasons which follow are merely a product of approaching the issue from a different perspective. 4 By way of observation only, I note that s 47(7) FBTAA exempts from fringe benefits tax what are commonly known as "fly-in fly-out" ("FIFO") arrangements. The concession extends, inter alia, to where an employee's usual place of employment is at a location in a State or internal Territory but not in, or adjacent to, an eligible urban area (see s 140 FBTAA) and where, having regard to the respective locations of the usual place of employment and the employee's usual place of residence, it would be unreasonable to expect the employee to travel between them on a daily basis on work days (s 47(7)(e)). If the terms of s 47(7)(e) manifest the policy underlying this concession, the Court was not informed why the concession was not applicable in the present case, but there is no utility to resolving the issue in the present case in speculating why not. It suffices to say that the proximity of the Midwest Project to Geraldton probably provides the answer. 5 So while the actual facts of this case do not fall for consideration within the stream of jurisprudence that has ebbed and flowed for over 55 years since the decision of the High Court of Australia in Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation (1958) 100 CLR 478 ("Lunney"), those facts as altered by the statutory hypothesis that is the "otherwise deductible rule" in s 52(1) FBTAA, certainly do. 6 In Lunney (at 485), the question of income tax law which Dixon CJ took "as settled for the last two generations", and was not prepared to have "ripped up now" by the Court, was that: [T]he fares paid by ordinary people to enable them to go day by day to their regular place of employment or business and back to their homes are [not] deductible expenses allowable against the assessable income earned by the employment or business. 7 His Honour went on to observe that both in Australia and England the view had always prevailed that expenses of travelling from home to work or business and back again are not deductible; and that an explanation of how this came about in England was given by Denning LJ in the Court of Appeal in Newsom v Robertson (Inspector of Taxes) [1953] 1 Ch 7 at 15, 16; the explanation being that expenses of travel are incurred in order to enable the taxpayer to live away from his work. They are living expenses, not business expenses. His Lordship put it, thus (at 16): A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not. It is a living expense as distinct from a business expense. 8 Dixon CJ in Lunney adopted the reasoning with "misgivings about the conclusion", at least "if the matter were to be worked out all over again on bare reason" (at 486), and McTiernan J dissented. The other members of the Court (Williams, Kitto and Taylor JJ) accepted the reasoning without expressing any reservation (at 500). Their Honours, by reference to earlier decisions of the Court in Ronpibon Tin No Liability; Tongkah Compound No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 and in Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 concluded (at 499) that "to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing such income". 9 The relevant facts in Lunney were what might, these days, be colloquially described as "vanilla". The fares in question were bus fares incurred by Mr Lunney in travelling from near his residence at Narraweena, a residential suburb of Sydney, to Wynyard station and return, Monday to Friday. The distance between his residence and the point where he boarded or alighted from the bus and the distance between the office of the company, where he reported, both at the commencement and at the completion of each day's work, and Wynyard station, he covered on foot. The only other relevant fact that appears from the stated case is what appears at para 2, namely: He was required to report at the office of the company at No. 11 Darling Harbour, both at the commencement and completion of each day's work. From the said office he travelled at the expense of the company to various parts of the Port of Sydney to carry out his work. The relevance of this fact to the case at hand will become apparent below. 10 Over forty years later, the High Court of Australia again had occasion to consider the question of the deductibility of travel expenses in the less "vanilla" factual context of a taxpayer who was employed as a pilot by an airline operating out of Sydney and who lived on a property in New South Wales where he conducted a deer farming business; he claimed the expenses he incurred in frequently travelling between his farm and Sydney Airport as allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936"). In upholding the Commissioner's appeal from a Full Court of this Court, the majority (Gleeson CJ, Kirby and Hayne JJ) in Commissioner of Taxation of the Commonwealth of Australia v Payne (2001) 202 CLR 93 after referring to the approach of the plurality in Lunney referred to in [8] above said, at [14] and [15]: [14] When, as here, the travel is between two places of unrelated income derivation, the expense cannot be said to be incurred "in the course of "deriving income from either activity. As the majority of the Full Court recognised in this case [Payne (1999) 90 FCR 435 at 445 [41]]: "The expenditure was incurred before [the taxpayer] began to perform his duties as a pilot, or after he had fulfilled those duties. Similarly, in relation to the deer farming business." The expenditure was, as the majority of the Full Court rightly said, "not incurred in the course of his employment as a pilot, nor in the course of his deer farming business" [Payne (1999) 90 FCR 435 at 445 [41]]. The taxpayer's travel occurred in the intervals between the two income-producing activities. The travel did not occur while the taxpayer was engaged in either activity. To adopt and adapt the language used in Ronpibon, neither the taxpayer's employment as a pilot nor the conduct of his business farming deer occasioned the outgoings for travel expenses. These outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived. In this respect they were no different from expenses incurred in travelling from home to work. [15] … The conclusion that the travel occurred in the intervals between the two income-producing activities, when the taxpayer was not engaged in either of them, denies the requisite connection between any part of the outgoing and the gaining or producing of assessable income. 11 In dissent, Gummow and Gaudron JJ were not prepared to conclude (see [51]) that the "principle" to be derived from the holding in Lunney was determinative of an outcome that travel expenses are insufficiently connected with income derivation to attract a deduction under the first limb of s 51(1), at least where what is involved is the expenses of movement between two or more places of work or business activity; nor where the taxpayer also resides at one of those places. 