REASONS FOR JUDGMENT
1 The issue in these appeals is the deductibility for tax purposes of the costs the applicants incurred in flying employees from Perth to Geraldton and back for a rail upgrade construction project on a railway line east of Geraldton (the Midwest Project).
2 The Commissioner of Taxation contended that "fly-in fly-out" (FIFO) employees are undertaking another form of journey to and from work, it having long been established that such journeys are not deductible (Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478; [1958] HCA 5 (Lunney)). According to the Commissioner, it would be wrong for the Court to attempt to resolve the matter "by logic alone", the course of authority having been set long ago. The Commissioner thus counselled that the matter called for an exercise of the same restraint shown by Dixon CJ in Lunney when his Honour said (at 485-486):
Both in Australia and in England the view has always prevailed that expenses of travelling from home to work or business and back again are not deductible. An explanation of how this came about in England is given by Denning L.J. in Newsom v. Robertson [(1953) Ch. 7, at pp. 15, 16; (1953) ; 33 Tax Cas. 452, at pp. 463, 464]
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The question having been agitated it became necessary to turn to the Australian authorities by which it was settled long ago. It was surprising to find how few they were and that they depended rather upon their persuasive authority than their imperative character. But the judgment of Judge Murray in Re Adair [(1898) 4 A.L.R. (C.N.) 42] was pronounced sixty years ago and the dicta of a'Beckett and Hodges JJ. in the Victorian Supreme Court in Re Income Tax Acts [(1903) 29 V.L.R. 298; 25 A.L.T. 110] implied the same view over fifty years ago. These views have remained unquestioned up till this case. The relevant provisions of the English Income Tax Acts are not in the same terms as those of the Australian law, but the whole course of English authority involves a like conclusion. To escape from the course of reasoning on which the decisions proceed requires the taking of refined and rather insubstantial distinctions. I confess for myself, however, that if the matter were to be worked out all over again on bare reason, I should have misgivings about the conclusion. But this is just what I think the Court ought not to do. It is a question of how an undisputed principle applies. Its application was settled by old authority long accepted and always acted upon. If the whole subject is to be ripped up now it is for the legislature and not the Court to do it. I therefore would answer the questions in the special cases that the sums respectively mentioned are not deductible either wholly or in part.
3 The applicants contended that Lunney had never been considered to be an exhaustive statement about the deductibility of travel expenses and did not yield an answer to the present matter given the different facts. On the facts, they said, the costs of the flights were deductible, consistent with the meaning which had been given to the concept of "incurred in gaining or producing your assessable income" in s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997).
4 There was no material dispute about the facts.
5 Between May 2011 and September 2012, the employees of each applicant worked on the Midwest Project. The applicants paid for their respective employees to be flown from Perth to Geraldton, near where the Midwest Project was located, and back again on a rostered basis.
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.
9 There was also no dispute about the relevant provisions.
10 By operation of the Fringe Benefits Tax Assessment Act 1986 (Cth) (the FBTAA) s 136 (the definition of fringe benefit) and s 45 (which provides for residual benefits), the provision of flights by the employers to their employees will be an "external non-period residual fringe benefit".
11 Section 52 of the FBTAA operates so that the taxable value of the residual fringe benefit will be nil where the costs of the flight would be deductible by the employees under s 8-1 of the ITAA 1997 had the employees paid for the flights themselves.
12 Section 8-1(1) of the ITAA is in these terms:
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) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
13 There was no suggestion that, for the purpose of the statutory hypothesis created by s 52 of the FBTAA, it should be inferred or assumed that any of the employees (be they staff or workforce) were carrying on a business for the purpose of gaining or producing assessable income. Accordingly, it is s 8-1(1)(a) that is called up as part of the s 52 statutory hypothesis. The question which must be answered is whether, in the factual circumstances identified, the employees could deduct the cost of the flights had they paid for the flights themselves. In this regard, there was also no suggestion that staff employees were in any position different from workforce employees, or that any particular employee was in a position different from the balance of the employees. Accordingly, the facts identified above relate to all of the employees and the answer to the question posed by s 52 (and, by dint of that provision, s 8-1) will apply to all employees and, thereby, to the whole of the amount paid for flights by the applicants.
