House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Extension of fringe benefits tax exemption for fly - in fly - out arrangements

Outline of chapter

2.1 Schedule 2 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to provide an exemption from fringe benefits tax (FBT) for transport, from an employee's usual place of residence to their usual place of employment, where the employee is an Australian resident employed in a remote area overseas, under what is commonly known as a fly-in fly-out arrangement.

Context of amendments

2.2 There is currently an exemption in the Fringe Benefits Tax Assessment Act 1986 which expressly exempts from FBT transport from an employee's usual place of residence to their usual place of employment, where the employee is:

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employed under (what is commonly known as) a fly-in fly-out arrangement; and

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the usual place of employment is a remote location in Australia, or on an oil rig or other installation at sea.

2.3 The exemption covers employees who work in a remote area of Australia, or on an oil rig or other installation at sea, who are provided with residential accommodation at or near the worksite on working days and are returned to their usual residence on days off.

2.4 The explanatory memorandum to the Fringe Benefits Tax Assessment Bill 1986 stated:

'Fly-in fly-out arrangements'

'Instead of providing permanent residential accommodation to their employees in designated remote areas, some employers choose to provide regular transport between the employee's place of residence and the worksite. Under this kind of arrangement the employee is provided with accommodation at or near the worksite on working days and is returned to his or her permanent place of residence on days off.

The provision of transport on this basis is exempt from fringe benefits tax where, having regard to the respective locations of the worksite and the employee's place of residence, it would be unreasonable to expect the employee to travel to and from work on a daily basis.'

2.5 This exemption from FBT only applies where, during a period of employment with an employer:

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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 (that is, a remote area), or an oil rig or other installation at sea;

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the employee is provided with residential accommodation, at or near that usual place of employment, by their employer or an associate of their employer;

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the employee, on a regular basis, works for a number of days and has a number of days off, returning to their usual place of residence during the days off;

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the employee is provided with transport on a regular basis in connection with this travel between their usual place of residence and their place of employment, by their employer or an associate of their employer; and

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having regard to the location of that usual place of employment and the location of the employee's usual place of residence, it would be unreasonable to expect the employee to travel between those places on work days on a daily basis.

2.6 An eligible urban area is a town or city with a 1981 Census population of not less than 14,000 (or not less than 28,000 if the town or city is located in zone A or zone B for income tax purposes, described in Schedule 2 to the Income Tax Assessment Act 1936 (ITAA 1936)).

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A location is treated as being adjacent to an eligible urban area (that is, not remote) if it is less than 40 kilometres by the shortest practicable surface route from the centre point of an eligible urban area with a 1981 Census population of less than 130,000, or is less than 100 kilometres from an eligible urban area with a population of 130,000 or more.

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If there is only one place within the urban area from which distances to other places are measured, it is the distance from that place to the location in question. If there are two or more such places within the urban area, the principal one is the distance measuring yardstick.

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Where the shortest practical surface route between a locality and an eligible urban area includes a route by water, the distance travelled by water is doubled for the purposes of working out how remote that locality is from the eligible urban area.

2.7 An extended exemption applies to housing benefits provided to employees of certain hospitals, charitable institutions, a public ambulance service or a police service. For such benefits, accommodation is treated as being in a remote area where it is situated at least 100 kilometres from a town with a census population of 130,000 or more.

2.8 The census was taken on 30 June 1981, and published by the Australian Statistician in Persons and Dwellings in Local Government Areas and Urban Centres .

Changes to the taxation of overseas income

2.9 In the 2009-10 Budget, the Government tightened the eligibility requirements for an income tax exemption provided to Australian residents employed overseas for periods greater than 91 continuous days under section 23AG of the ITAA 1936.

2.10 Generally under Australian income tax law, Australians who are resident taxpayers are required to pay tax on their worldwide income. Section 23AG was originally introduced to ensure that foreign employment income was not double taxed, first in the country where the income was earned and then again in Australia.

2.11 As a result, from 1 July 2009, the foreign employment income of most Australians working overseas is no longer exempt from Australian income tax. It is instead included in the assessable income of the Australian employee and subject to the appropriate marginal tax rates.

