I have started again with a new workbench 2014 SP3 which has not fixed it.
I note that when I add the Reader I add the fgb path and when i get the table list it never shows the featuredataset. Since I am not using anything of the source polygons that should not matter, but it is a bit strange.
The output is not a fanout, just a static name.
I end up with the output named featuredataset/featureclass