14 At this point it is appropriate to note that because of an arithmetical error in its objection John Holland Group required leave to object in respect of the 2013 tax year on the ground that the assessment is excessive in the amount of $151,078.02. This is because s 14ZZO of the Taxation Administration Act 1953 (Cth) (the TAA 1953) provides as follows:
In proceedings on an appeal under section 14ZZ to a court against an objection decision:
(a) the appellant is, unless the court orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the appellant has the burden of proving:
(i) if the taxation decision concerned is an assessment--that the assessment is excessive or otherwise incorrect and what the assessment should have been; or
(ii) in any other case--that the taxation decision should not have been made or should have been made differently.
15 The Commissioner did not object to an order being made to permit John Holland Group to appeal on the basis that the assessment was excessive in the correct amount of $151,078.02, and I made that order.
16 The applicants submitted that the costs of the flights would be deductible by the employees (had they paid those costs themselves) in accordance with s 8-1 of the ITAA 1997 on a number of bases.
17 The relevant principles were common between the parties, albeit their application leading to contentions for a different result.
18 The question is whether, had the employees paid the costs of the flights, those expenses should be characterised as "incidental and relevant" to the production of their income (Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 (Ronpibon Tin). In Ronpibon Tin at 56-57 the High Court said:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income. Their operation has been explained in cases decided under the provisions of the previous enactments: see particularly Amalgamated Zinc (de Bavay's) Ltd. v. Federal Commissioner of Taxation [(1935) 54 CLR 295, at 303-304, 307, 309, 310] and W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation [(1937) 56 CLR 290 at 300, 301, 305-306, 308].
Notwithstanding the differences in other respects in the present provision, the expression "incurred in gaining or producing the assessable income" has been left unchanged and bears the same meaning. 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.
19 In Lunney, Williams, Kitto and Taylor JJ reasoned at 496-499 as follows:
The language is simple enough and, in the main, little difficulty is encountered in recognising those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words "in gaining or producing the assessable income" and "incurred in carrying on a business for the purpose of gaining or producing such income" and to attempt to express precisely what those words mean.
For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as "incidental or relevant" to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section…
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Examination of these cases, however, readily shows that the expression "incidental and relevant" was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation, above, at pp 56, 57, 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 subsection 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. In each of the cases except the last the expenditure in question was essentially expenditure of a business character but the question was whether it was expenditure "incurred in gaining or producing the assessable income" or necessarily "incurred in carrying on a business for the purpose of gaining or producing such income" whilst in the last-mentioned case the occasion of the loss in question was properly regarded as an "incident" of the carrying on of the business which produced the taxpayer's assessable income.
The sense in which the appellants suggest that the expenditure in question in this case was incidental and relevant to the derivation of assessable income is well illustrated by the observations of Holroyd J in Re The Income Tax Acts (1903) 29 VLR 298. In that case the learned judge was concerned, inter alia, with the question whether a taxpayer was entitled to claim as a deduction expenditure incurred in travelling to and fro between his private residence and the city of Melbourne where he performed duties which enabled him to earn fees as a director of a company. His Honour said, at p 304: "These fees, like the profits of his business, are part of his income, and the money which he employs in travelling up to Melbourne in order to earn them is expended for the purpose of enabling him to earn his income and without paying those expenses, apparently, he could not earn it. I may say I do not understand the difference between the going and returning in such cases. If he goes to Melbourne, he comes back to where he lives; and in my opinion the expenses of going and returning are both necessary for the purpose of earning the money." The question in that case was whether expenditure so incurred by the taxpayer was "wholly and exclusively expended for the purposes of his trade" and may, perhaps, be said to differ substantially from that which arises in the present case. Possibly, if the learned judge had been required to apply the provisions of a section similar in terms to s 51 he would have found great difficulty in saying that the expenditure had been "incurred in gaining or producing" the taxpayer's assessable income. The grounds for his Honour's decision on the point did not, however, commend themselves entirely to the other two members of the court in that case and do not appear to have found acceptance on any other occasion on which not dissimilar problems have arisen for consideration.
The question whether the fares which were paid by the appellants are deductible under s 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It is, of course, beyond question that unless an employee attends at his 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.