12 While the factual context of the case at hand is very different from that in Payne, this case raises the same issue: that is, whether the "principle" to be derived from the holding in Lunney is determinative of an answer that the hypothetical expenses in question in this case are not deductible, as the primary judge concluded. With great respect, for the reasons which follow, I cannot agree with her Honour's conclusion. The Factual Context 13 The primary judge found that there was no material dispute about the facts: Reasons ("R") [4]. The respective notices of appeal raised identical grounds of appeal and none of those grounds put in issue findings of fact below or that the primary judge erred in not making a particular finding of fact on the evidence. And so much was common ground in the appellants' and the respondent's ("Commissioner") written outline of submissions relied on at the hearing of the appeals. 14 The John Holland group of companies (of which John Holland Group Pty Ltd ("JHG") and John Holland Pty Ltd ("JHPL") (collectively "John Holland") were members) conducted a large rail construction and maintenance business (known as "JH Rail") throughout Australia. At the time of the Midwest Project, JH Rail had a "pipeline" of projects over the following three or more years. To carry out its rail projects, JH Rail needed to be able to deploy skilled people to projects in locations (sometimes hundreds of kilometres distant) as those projects came on line. JH Rail could not satisfy its skilled worker requirements from the pool of available workers resident near each project. JH Rail thus sought to employ, train and maintain its own skilled labour force available for deployment on a project by-project basis. Where possible, JH Rail transferred employees from one project to another in order to maintain continuity of employment. Upon failing to identify a role on another project for an employee (but only then), the employee would be made redundant (with the prospect of being re­employed in the future). 15 Most employees of JH Rail's labour force in Western Australia lived in Perth. Most of JH Rail's projects in Western Australia were located in remote and regional areas, including the Midwest Project which involved a rail upgrade construction project on a railway line east of Geraldton in Western Australia between May 2011 and September 2012. Most projects lasted about a year, and employees commonly worked on a project for only part of its duration according to the skills and expertise required from time to time. Most areas in which a project was located did not have sufficient accommodation available to function as permanent accommodation for employees and their families. 16 John Holland's employees were designated as either "workforce" (who were paid by an hourly rate) or "staff" (salaried workers) – as to which see below. On the Midwest Project, JH Rail offered to relocate the residences of "staff" (but not "workforce"). Consistent with the employees generally declining to relocate their residences to remote regions in which short term projects were undertaken, only one out of 31 staff employed on the Midwest Project from time to time accepted the offer to relocate his or her residence. The employees who lived in Perth and worked on the Midwest Project were FIFO employees (see below). FIFO employees on the Midwest Project generally worked a "2 and 1 roster" – two weeks working at the project site, followed by one week of rest and recreation ("R&R") at home in Perth. 17 John Holland arranged and paid for apartment style group accommodation for employees at a resort in Geraldton. It was suitable for employees but not for partners and families, who were not generally permitted to stay at the accommodation. 18 JHPL employed all work force employees and JHG employed all staff employees. There were approximately 91 workforce and 31 staff employees employed on the Midwest Project. All employees entered into individual employment contracts. Standard terms of employment were used for staff and workforce respectively. 19 ("Workforce" terms of employment): The terms of the employment contracts for workforce employees were prepared in conformity with the "John Holland Pty Ltd and RTBU – Rail Maintenance Agreement – 2009-2012" ("2009 Rail Agreement"). The Workforce employees commenced their "rostered-on" employment duties from the time of their arrival at Perth Airport ("Point of Hire"). Their travel on the flight from Perth Airport to Geraldton, and the return flight from Geraldton to Perth Airport, occurred during rostered-on work time, during which Workforce employees were remunerated at the applicable hourly rate. Ordinarily, workforce employees were entitled to 10–14 days' notice of a change in project location. 20 ("Staff' terms of employment): Staff employees were not covered by the 2009 Rail Agreement. Staff were paid an annual salary rather than wages, which salary was calculated to reflect the hours worked to complete the employee's responsibilities. The standard terms of employment provided that staff may be required to travel to project locations and to spend days away from the employee's usual place of work. The standard terms for the Midwest Project also provided that a Project Allowance of 25% of the employee's annual salary was payable to compensate for the project location and "other disabilities associated with the [Midwest Project]". 21 The terms of employment of both workforce and staff employees required them to act in accordance with directions from John Holland and to observe certain codes of conduct. During travel "on the employer's time … [the employees] were bound to comply with all JH Rail directives and policies, and disciplinary action [including dismissal] could result if an employee breached any such requirement during a flight". 22 All travel between Perth Airport and Geraldton was controlled, arranged and paid for by John Holland. Employees had no control over their FIFO travel arrangements. Specifically, John Holland directed that the employees undertake the travel by requiring them to present themselves at the "point of hire" – i.e. Perth Airport – at a specified time on the last day of R&R to embark on a specified flight paid for by John Holland from Perth to Geraldton, being either a commercial flight or more commonly a flight chartered by John Holland exclusively for the employees. John Holland also directed the employees to travel on flights from Geraldton to Perth on the last day of the "rostered on" period. 23 Pursuant to the directions referred to above, and the terms and conditions of employment, the FIFO arrangements for the Midwest Project involved the following: (a) on the day on which they were to fly to Geraldton employees travelled at their own expense to the "point of hire" (Perth Airport) as directed by John Holland; (b) the employees embarked as directed on the flight from Perth to Geraldton arranged and paid for by John Holland; (c) John Holland arranged and paid for the employees' transport from Geraldton Airport to the accommodation, which accommodation was also arranged and paid for by John Holland; (d) on the last day of the rostered-on period, John Holland arranged and paid for transport for the employees from the project accommodation to Geraldton Airport, and the employees embarked on a flight back to Perth, which had been arranged and paid for by John Holland; and (e) the employees made their way home from Perth Airport at their own expense. 24 Travel each way between Perth Airport and the project accommodation occurred during working time for which the employees were rostered-on, and paid. Statutory Context 25 Section 45 FBTAA provides: A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). 