2.12 Australian employees whose income is no longer exempt because of the 2009-10 Budget changes are eligible to claim a foreign income tax offset for the foreign income tax paid on those amounts now included in their assessable income. The offset applies against any Australian tax payable on that Australian employee's assessable income. This will eliminate double taxation of wage and salary income for those Australian employees.

2.13 The amendments improved the fairness and integrity of Australia's tax system by better targeting the tax exemption for income earned by Australians overseas. As a result, most Australian residents earning employment income (whether within Australia or overseas) are now treated more consistently.

2.14 Employers of employees whose foreign employment income is no longer exempt are now liable for FBT if they provide fringe benefits to employees who are Australian residents for tax purposes, and the employer has a sufficient connection to Australia.

2.15 Such benefits were previously exempt from FBT because no FBT liability arose in relation to benefits provided to employees whose salary or wages were fully exempt from income tax. Removing the income tax exemption for affected individuals has brought these individuals within the FBT regime.

2.16 The general application of FBT to these employees is appropriate, as it ensures the consistent treatment of employee remuneration regardless of whether it is received as cash or as a non-cash benefit.

2.17 However, the presence of the exemption from FBT for employees working in remote areas of Australia under fly-in fly-out arrangements means that Australian resident employees working in Australian remote areas are now taxed inconsistently to Australian residents working in remote areas overseas.

2.18 Taxing transport provided under these arrangements may also result in economic double taxation, with an Australian employer paying FBT on transport provided to an employee employed under a fly-in fly-out arrangement, as well as the possibility of an employee paying foreign tax on the value of transport received.

2.19 Double taxation may occur because Australia taxes fringe benefits in the hands of employers, whereas most other countries that tax fringe benefits, tax them in the hands of employees. The FBT regime does not include an equivalent to the foreign income tax offset.

2.20 In the Media Release of 18 November 2010, the Assistant Treasurer and Minister for Financial Services and Superannuation said:

'The operation of the current FBT exemption for fly-in fly-out arrangements, which apply for work in Australia, will be extended and applied to Australian workers in similar situations overseas.'

2.21 Extending the exemption will ensure that Australian residents working for Australian employers in remote areas on fly-in fly-out arrangements are taxed consistently, regardless of whether they are working in Australia or overseas, as well as eliminate any possibility of double taxation on such benefits.

2.22 Separate consideration is being given to Australian residents working for foreign employers. While FBT does not apply in such circumstances, employees may instead be subject to income tax on any non-cash benefits received.

Summary of new law

2.23 The new law expressly exempts from FBT transport, from an employee's usual place of residence to their usual place of employment, where the employee is an Australian resident employed to work in a remote area overseas under what is commonly known as a fly-in fly-out arrangement.

2.24 The new law provides this exemption by extending the current exemption for employees working in remote areas of Australia, to include employees (Australian residents) working in remote areas overseas.

2.25 The extension effectively only applies to Australian resident taxpayers because foreign resident taxpayers are not taxable in Australia on their foreign sourced income.

2.26 Similar conditions as those required by the existing FBT exemption will need to be met for the transport to be exempt from FBT. These include:

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an employee being provided with residential accommodation at or near their usual place of employment by their employer, or an associate of their employer;

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the employee, on a regular basis, working for a number of days followed by a number of days off, returning to their usual place of residence during the days off;

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the employee being provided with transport on a regular basis in connection with this travel between their usual place of residence and their place of employment, by their employer or an associate of their employer; and

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having regard to the location of that usual place of employment and the location of the employee's usual place of residence, it would be unreasonable to expect the employee to travel between those places on work days on a daily basis.

2.27 Similar to the existing exemption, the new law will only apply when the place of employment is located in a remote area.

2.28 While 'remote' can be defined based on census data in Australia, this cannot be easily applied in an overseas context, and whether a location overseas is remote will need to be considered on a case-by-case basis, having regard to the location of the work place and a number of related factors (see paragraphs 2.35 to 2.41).