The problem now before us was to some extent the subject of consideration in the recent case of Newsom v Robertson (1953) 1 Ch 7 where, pursuant to the Income Tax Assessment Act 1918, the question was whether railway fares which had been paid by a professional man in respect of journeys between his home and his professional chambers constituted "money wholly and exclusively laid out or expended for the purposes of his profession". It should be mentioned that in this case the additional fact appeared that the taxpayer consistently performed some of his professional duties at his home and the case was put as one in which the facts disclosed that the expenditure was incurred, not merely in travelling between his home and place of business, but, rather, in travelling between one place of business and another. Yet the taxpayer's claim to a deduction was rejected both in the first instance and in the Court of Appeal. None of the members of the latter court were prepared to assent to the proposition that the taxpayer's journeys were for the "purpose" of his profession; in the language of Romer LJ "The object of the journeys, both morning and evening, is not to enable a man to do his work but to live away from it" (1953) 1 Ch, at p 17. The fact that few taxpayers are free to choose whether they will live at their place of work or away from it may appear to invest this statement with a degree of artificiality. But, even in these modern times, they still have, within limits, the right to choose where their homes shall be so that a taxpayer's daily journeys between his home and place of work are rendered necessary as much by his choice of a locality for his residence as by his choice of employment or occupation. And indeed the purpose of such journeys is, at least, as much to enable him to reside at his home as to attend his place of work or business.
20 In Commissioner of Taxation v Genys (1987) 17 FCR 495; [1987] FCA 20 (Genys) Northrop J dealt with the case of a relief nursing sister who would receive telephone calls at her home requiring her to attend to work at short notice at other locations. She claimed the costs of her travel from home to the other locations on the basis that her home was also her place of work, as she received the calls there despatching her to the relief locations. At 497-498 Northrop J said:
The starting point for a consideration of the principles regarding the deductibility of travelling expenses is Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478. In that case, the Court settled the question of the deductibility of travel expenses as it arises in the simple case of an employee travelling day by day from his home to a sole place of work and back again by holding that such expenses were not "losses or outgoings" within the meaning of s 51(1) of the Tax Act. In coming to this decision, Williams, Kitto and Taylor JJ in a joint judgment, adopted the test which was formulated and developed in Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 and Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 that expenditure is invested with the requisite character if it is "relevant and incidental" to the derivation of assessable income. However, they held that a decision as to the deductibility of travelling expenses could not be arrived at by adopting the process of reasoning that unless travelling expenses are incurred in getting the taxpayer from his residence to his place of employment and back again, the taxpayer would not be able to engage in the activities from which his assessable income is derived, and that therefore, the expenditure is "relevant and incidental" to the gaining or producing of such income. 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.
Williams, Kitto and Taylor JJ proceeded to characterise the expense as a living expense, in accordance with the following observations of Denning LJ in Newsom v Robertson [1953] Ch 7 which they quoted (at 500):
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.
Their Honours agreed with Denning LJ that the essential purpose of the expenditure is not to enable a taxpayer to derive assessable income, but is a necessary consequence of living in one place and working in another.
Dixon CJ, with apparent reluctance, came to the same conclusion; McTiernan J dissented.
However, the general proposition laid down in Lunney, notwithstanding that it remains good law, is not exhaustive. In Garrett v Federal Commissioner of Taxation (1982) 58 FLR 101; (1982) 82 ATC 4060, the Supreme Court of New South Wales constituted by Lusher J, held that it had no application to the following situations:
(a) where the taxpayer keeps necessary equipment or instruments at his home which he needs for the purpose of performing his work, and by reason of its bulk, such equipment needs to be transported by vehicle from the home to his place or places of work and where the equipment is used at home.
(b) where the taxpayer incurs expenses for travel between two places of business or work; and
(c) where the employment can be construed as having commenced at the time of leaving home.
A fourth situation, not enunciated in Garrett, is where the taxpayer travels between home and shifting places of work, that is, an itinerant occupation.
Before embarking upon a consideration of Lunney and the qualifications thereto outlined above, it is emphasised that neither the decision nor the qualifications are statutory law and should not be construed as though they were the words of an Act of Parliament. The question which this court is called upon to decide is whether the travelling expenses incurred by the taxpayer are "losses or outgoings" incurred in gaining or producing the assessable income. The various categories referred to above are mere examples of how courts have applied s 51(1) in given circumstances.