26 The provision of flights by John Holland to the employees was the provision of a "residual benefit" and therefore a "residual fringe benefit" by virtue of the definition of that phrase in s 136(1) FBTAA. 27 Section 136(1) FBTAA relevantly provides that "external non-period residual fringe benefit" means "a non-period residual fringe benefit other than an in-house residual fringe benefit". 28 The provision of flights by John Holland to the employees was the provision of an "external non-period residual fringe benefit" because it was not an "in-house residual fringe benefit" nor a "period residual fringe benefit" as these phrases are defined in s 136(1) FBTAA. 29 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 … 30 It is common ground that the only question in this case is whether deductions for expenditure hypothetically incurred by the employees would have been allowed to the employee under s 8-1 of the ITAA 1997, which relevantly provided: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) … (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or … The Reasoning and Conclusion of the Primary Judge 31 The reasoning and conclusion of the primary judge is encapsulated in R [28]–[34], the salient aspects of which are reproduced below: [28] I find much in the applicants' submissions persuasive. In particular, unlike the circumstances in Lunney, the employees are paid for the time during which they travel. As such, they are travelling not only for the purpose of, but also in the course of their employment. They are also directed to travel in a particular way and at particular times by their employer. Their travel, unlike the case in Lunney, is not at their discretion. To the extent that the Commissioner suggested that the employees, at their election, could control their own travel arrangements, the evidence is to the contrary. The employers arranged the flights and the transport to and from the airports. Although an employee could request some special arrangement (on one occasion, an employee drove to the project location), the general arrangement was that employees travelled in accordance with arrangements the employers made. [29] … [30] Untrammelled by authority, it is likely that I would find the features identified above sufficient to conclude that cost of flights was incurred in each employee gaining or producing their assessable income within the meaning of s 8-1. Other considerations emphasised by the authorities do not permit me to reach this conclusion. [31] … [32] … In the present case, there was no suggestion in the evidence that the employees were doing anything other than travelling to their place of work. While they were being paid to travel, and thus travelling was undertaken as part of their employment, that was a result of the deal negotiated between the employers and the employees. Their place of work remained the project location. On the statutory hypothesis that each employee paid the cost of flights, their work productive of income remained the work they did at the project location. [33] Third, while there were many difficulties with employees relocating to the project location for the duration of the project, relocation is an option which the employers offered. The fact that the overwhelming majority of employees opted not to relocate remained their choice. On this basis, it is difficult to see why the object of the travel was not to enable the employees to live where they chose, distant from the project location. On this basis, the case is indistinguishable from Newsom v Robertson (1953) 1 Ch 7 on which the High Court relied in Lunney. [34] Fourth, while Lunney is not exhaustive, the fact that the travel is undertaken on a periodic rather than a daily basis does not seem a relevant distinguishing feature. The important distinguishing features are that in the present case the travel is undertaken at the employer's direction and the employee is paid for the period of travel. But the character of the outgoing, assuming that the employees had paid for their own flights, remains the same. 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. If, as Northrop J said in Genys, the question is the "essential character" of the outgoing, then, on the hypothesis of payment by each employee, the character of the outgoing is too similar to that in Lunney to reach a different conclusion, particularly when regard is had to the caution of Dixon CJ in that case. While I do not consider the important distinctions in this case to be "refined and rather insubstantial", as his Honour referred to in Lunney at 486, I also do not consider them sufficient to reach a different conclusion from the view which, as Dixon CJ put it (at 485), "has always prevailed that expenses of travelling from home to work or business and back again are not deductible". Analysis of the Primary Judge's Reasoning 32 With great respect to the learned primary judge, the difficulty I have with her Honour's conclusion is that it is at odds with her Honour's findings of secondary fact. For example, at R[28], her Honour found that the employees were travelling "in the course of their employment". That finding is totally at odds with the finding of the plurality in Lunney that the expenses which the taxpayer incurred in travelling on the bus from near his home at Narraweena to Wynyard Station and return, were not incurred in travelling in the course of his employment. 33 Again, for example, her Honour found, at R [32], that the "travelling was undertaken as part of their employment", but, somehow, that was to be discounted because "that was a result of the deal negotiated between the employers and the employees". I do not understand how that deal has anything to do with the answer to the question posed by the statutory hypothesis. 34 At R [32], her Honour found that the employees "work productive of income remained the work they did at the project location", but that overlooks her Honour's finding two paragraphs later (at R [34]) that "the travel is undertaken at the employer's direction and the employee is paid for the period of travel". As her Honour observed, they are "important distinguishing features" from what I have called the "vanilla" factual context considered in Lunney. 35 For example, if an employed solicitor in a Sydney law firm was required by his employer to travel to Melbourne to have the carriage of litigation in that city on behalf of a client of his employer, with the employer picking up the tab for the employee's air fares, it could not be seriously suggested that under the statutory hypothesis in s 52(1) FBTAA, the employee solicitor would not be entitled to an allowable deduction for the full cost of his airfares, irrespective of whether he travelled to Sydney Airport from his house or from his office and irrespective of whether on arrival in Melbourne he went to a hotel or straight to court. True it is that the main purpose of his travel is to conduct the litigation in Melbourne, but it is somewhat artificial to say that that is what is productive of the employee's income. He is being paid for performing his duties as an employed solicitor and those duties include complying with the directions of his employer, including travelling to Melbourne (and returning to Sydney) to conduct the litigation there. That was certainly the approach of the majority in Commissioner of Taxation of the Commonwealth of Australia v Day (2008) 236 CLR 163, in particular at [20] and [30]–[33]. 