2.29 Referencing an overseas definition of 'remote' to population, similar to Australia, would result in some countries with high population density falling completely out of the definition, when they could be defined as remote when other factors (such as facilities and access to the location) are taken into consideration.

Comparison of key features of new law and current law

Detailed explanation of new law

2.30 The new law provides an exemption from FBT for transport from an employee's usual place of residence to their usual place of employment, where the employee is an Australian resident employed under a fly-in fly-out arrangement, and the usual place of employment is a remote area overseas. [ Schedule 2, item 1, paragraph 47(7 )( a )]

2.31 This exemption from FBT only applies where, during a period of employment with an employer:

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an employee's usual place of employment is at a remote location overseas;

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the employee is provided with residential accommodation, at or near that usual place of employment, by their employer or an associate of their employer;

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the employee, on a regular basis, works for a number of days and has a number of days off, returning to their usual place of residence during the days off;

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the employee is provided with transport on a regular basis in connection with this travel between their usual place of residence and their place of employment, by their employer or an associate of their employer; and

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having regard to the location of that usual place of employment and the location of the employee's usual place of residence, it would be unreasonable to expect the employee to travel between those places on work days on a daily basis.

2.32 The fly-in fly-out arrangement conditions and all other requirements applicable to the previous exemption will operate similarly to the extended exemption for remote areas overseas.

2.33 Broadly, a remote area is one which is inaccessible or sparsely populated, and has not been developed into, or located in close proximity to, an urban area (a built up area, such as a town or city).

2.34 Often it will be clear and obvious whether a location is remote or non-remote (for example, Singapore, Singapore is not remote, but Aasiaat, Greenland is remote). Other cases may not be so clear and obvious and those cases would require closer examination.

2.35 In determining whether a location can be considered 'remote', consideration should be given to the following factors, having regard to comparable Australian standards:

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the distance and time it takes to travel from the worksite to the nearest urban area;

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the population of the nearest urban area;

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accessibility of the overseas site;

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safety and the crime rate, adequacy of local law enforcement, or health risks in the surrounding areas to the worksite (and whether the nearest urban area is reasonably safe if adequate precautions are taken, the ability to take safety precautions);

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location of the worksite relative to the arrival destination in the foreign country (for example, an international airport);

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the quality of the roads between the nearest urban area and the worksite; and

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amenities and facilities available at the nearest urban area (in close proximity to the worksite), such as (but not limited to):

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public transport;

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availability of accommodation/housing;

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a library, public park or other recreational facilities;

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places for buying a variety of foods;

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a reliable electricity supply and access to clean drinking water/running water and a sewage system; and

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availability of access to the Internet, mobile phone reception and access to facilities such as banks and medical supplies and facilities.

2.36 No single factor is expected to be determinative - each location will need to be considered on a case-by-case basis, and all of the factors balanced to see whether it would be considered remote.

2.37 While a location might be remote based on one consideration, on balance, it might not be considered remote.

2.38 Proximity to the worksite would not only take into consideration the distance between the urban area and the worksite, but also such factors as accessibility of the urban area and the ease of travelling between the urban area and the worksite.

2.39 Being in close proximity to a built up urban area disqualifies an area from being remote, but what qualifies as an urban area is important.

2.40 When considering whether or not an area could be considered remote, factors such as amenities and facilities should be compared to relevant Australian standards.

2.41 As such, when considering whether the availability of housing in an urban area in close proximity to the worksite is of sufficient standard, the accommodation can be compared with what a reasonable person would expect in a house in Australia, such as multiple rooms, its own toilet and running water supply.

2.42 Remoteness, for these purposes, is not a test by reference to the distance from Australia.

2.43 By considering each location on a case-by-case basis, all specifics can be taken into account to ascertain whether or not a location is remote.

2.44 These considerations help maintain the integrity of the tax system and ensure that the FBT concession only applies to remote locations.