21 Commissioner of Taxation v Payne (2001) 202 CLR 93; [2001] HCA 3 (Payne), a travel deductibility case, is also instructive. The question was whether the costs incurred in flying between one location of employment and another was deductible. Gleeson CJ, Kirby and Hayne JJ referred to Ronpibon Tin at [9] and continued in these terms:
11 Accepting, as one must, that "the assessable income" referred to in s 51(1) is a broad concept, it may well follow, as the majority of the Full Court said, that "[t]he relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income" [Payne v Commissioner of Taxation (1999) 90 FCR 435 at 445 [42]]. That is not to say, however, that the kind of connection which s 51(1) requires between outgoing and income is other than the connection described as "incurred in gaining or producing the assessable income". The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive of actual or expected income?
12 The application of s 51(1) to expenses incurred in travelling between a taxpayer's place of residence and a place where income is derived has long been regarded as settled. Such expenses are not deductible. In the leading decision on that question in this Court, Lunney v Federal Commissioner of Taxation [(1958) 100 CLR 478], Dixon CJ said [at 485] that the question had then "been accepted as settled for the last two generations". Having referred to two earlier decisions which were said to have settled the question [Re Adair (1898) 4 ALR (CN) 42; Re Income Tax Acts (1903) 29 VLR 298], Dixon CJ said [Lunney at 486]:
To escape from the course of reasoning on which the decisions proceed requires the taking of refined and rather insubstantial distinctions. I confess for myself, however, that if the matter were to be worked out all over again on bare reason, I should have misgivings about the conclusion. But this is just what I think the Court ought not to do. It is a question of how an undisputed principle applies. Its application was settled by old authority long accepted and always acted upon. If the whole subject is to be ripped up now it is for the legislature and not the Court to do it.
13 Three other members of the Court, Williams, Kitto and Taylor JJ, reached the same conclusion as Dixon CJ. In their joint reasons, their Honours made more extensive reference to the decisions of the Court in Ronpibon [(1949) 78 CLR 47] and Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation [(1956) 95 CLR 344]. Particular consideration was given to what is meant by "in gaining or producing the assessable income" and "incurred in carrying on a business for the purpose of gaining or producing such income" and to how those expressions apply to expenditures on travel between home and work [Lunney at 496]. Their Honours concluded [Lunney 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 his income". That is, the majority in Lunney held that a taxpayer does not demonstrate that the first limb of s 51(1) is satisfied by demonstrating only that there is some causal connection between the expenditure and derivation of the income. What must be shown is a closer and more immediate connection. The expenditure must be incurred "in the course of" gaining or producing the assessable income.
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.
16 The reference by Dixon CJ in Lunney to his misgivings "if the matter were to be worked out all over again" [at 486] was taken, in the argument of the present matter, as suggesting that the rule established in that case could not be supported logically. We do not accept that this is so, and it is not what we understand Dixon CJ to have said. As Dixon CJ pointed out, the question in Lunney was how an undisputed principle was to be applied. The principle which had to be applied in that 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. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way in which the legislation has been interpreted.
17 Moreover, the distinction has long been made and it is now too late for the Court to "rip it up" and treat the section as allowing any and all deductions having some causal connection with the derivation of assessable income. As cases like Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [(1935) 54 CLR 295] , Ronpibon [(1949) 78 CLR 47] , and Fletcher v Federal Commissioner of Taxation [(1991) 173 CLR 1] show, the distinction between outgoings incurred in the course of deriving income and other outgoings is a distinction which applies generally, not just in relation to travel expenses [Fletcher (1991) 173 CLR 1 at 17]. Once the distinction is recognised, it follows that the expenditure which was in issue in this case could not be held to be an allowable deduction.
22 Commissioner of Taxation v Day (2008) 236 CLR 163; [2008] HCA 53 (Day) related to the deductibility of legal expenses for an employee, a public servant, defending disciplinary proceedings. The Commissioner contended that "the legal expenses were incurred in defending charges of conduct extraneous to the performance of the respondent's income-producing activities and therefore cannot be said to have been incurred in the course of gaining or producing assessable income" (Day at [5]). As part of this contention, the Commissioner submitted that "the attention of s 8-1(1) is directed to specific activities which can be said to be productive of assessable income" (Day at [20]). Gummow, Hayne, Heydon and Kiefel JJ made these points in rejecting the Commissioner's case:
The references to s 8-1 requiring the expense to be incurred "in the course of" gaining or producing the assessable income "should not be taken to suggest a closer or more direct connection between expenditure and that which is productive of assessable income than the words of the provision themselves convey. Rather the words draw attention to the connection made necessary by the provision, which the majority considered on the facts of that case to be too remote" (at [22]).