36 At R [34], her Honour said: "[W]hile Lunney is not exhaustive, the fact that the travel is undertaken on a periodic rather than a daily basis does not seem a relevant distinguishing feature". But the difference does, with respect, point to the costs of such periodic air travel on paid time being more likely characterised as an "incident of the employment": Roads and Traffic Authority of New South Wales v Commissioner of Taxation (1993) 43 FCR 223 at 240 per Hill J, than the day to day bus travel of Mr Lunney before he "clocked on" and after he "clocked off" each day. 37 Finally, at R [34], her Honour concluded that while she did not consider the "important distinction" in this case to be "refined and rather insubstantial", as Dixon CJ referred to in Lunney at 486, she did not consider them sufficient to reach a different conclusion from the view which, as the Chief Justice put it at 485, "has always prevailed that expenses of travelling from home to work or business and back again are not deductible". In coming to this conclusion, her Honour relied on what was said by Northrop J in Commissioner of Taxation v Genys (1987) 17 FCR 495 at 498: Whether or not such expenditure is deductible depends not on its purpose or whether it is an essential prerequisite to the derivation of income, but on whether the essential character is relevant and incidental to such derivation. 38 This, of course, was taken from what the plurality said in Lunney at 497: In Ronpibon Tin N. L. and Tongkah Compound N. L. v. Federal Commissioner of Taxation the passage quoted above was immediately followed by the observation "The words 'incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income". Thereafter, it was said: "In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income". In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself. And later at 498, 499: It is, of course, beyond question that unless an employee attends at this place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived. 39 Of the above passages from the joint judgment in Lunney, Professor Parsons wrote (Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (Law Book Company, 1985) at [8.62]: It appears that the determination of "essential character" makes possible a conclusion on relevance. The determination of essential character involves the adoption of a description of the expense which affords an answer to the question of relevance. The description in effect asserts the relevance or want of relevance of the expense. The analysis tends rather to cloak than to reveal the process of decision. No analysis can deny the evaluation that must be made in concluding that an expense is relevant or irrelevant. 40 Notably, the majority in Payne did not refer to the "essential character" of the expenditure in coming to the conclusion they did, while the minority quoted the extract from the learned Professor's work in support of their statement at [47] that: In various fields of the law the actual process of decision is obscured rather than displayed by reference to the criterion of essential character. See too Day at [29] where the majority said that reference in some cases to the expenditure having an "essential characteristic" "…is perhaps better understood as a statement of conclusion than of reasoning". 41 In my view, the "essential character" of the expenditure is a distraction to the task of determining whether it is relevant to the income derivation mandated by the statute, namely, whether it is in, or in the course of, gaining or producing such income; if not, it is irrelevant, and not deductible. The "essential character" test has an affinity with the reasoning of Denning LJ in Newsom v Robertson and his Lordship's dichotomy between living expenses and business expenses. Such a test may be apt with respect to the text of the United Kingdom legislation of whether "an outgoing is wholly and exclusively paid out or expended for the purposes of a trade or profession"; it does not seem to me to be apt where the test is, as it is in this country, the relevance of the expenditure to income derivation and where the statutory test of relevance is textually expressed in terms of the expenditure being in, or in the course of, gaining or producing income. Consideration and Conclusion 42 Whatever the differences and similarities between the expenditure of the employees on air travel under the statutory hypothesis in s 52(1) FBTAA in this case and the expenditure of Mr Lunney on the bus travel in his case, as her Honour the learned primary judge found, the former are not, to use the terminology of Dixon CJ in Lunney, "refined and rather insubstantial distinctions" (at 486). 43 The expenditure in this case is more akin to the expenditure in Lunney referred to in para 2 of the stated case, and referred to in [9] above, namely, the expenditure incurred by the company in transporting Mr Lunney to various parts of the Port of Sydney to carry out his work after he first reported to the office of the company at No 11 Darling Harbour and returning him to that office from the work sites at the end of each working day. The provision of such travel would be a residual fringe benefit and, on the Commissioner's argument, Mr Lunney would not be entitled to an allowable deduction for the cost of such travel under the statutory hypothesis in s 52(1) FBTAA because it was incurred in travelling to the work sites on the Port of Sydney, and it was his work at the work sites, not his travel to them, that was productive of his income. With respect, the argument does not withstand close scrutiny. True it is that there are differences of degree between the extent and cost of the travel in transporting Mr Lunney to the various parts of the Port of Sydney as against transporting the John Holland employees to Geraldton in this case, but the principle by reference to which the issue must to be determined, remains the same. 44 In my view, 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 commences and ceases. The contract of employment so provides. The fact that Perth Airport is not an area or premises owned or leased by John Holland, is irrelevant. In this respect, there is no difference between Perth Airport and No 11 Darling Harbour. 45 From the time the John Holland employees, both Workforce and Staff, checked in at Perth Airport 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. 46 For the foregoing reasons, I would allow the appeal with costs. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 11 June 2015 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1397 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND GROUP PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1398 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND GROUP PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: EDMONDS, LOGAN AND PAGONE JJ DATE: 11 JUNE 2015 PLACE: SYDNEY REASONS FOR JUDGMENT LOGAN J: 47 I have had the advantage of reading in draft the judgments respectively prepared by Edmonds J and by Pagone J. I agree with the orders which they propose, for the reasons each gives. I only wish to add the following. 48 Once it was concluded, as it had to be on the evidence, that both "workforce" and "staff" employees were on paid duty under the control and direction of the appellant on and from their arrival at Perth Airport and during the flight from there to Geraldton the outcome of the case was dictated by Lunney v Commissioner of Taxation; Hayley v Commissioner of Taxation (1957–1958) 100 CLR 478. 