2.45 Given the significant differences that exist between countries (such as population, amenities and development) it is not possible to provide a single test that can make determining 'remote' simple to administer without creating significant distortions (that is, inappropriately classifying many locations and countries as non-remote when in practice, a remote classification is appropriate). Further, population estimates are not necessarily available for locations or certain countries, making proxy tests unreliable, more administratively complex or unworkable.

2.46 The Australian Taxation Office will give consideration to publishing a list of locations on its website (based on requests received), as determined by the Commissioner of Taxation, as remote or not remote to assist employers.

Example 2.1: Considering whether a location is remote

An Australian employee is currently working on a fly-in fly-out basis between Sydney and Khartoum (the capital of Sudan).

Currently, Khartoum has a population of over 5 million people, an international airport, rail lines, multiple shops, museums, restaurants, recreational facilities, electricity and roads.

Although a certain level of danger may be present when living in Khartoum, on balance Khartoum would not be considered remote.

Provision of transport to and from the worksite from an employee's usual place of residence in Australia, provided by the employer, would not be exempt from FBT.

Example 2.2: Considering whether a location is remote

An Australian company, employing Australian workers on a fly-in fly-out basis from their homes in Australia, has a worksite located in Papua New Guinea.

The worksite is located 350 kilometres from a city of 500,000 people. Various small towns (populations under 1,000 people) with limited electricity supply and facilities are located closer to the worksite.

Due to the poor road quality and no direct route between the worksite and the town, the worksite location is over five hour's drive from the city, which has accommodation, restaurants, electricity, and a limited number of roads, as well as bus services.

Provided that any factors not mentioned in the example do not alter the outcome, on balance, the worksite would be considered remote. The closest urban area to the worksite is located 350 kilometres away, with poor road quality adding to the long trip. This town would not be considered to be within close proximity to the worksite.

Provision of transport to and from the worksite from an employee's usual place of residence in Australia, provided by the employer, would be exempt from FBT.

Example 2.3: Considering whether a location is remote

An Australian employee is working on a fly-in fly-out basis at a site located 90 kilometres outside (the centre of) Beijing.

Currently, Beijing has a population of around 22 million people, and adequate facilities expected of a large city are available. There are parks, shops, electricity, roads, accommodation, infrastructure and leisure activities.

The travel time between the work location and the outskirts of Beijing is just under one and a half hours on a sealed road.

On balance, the work site would not be considered remote. The location is too close to a large city, with direct road access, to be considered remote.

Provision of transport to and from the worksite from an employee's usual place of residence in Australia, provided by the employer, would not be exempt from FBT.

Example 2.4: Considering whether a location is remote

A mining company, employing Australian workers on a fly-in fly-out basis from their homes in Australia, operates a copper mine on the Frieda River in Papua New Guinea.

The mine is serviced by a small airport. The airport is unpaved and only has one runway. There are no roads to any surrounding areas. The only means of access to the mine worksite is by small plane.

On balance, provided that no factors not mentioned in the example alter the outcome, the mine worksite would be considered remote. There are no amenities and facilities in the surrounding area, or built up urban areas. Small plane transport is required to access the worksite.

Provision of transport to and from the mine worksite, from an employee's usual place of residence in Australia provided by the employer, would be exempt from FBT.

Example 2.5: Considering whether a location is remote

An Australian resident works in Honiara, on the Solomon Islands, on a fly-in fly-out basis.

The city has a total population of about 78,000 people. The city has adequate accommodation, supermarkets, roads, electricity and sufficient recreational facilities.

On balance, the city of Honiara would not be considered remote. There are adequate amenities and facilities in the capital, and a sizeable population.

Provision of transport to and from the worksite from the employee's usual place of residence in Australia, provided by the employer, would not be exempt from FBT.

Example 2.6: Assessing a remote area location

Adele is employed by an Australian company to work on a fly-in fly-out arrangement in South America, and she returns to her home in Sydney during the leave time.

The nearest urban area to the work location has a population of over one million people, and is located 120 kilometres away. The city has hotels, restaurants, medical facilities, a variety of parks and shops. The city has an active police force, local buses for getting around, and an electricity network. The city has a crime rate comparable to those of many Australian cities.