Cases such as Payne and Commissioner of Taxation v Cooper (1991) 29 FCR 177; [1991] FCA 190 (Cooper) involved different facts. Accordingly:
[23] Payne was concerned with expenses incurred by the taxpayer in travelling between his place of employment as a pilot and between the place where he conducted a deer farm. The majority held that the expenditure was not incurred in the course of either income-producing activity. Adapting the language of Ronpibon Tin, their Honours held that neither the taxpayer's employment nor the conduct of the business of a deer farm occasioned the outgoings for travel expenses. Rather they were occasioned by the need for the taxpayer to be in a position where he could set about the tasks from which income would be derived [Payne at 101 [13]]. The expenditure was incurred in the interval between income-earning activities [Payne at 102 [15]]. In Cooper, Hill J referred to an outgoing which preceded an income-earning operation or activity and which came at a point too soon to be an incident of, or relevant to, that activity. His Honour described the expenditure as referable to getting the work, rather than doing it [at 198].
[24] The facts in Payne and Cooper are far removed from this case. It may also be observed that no issue arose in those cases concerning what tasks or duties are encompassed in what is productive of assessable income, as it does here. The references in those cases to the taxpayer's activities were to all that might be encompassed in an income-producing business or employment, not to discrete tasks. Those cases were concerned with the degree of connection to such a business or employment necessary for an expense to be deductible.
Further:
[29] Expressions used in the cases, such as "incidental and relevant", as referable to a business, should not be thought to add more to the meaning of provisions such as s 8-1(1)(a) of the ITAA, or to narrow its operation. They should be taken to describe an attribute of an expenditure in a particular case, rather than being an exhaustive test for ascertaining the limits of the operation of the provision [Lunney at 497]. Reference in some cases to the expenditure having an "essential characteristic" must likewise be treated with some care. As Gaudron and Gummow JJ observed in Payne, the use of the term may avoid the evaluation which the section requires [at 110-111]. It is perhaps better understood as a statement of conclusion than of reasoning.
[30] Section 8-1(1)(a) is couched in terms intended to cover any number of factual and legal situations in which expenditure is incurred by a taxpayer. Its language and breadth of application do not make possible a formula capable of application to the circumstances of each case [Lunney at 495-496]. Cases are helpful to show the connection found on the facts there present, but not always to explain how the search for the requisite connection is to be undertaken. Payne directs attention to the statement made in Ronpibon Tin, as to the question posed by a provision such as s 8-1(1)(a), as correct and appropriate to be applied. The question, as restated in Payne, is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?" [at 100 [11]]. That inquiry will provide a surer guide to ascertaining whether a loss or expenditure has been "incurred in [the course of] gaining or producing … assessable income".
[31] Essential to the inquiry is the determination of what it is that is productive of assessable income. The dichotomy to which the Commissioner's argument refers, that between proper conduct and that which is proscribed, may pose some difficulty in the delineation of tasks which the Commissioner would describe as falling within or without the scope of a person's occupation. The present case furnishes an example. It is not clear where the Commissioner would place expenses incurred with respect to charges of inefficiency, incompetence or negligence under s 56 in the carrying out by an officer of ordinary day-to-day tasks.
…
[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 [Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 309; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 at 307; Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 349-350]. 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 [at 198], and Lockhart J referred to the need to have regard to the terms and conditions of a taxpayer's employment [at 182]. 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 [(1961) 106 CLR 60; [1961] HCA 61] 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 [at 67], and as referable to his prospects of promotion [at 65-66]. 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.
23 In Spriggs v Commissioner of Taxation (2009) 239 CLR 1; [2009] HCA 22 (Spriggs), a case relating to the deductibility of management fees paid to managers of sportspeople, the difference between the two sub-limbs of s 8-1 was explained as follows:
[56] While s 8-1(1)(a) of the ITAA does not, in terms, refer to the carrying on of a "business", in considering deductibility under that provision, it may be "useful and necessary" [Federal Commissioner of Taxation v Stone (2005) 222 CLR 289; [2009] HCA 21 at 296 [16] per Gleeson CJ, Gummow, Hayne and Heydon JJ] to consider whether the taxpayer is carrying on a business. This is because the conduct of a business is one of the ways, according to the "ordinary concepts and usages of mankind", in which a person may earn income. Whether a particular loss or outgoing is deductible will depend on the way in which the taxpayer gains or produces their income. Where a taxpayer earns income from a business which they operate, a loss or outgoing may be incurred "in the course of" gaining or producing their income, when the same loss or outgoing would not be incurred "in the course of" gaining or producing income from service as an employee.