49 It is all too easy to focus one's attention just on the remote project site and on the work undertaken there, instead of all of the circumstances which occur in the course of the gaining or producing of assessable income. That is how the respondent led himself into error and how, in turn, the learned primary judge was led into error. I certify that the preceding three (3) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate: Dated: 11 June 2015 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1397 of 2014 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: JOHN HOLLAND GROUP PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1398 of 2014 BETWEEN: JOHN HOLLAND PTY LTD Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGES: EDMONDS, LOGAN AND PAGONE JJ DATE: 11 JUNE 2015 PLACE: SYDNEY REASONS FOR JUDGMENT PAGONE J: 50 The issue in this appeal is whether employees of John Holland Group Pty Ltd and John Holland Pty Ltd attract the "otherwise deductible" rule in s 52 of the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the FBT Act"). John Holland Group and John Holland have been assessed to fringe benefits tax under s 66 on their respective fringe benefits taxable amounts in relation to the cost of their employees' air travel between Perth and Geraldton. Their liability is to be reduced under s 52 of the FBT Act if their employees would have been entitled to a deduction under s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") for the amounts of expenditure on that air travel upon the hypothesis that the employees had paid the amounts. 51 The Commissioner's contention that the employees would not have been entitled to a deduction depends upon whether an employee's air travel between Perth airport and Geraldton was travel between the employee's residence and a place of work or whether that travel was undertaken in the course of the employee's employment. It has long been established that an employee is not entitled to a tax deduction for the cost of travel between home and work notwithstanding that the travel to work might be a prerequisite to the derivation of income or that the travel is connected with the derivation of income by the employee: Lunney v Commissioner of Taxation (1957) 100 CLR 478, 485-6; 498-9; Newsom v Robertson [1953] 1 Ch 7. The principle in Lunney was applied in Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at 101 [14] to deny a deduction for travel between two places of unrelated income derivation. 52 The allowability of a deduction under s 8-1(1)(a) requires, under the first limb, that any loss or outgoing be incurred "in" the gaining or producing of assessable income and excludes losses or outgoings which may otherwise have been incurred "for the purpose of" the derivation of assessable income or as a prerequisite to its derivation. The principle was explained in the joint judgment of Gleeson CJ, Kirby and Hayne JJ in Payne at 102 [16]: The principle which had to be applied in [Lunney's] case, and must be applied in this, is one which limits the allowance of a deduction for outgoings to those outgoings that are incurred in the course of deriving assessable income. It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. [Emphases in original] The relevant connection of a loss or outgoing with the derivation of income which must be demonstrated for the loss or outgoing to fall within s 8-1(1)(a) is, as their Honours said at 99 [9], that the loss or outgoing be incurred "in" gaining or producing income. The connection is not satisfied by showing some broader connection such as that the loss or outgoing was incurred "in connection with" the derivation of assessable income, that it was incurred "for the purpose of" deriving such income, or that it was a prerequisite to the derivation of income. 53 The taxpayers, however, contended that the hypothetical expenditure of the employees, which was required to be considered by s 52 of the FBT Act, in this case, would have been incurred "in" the derivation of income by the employees and that the decision in Lunney itself provides an informative analogy to require that conclusion. The appeals in Lunney raised for the court's consideration the question, described by Dixon CJ at 485, as "whether the fares paid by ordinary people to enable them to go day by day to their regular place of employment or business and back to their homes are deductible expenses allowable against the assessable income earned by the employment or business". Mr Lunney earned his income as an employee and claimed a deduction for the cost of his travel from home to work. He had been employed as a ship's joiner by the Union Steamship Company of New Zealand for the hours from 7.45am to 4.30pm daily Mondays to Fridays and: […] was required to report at the office of the company at No. 11 Darling Harbour, both at the commencement and at the completion of each day's work. From the said office he travelled at the expense of the company to various parts of the port of Sydney to carry out his work. 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. Counsel for John Holland Group and John Holland 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 submitted to be "in" their employment from the moment of their arrival at Perth airport and were not travelling "to" their employment at Geraldton. In contrast, the Commissioner contended that the employees were employed, and paid, to undertake activities at Geraldton and that their employment did not include their travel from Perth airport to Geraldton. 54 It is not uncommon for an employee's employment to include travel as a necessary incident of the employment. A number of examples in different fields of employment were considered during the course of argument at the hearing of the appeal. Thus, for example, a person employed as a professional footballer to train and play football may also be required to travel interstate as a necessary incident of the employment as a footballer. Government employees may, similarly, be required to travel to different locations for the purpose of undertaking tasks and duties at the place of arrival. In each case the travel may not be the primary activity for which the person is employed, but may be a necessary incident of the employment and undertaken in, and as part of, the employment for which the employee may be remunerated without specific reference to the travel. 55 Section 52 of the FBT Act requires a conclusion to be reached about whether the hypothetical expenditure of money would have been allowable as a deduction to the employee if the employee had incurred that expenditure. The hypothesis to be considered by s 52 requires the making of the assumption that the expenditure actually incurred by the employer had been incurred by the employee. The hypothesis does not require, or permit, the consideration of alternative facts or circumstances other than that the actual unreimbursed expenditure had been incurred and paid by the recipient of the benefit. The section does not permit, or require, the Commissioner to hypothesise about other reasonably likely alternative losses or outgoings but, rather, calls for a judgment about whether the expenditure actually incurred would have entitled the employee to obtain a deduction upon the hypothesis that it had been incurred by the employee rather than the employer. 