The work location in South America is surrounded by dense forest, making directly flying in and out of the site the only practical way of getting to the worksite. As such, once she is flown in for her shift (via a larger airport in the country), her employer provides accommodation and meals, as sturdy 4WD vehicles would be needed to cut through the jungle to reach the nearest city. Travel time by 4WD between the work location and the nearest urban area would exceed four hours, and is dangerous.

Provided that no factors not mentioned in the example alter the outcome, on balance, despite the high population, amenities available and development in the nearest urban area, the lack of access from the worksite and quality of the roads from the worksite would mean the location is considered remote.

Provision of transport to and from the worksite from Sydney, provided by her employer, would be exempt from FBT.

Example 2.7: Assessing a remote area location

A mining company, employing Australian workers on a fly-in fly-out basis from their homes in Australia, operates a nickel mine and smelter 70 kilometres outside of Selebi-Phikwe in Botswana.

Selebi-Phikwe is a mining town with a population of 52,000. The town has running water and electricity. The town also has accommodation facilities, places for buying a variety of foods, and a small mall. A single runway airport only operates during daylight and there is no refuelling facility. Selebi-Phikwe also has a community centre, two clubs and a recreation centre.

The next largest town, Francistown, is 147 kilometres away. The road between Francistown and Selebi-Phikwe is a mixture of paved and unpaved. Francistown has a population of 85,000 people. Francistown has similar facilities to Selebi-Phikwe except it has a rail station and an airport that has two runways. The city also has a campus of the University of Botswana.

The worksite location would be considered remote. The worksite is a sufficient distance from Selebi-Phikwe and Francistown given the characteristics of these towns.

Provision of transport to and from the worksite from an employee's usual place of residence in Australia, provided by the employer, would be exempt from FBT.

2.47 The transport does not need to originate in Australia, or include an Australian leg for the exemption to apply.

Example 2.8: Fly-in fly-out arrangements

An Australian company employs an Australian resident on a fly-in fly-out basis. The worker is based in Singapore, and is flown to a mine-site in Mongolia on a three-week on, one-week off basis.

The worksite is located four hours drive from the nearest town, which has a population of 15,000 people, and limited facilities. The road network is limited and there is no public transport.

Provision of transport to and from the worksite from an employee's usual place of residence in Singapore, provided by the employer, would be exempt from FBT.

2.48 Other examples of non-remote locations include:

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Ulaanbaatar, Mongolia;

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Valencia, Venezuela;

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Riyadh, Saudi Arabia;

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Dubai, United Arab Emirates;

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Nanchang, China; and

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Gurgaon, India.

2.49 Other examples of (currently) remote locations include:

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Nhemba, Tete, Mozambique;

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Nunavut, Canada;

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Tengiz, Kazakhstan; and

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Goro, New Caledonia.

2.50 The changes are only intended to cover remote area situations similar to those already covered by the FBT exemption from transport for fly-in fly-out workers, and are not intended to provide an exemption from FBT for all employees working under fly-in fly-out arrangements overseas.

Application and transitional provisions

2.51 The new law will apply to fringe benefits provided after 1 July 2009, when Australian residents working in remote areas overseas potentially became assessable on their foreign employment income. This ensures consistency between the tax treatment of employees working in remote areas on fly-in fly-out arrangements in Australia and overseas. [ Schedule 2, item 9 ]

2.52 Backdating the application of the provision to when the changes to foreign employment income were introduced also ensures that no double taxation will be paid with respect to transport provided to employees on fly-in fly-out arrangements covered under the new changes.

2.53 The changes will not adversely affect any taxpayer.

Consequential amendments

2.54 There are also some changes being made to tidy up and update assorted provisions. [ Schedule 2, items 2 to 8, subsections 47(7 ) and 136(1 ), paragraph 47(7 )( d ), subparagraphs 47(7 )( b )( i ) and 47(7 )( d )( i ) and sub - subparagraphs 47(7 )( b )( iii )( B ) and 47(7 )( d )( iii )( B )]