[57] Section 8-1(1)(a) is available both to a taxpayer who earns income as an employee and also to a taxpayer who earns income from a business carried on by the taxpayer [Federal Commissioner of Taxation v Green (1950) 81 CLR 313; [1950] HCA 20 at 319 per Latham CJ, McTiernan, Webb, Fullagar and Kitto JJ]. If each of the appellants was engaged in the business of exploiting their sporting prowess and associated celebrity, as contended on their behalf, it becomes necessary to ask whether the management fees were incurred in the course of gaining or producing their assessable income from that business. The answer may be different from that which would apply if the appellants were not conducting businesses, but were no more than employees.
[58] This distinction was recognised in Maddalena [Federal Commissioner of Taxation v Maddalena (1971) 45 ALJR 426 at 427; 2 ATR 541 at 549-550], where Menzies J, with whom the rest of the court agreed, said:
Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business. There is a difference of first importance for present purposes between an electrician who seeks work as an employee and an electrician who seeks contracts to do work as a principal. In the former case the electrician would not have a business; in the latter he would. In the latter, therefore, what he spent to obtain contracts to do electrical work would be properly regarded as an outgoing of his business. There is, however, a clear distinction between the two cases.
The late Professor Parsons made the same point [Income Taxation in Australia (1985) at 313 [5.33]]:
Whether the applicability of the first limb or the second limb is in question, the inquiry must be concerned with the connection between the expense and the particular process of derivation of income.
(Emphasis added.)
24 It will be recalled that there is no suggestion that, in the present matters, any workforce or staff employee was carrying on a business.
25 The applicants' case is that Lunney does not establish any general principle relating to the deductibility of travel expenses. In the present case, the employees reside in and around Perth. The employees have been directed by their employer to work at project locations remote from Perth. Day-to-day travel to and from the project location is impractical. Permanent accommodation near the project location is scarce and it is impractical for employees to relocate to that location for numerous reasons including the relatively short duration (about one year) of the project. The employees are "rostered on" during the travel which the employer requires them to undertake and are thus remunerated for their travel. The travel is thus part of the scope of their employment during which they are exposed to disciplinary action if they breach any requirement of their employer. Unlike Lunney, the employees are not undertaking day-to-day travel. They travel on a periodic basis as required by their employer. The circumstances are analogous to those in Roads and Traffic Authority of New South Wales v Federal Commissioner of Taxation (1993) 43 FCR 223 at 240 in which Hill J considered the deductibility of accommodation allowances paid to employees. Hill J said:
[the employees] are required, as an incident of their employment, by their employer and for the purposes of the employer to live close by their work site for relatively short periods of time. No question arises of their choosing to live in these places. Each of the persons in question has a permanent house in which he lives when not in camp. None of the employees spend inordinate periods of time in the camps so that the camp becomes their home. Their house is retained and the employees in question travel home at weekends. They do not remain in the camps. The costs in question here are an incident of the employment.
26 The applicants contend that the Commissioner's focus, on the aspects of the work that actually produce income, is contrary to the reasoning in Day.
27 It follows, submitted the applicants, that the travel between Perth and Geraldton was within the scope of the employees' employment and productive of assessable income. Accordingly, if the employees had paid those travel costs, the costs to them would have been deductible under s 8-1 of the ITAA 1997. By operation of s 52 of the FBTAA, the taxable value of the fringe benefit should be reduced to nil.
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 That said, I accept the Commissioner's submission that the purpose of the employers (to have available a skilled workforce ready to be deployed at remote locations) is not the issue. The statutory hypothesis is to ask whether the cost of the flights would be deductible if incurred by each employee.
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 First, the reasoning of the High Court in Day is not readily applicable to the facts of the present case. The disaggregation of activities involved in the employee's job which the Commissioner advocated in Day involved a context different from that in the present case.
32 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.
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".
35 For these reasons the appeal in each matter should be dismissed.
I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.