56 A consideration of the hypothesis in this case requires the conclusion that the employees would have been entitled to a deduction for the cost of travel from Perth airport to Geraldton because the travel between those two locations was part of their employment. John Holland Group and John Holland were both members of the John Holland Group of companies which conducted a large rail construction and maintenance business ("JH Rail") throughout Australia. The labour force were classified as either "workforce" (who were paid an hourly rate) or "staff" (who were salaried workers). John Holland employed all "workforce" employees and John Holland Group employed all "staff" employees. There were approximately 91 workforce and 31 staff employees employed by them on a rail upgrade construction project on a railway line east of Geraldton in Western Australia between May 2011 and September 2012 ("the Midwest Project"). The relevant, and uncontested, facts as set out by her Honour, were: 6 John Holland Group Pty Ltd (John Holland Group), the applicant in proceeding NSD 357 of 2014, has a rail business, referred to as 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 is involved are connected with the requirements of mining projects. 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. In JH Rail's experience, its work requirements could not be satisfied from the available pools of local workers. JH Rail thus sought to employ, train and maintain its own skilled labour force available for deployment on a project-by-project basis. Once an employee was demobilised from one project, JH Rail would try to transfer the employee to another project to maintain the continuity of employment. Upon failing (but only then), the employee would be made redundant (with the prospect of being re-employed in the future. This approach was possible because, before and at the time of the Midwest Project being undertaken, JH Rail had three or more years of projects in the pipeline. 7 Most employees of JH Rail's labour force in Western Australia lived in Perth. Most of JH Rail's 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. JH Rail's employees generally did not take up an option they were offered of relocating to a place near the project for various reasons. 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. 8 The FIFO arrangements for the Midwest Project involved the following: • Employees are designated as either "workforce" or "staff". John Holland Pty Ltd, the applicant in proceeding NSD 358 of 2014, employed all workforce employees. John Holland Group employed all staff employees. 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 (the 2009 Rail Agreement). • There were approximately 91 workforce and 31 staff employees employed on the Midwest Project. • Employees travelled at their own expense to Perth airport. Perth airport was designated in JH Rail documents as the "point of hire". • The relevant employer would pay for the employees' flights from Perth to Geraldton, the nearest airport to the Midwest Project. Most flights were chartered by the employers. • JH Rail would arrange for transport of the employee, at the employer's cost, to the accommodation, also arranged and paid for 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. • It is possible to ascertain from pay slips that all flights returning from Geraldton to Perth occurred while the employee was rostered on. That is, the flight was undertaken on the time of the employer. Although it is not possible to ascertain from pay slips that the flights from Perth to Geraldton were also undertaken while the employee was rostered on (the periods of rostering did not coincide with pay periods), there is no real doubt that this was the case. Amongst other things, it was a requirement of the 2009 Rail Agreement. • Following a two week or longer rostered on schedule, the employees would have a period of at least one week when they were rostered off – referred to as "R&R" (or rest and recreation) on the pay slips. • Employees, travelling on the employer's time (as they were), were bound to comply with all JH Rail directives and policies, and disciplinary action could result if an employee breached any such requirement during a flight. The employees' arrival at Perth airport from their respective 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 and would be entitled to a deduction for the cost of air travel from Perth airport to Geraldton. 57 The trial judge concluded that established authority required the conclusion that the employees would not be entitled to a deduction if they had incurred the cost of air travel from Perth airport to the project location. At [30] her Honour said: Untrammelled by authority, it is likely that I would find the features identified above sufficient to conclude that cost of flights was incurred in each employee gaining or producing their assessable income within the meaning of s 8-1. Other considerations emphasised by the authorities do not permit me to reach this conclusion. That conclusion depended upon her Honour's view that the employee's place of work was the project location and that their employment did not commence from arrival at the airport. At [27] her Honour noted a submission for the taxpayers (in reliance upon the decision in Commissioner of Taxation v Day (2008) 236 CLR 163) "that the travel between Perth and Geraldton was within the scope of the employee's employment and productive of assessable income". At [32] her Honour said: Second, in Day itself the High Court said that "[e]ssential to the inquiry is the determination of what it is that is productive of assessable income" (at [31]). In the present case, there was no suggestion in the evidence that the employees were doing anything other than travelling to their place of work. While they were being paid to travel, and thus travelling was undertaken as part of their employment, that was a result of the deal negotiated between the employers and the employees. Their place of work remained the project location. On the statutory hypothesis that each employee paid the cost of flights, their work productive of income remained the work they did at the project location. The facts, as her Honour had observed at the outset, were not in dispute but her Honour was in error to conclude that the authorities required the conclusion that the cost of flights would not have been incurred by the employees in gaining or producing their assessable income. The answer to the question in dispute depended upon whether the travel undertaken by the employees between Perth airport and Geraldton was within the employment of the employees. The Commissioner's challenge had been that the scope of the employment was to be considered more narrowly than the taxpayers had submitted in reliance upon Day, namely, as the performance of the duties at the project location and to exclude the travel by air from Perth airport to the project location which the employer required the employees to undertake. The taxpayers' reliance upon what had been said by the High Court in Commissioner of Taxation v Day (2008) 236 CLR 163 had been directed to the proposition that the employee's activities included the travel and, therefore, that the travel was undertaken by those employees as part of the employment, albeit that it might be to undertake activities at the project location in much the same way as the travel by, for example, a tax official from one city airport to another might be ancillary to attending the location of a taxpayer under audit at the place of destination. 58 The authorities did not require the conclusion that the employees would not be entitled to a tax deduction for the travel between Perth airport and Geraldton if they had incurred the outgoing themselves. Her Honour erred by taking too narrow a view of what was productive of the employee's assessable income. In Commissioner of Taxation v Day (2008) 236 CLR 163 the majority said in a joint judgment at 180, [33]: That no narrow approach should be taken to the question of what is productive of a taxpayer's income is confirmed by cases which acknowledge that account should be taken of the whole of the operations of the business concerned in determining questions of deductibility. A similar approach should be taken to what is productive of a salary-earner's income, whether it be described as employment or by reference to a bundle of tasks to be performed and duties to be observed. In some cases those duties to be observed may extend beyond what is contained in a contract of employment. In Cooper, Hill J, referring to the statement in Ronpibon Tin, observed that it will often be necessary to analyse with some care the operations or activities regularly carried on by the taxpayer, and Lockhart J referred to the need to have regard to the terms and conditions of a taxpayer's employment. A reference to the "day-to-day" activities undertaken by a taxpayer may not be a sufficient description of what their position involves. So, in Federal Commissioner of Taxation v Finn expenses of a senior design architect in the public service incurred in travelling in order to improve the taxpayer's knowledge were considered in the context of his employment by the government in accordance with his conditions of service, and as referable to his prospects of promotion. The essential difficulty with the Commissioner's argument in this case is that it does not fully recognise the scope of the respondent's role as an officer of the Public Service and what his office exposed him to. Travelling from Perth airport to Geraldton was part of the employment of those employees. Each of the employees commenced their "rostered on" duties on 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. The terms of employment of the "workforce" employees provided that the employees commenced their "rostered on" employment duties from their time of arrival at Perth airport. Those employees were governed by the 2009 Rail Agreement which expressly provided in cl 24.5.2 that the time in travel from an employee's Home Station was part of an employee's working time for the roster period. Staff employees were not covered by the 2009 Rail Agreement but the standard terms of employment provided that staff employees may be required to travel to project locations and to spend days away from their usual place of work. The standard terms of employment provided for a project allowance to compensate for the project location and other disabilities associated with the projects. Both workforce and staff employees were required to act in accordance with directions from their employers, including to observe codes of conduct whilst travelling by aeroplane from their departure airport to the point of destination. The outgoing incurred in the travel from the departure airport to the project location is not excluded from deductibility as a loss or outgoing incurred "for the purpose" of, but not "in the course of", deriving assessable income: cf Commissioner of Taxation v Payne (2001) 202 CLR 93, 102, [16]. An outgoing is not deductible merely because it is a necessary prerequisite to the derivation of income (see Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171, 173-4, 175-6), but it is allowable as a deduction if incurred "in" the derivation of income. 59 The hypothetical expenditure of the employees in this case, unlike that considered in Commissioner of Taxation v Cooper (1991) 29 FCR 177, would have been incurred in an activity which was part of the employment. In Cooper, the taxpayer, a professional rugby league player, had been directed by his employer to consume specified quantities of steak, potato, bread, beer and Sustagen each week in addition to his normal meals in order to retain his "optimum playing weight" in the off-season. The deduction he claimed for the expenditure incurred in acquiring that additional food and drink can readily enough be seen as having been incurred "in connection with", and perhaps as a pre-requisite for, the income producing activity, but not as part of the income producing activity itself. Lockhart J said at 185: The taxpayer incurred the expenditure on additional food and drink for the purpose of increasing his weight and thus to play professional football and earn assessable income. But its character as the cost of additional food and drink is neither relevant nor incidental to the training for and playing of football matches, which is the activity by which he gained assessable income. The expenditure was not incurred in or in the course of that activity. The taxpayer was paid money to train for and play football, not to consume food and drink. His income-producing activities did not include the consumption of food and drink. Hill J said at 199-200: The income-producing activities to be considered in the present case are training for and playing football. It is for these activities that a professional footballer is paid. The income-producing activities do not include the taking of food, albeit that unless food is eaten, the player would be unable to play. Expenditure on food, even as here "additional food" does not form part of expenditure related to the income-producing activities of playing football or training. The conclusion in that case that the consumption of food was not part of the income producing activities of playing football and training was not based upon a narrow view of the income producing activity but upon the fact that the income producing activity did not include eating, however essential that might be as a prerequisite to playing football or training or to perform those activities. In this case, in contrast, 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 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. 60 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 taxpayer in Newsom v Robertson [1953] 1 Ch 7 was not entitled to a deduction for the cost of travel between Whipsnade (the location of the taxpayer's residence) and London (the location of the taxpayer's base of work) because the former location had no relevant connection with the taxpayer's derivation of income. Somervell L.J. observed at 14 that "Whipsnade as a locality [had] nothing to do with" the taxpayer's practice and that his purpose in making the journey "was to get home in the evenings or at week-ends". Denning L.J. (as he then was) said at 16: A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not. It is a living expense as distinct from a business expense. On this reasoning I have no doubt that the commissioners were right in regard to Mr. Newsom's travelling expenses during term time. The only ground on which Mr. Millard Tucker challenged their finding during term time was because Mr. Newsom has a study at his home at Whipsnade completely equipped with law books and does a lot of work there. The commissioners did not regard this as sufficient to make his home during term time a base from which he carried on his profession, and I agree with them. His base was his chambers in Lincoln's Inn. His home was no more a base of operations than was the train by which he travelled to and fro. He worked at home just as he might work in the train, but it was not his base. The commissioners found, however, that during the vacation his professional base was not at his chambers in Lincoln's Inn but at his home at Whipsnade. I do not think this was a correct inference from the facts before them. His professional base was throughout in Lincoln's Inn, and it did not cease to be so simply because he rarely went there during the vacation. […] Romer L.J. said at 16-17: […] In order that the taxpayer's expenses of travelling to and fro between Whipsnade and London should qualify for tax purposes as permissible deductions from his gross earnings as a barrister, it must be shown that they were incurred wholly and exclusively for the purposes of his profession. The criteria for deductibility is thus 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 in contrast to the need to incur the "living expense" of the kind considered in Newsom. 61 Mr Bingham was one of the employees whose facts and circumstances were relied upon as illustrative of the employment arrangement in this case. He was appointed by John Holland as a track maintainer level 4 as a full time employee. He had initially been offered employment by John Holland Rail Pty Ltd as track maintainer level 2 on 6 January 2009 and had been located at the WestNat Infrastructure Maintenance Project. His "Home Station" was identified as "Harvey" in the letter offering him employment. On 29 April 2011 Mr Bingham was offered a transfer by John Holland as a track maintainer level 4 full time employee to be located at the Midwest Rail Upgrade Project located "between Geraldton and Mullewa". Clause 3.1 of that letter of offer identified his "home base" as being "Perth airport" with the qualification that he "may be required to travel to work at other locations as required" by the company. 62 The offer to Mr Bingham in the letter dated 29 April 2011 stipulated that the "John Holland Pty Ltd and RTBU Rail Maintenance Agreement 2009-2012" applied to his employment. That agreement had been approved under the Fair Work Act 2009 (Cth) and, by its terms, bound all employees of John Holland. Clause 24.5 of that agreement provided: 24.5 Travel 24.5.1 For the purpose of this clause all Employees are allocated a Home Station. Where the Home Station is unspecified the Home Station will be Midland. 24.5.2 All travel time where an Employee is required to travel from their Home Station to a temporary work location shall be deemed working time for the Roster period in which this occurs. Any travel time outside the Roster period shall be by mutual agreement at the applicable overtime rate. "Home Station" was defined by cl 5.10 of the agreement to mean "the designated work location, depot or facility which will be defined for individual employees at the time of appointment or at time of transfer". The time spent in travelling from Perth airport to Geraldton was part of the employee's employment for which he received wages and was entitled to an additional allowance if the period exceeded that provided for. Clause 24.5.2 of the industrial agreement deemed the travel from the Home Station to be "working time" for the roster period and specifically provided that any travel time outside of that period was to be at the applicable overtime rate by mutual agreement. Employees could make other arrangements with their employer's consent to travel to the project location other than by the means arranged by the employer but that was not an option available at the employee's unilateral discretion and was generally impractical. Mr Bingham gave evidence in cross-examination of one occasion when he travelled to Geraldton with his own motorcar but that he had done so with the agreement of his employer. The uncontradicted evidence of Mr Hikawai was that the employees were "required to report to Perth airport and embark on the [employer's] chartered flight to Geraldton". The number of staff and workforce travelling on each trip, and the distance of the travel to the project site, meant that it was more economical and convenient for the employer to book a charter flight rather than to arrange individual flights for employees with commercial airlines. 63 Mr Chan was an employee of John Holland Group whose circumstances differed from those of Mr Bingham because his flights from his "nominal base" of Perth to the project location were organised by him. Mr Chan was the commercial manager at John Holland Group. In April 2010 he was appointed as senior contracts administrator on a project known as the "RGP5 Southern Rail Project" under terms which included return economy flights between the project location and Mr Chan's nominal base in Perth. They also included company provided camp accommodation whilst on site. Mr Chan was employed by John Holland Group as a senior quality surveyor by letter of offer dated 4 May 2006. His location identified in that letter was Port Hedland in Western Australia. His duties were stated as requiring travel "to and from the areas in which John Holland operates" and that he may be required to spend days away from his usual place of work. His total remuneration included a project allowance to compensate him for the location and a living away from home allowance. A specific amount was not allocated for travel but travel was part of the duties he was expressly required to perform as part of his employment. Mr Chan was subsequently promoted and transferred on several occasions, namely, 2 May 2011, 1 November 2012 and 18 November 2013. In each case his employment conditions included a travel allowance for the cost of travel between Perth domestic airport and the project site. Mr Chan was, like Mr Bingham, also travelling "in" his employment between Perth domestic airport and the project location, and was not travelling "to" or merely "in connection with" his employment. His travel to the airport from his home was travel "to" or "in connection with" his employment, but upon arrival at the airport was performing one of the activities required of him to perform his duties. Mr Chan was not employed on terms that required his attendance only at the project location but, rather, upon terms that required his attendance at an airport from which he was required to travel to the remote location in order to undertake the particular duties at that location. The requirement to attend at the airport was one arising from the particular nature of the tasks to be performed at remote locations. He was told, at employee briefings by management, as were all employees subject to the "fly in/fly out" basis, that his employer's code of conduct and other policies applied to him, and to the other employees, whilst travelling between Perth domestic airport and the project site. Misbehaviour on flights "paid for by the company" could result in disciplinary action against him or other employees. 64 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 are required to travel as part of their employment to a remote location. Accordingly, the appeal should be allowed. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone. Associate: Dated: 11 June 2015