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Is the salary and wage income earned by a resident taxpayer while working in Papua New Guinea (PNG) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where it is exempt from tax in PNG under a Memorandum of Understanding (MOU)?

No. The salary and wages earned by a resident taxpayer while working in PNG is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for taxation purposes.

The taxpayer worked on a project in PNG for a period in excess of 90 days in the PNG year of income (1 January to 31 December).

The Australian and PNG governments have signed a Memorandum of Understanding (MOU), in relation to the project. The salary and wage income received by the taxpayer is exempt from tax in PNG under this MOU.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed.

Under paragraph 23AG(2)(b) of the ITAA 1936 where income is exempt in the foreign country as a result of the operation of a double tax agreement that income is not exempt.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporate that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 29 to the Agreements Act contains the double tax agreement between Australia and PNG (the PNG Agreement). The PNG Agreement operates to avoid the double taxation of income received by Australian and PNG residents.

Paragraph (1) of Article 15 of the PNG Agreement provides that salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in PNG. If the employment is exercised in PNG then PNG may also tax the income unless the taxpayer is present in PNG on a temporary visit .

Temporary visits are dealt with in paragraph (2) of Article 15 of the PNG Agreement which provides that remuneration derived by a resident of Australia in respect of employment exercised in PNG shall be taxable only in Australia if: • the taxpayer is present in PNG for a period or periods not exceeding in the aggregate 90 days in the PNG year of income; • the remuneration is paid by, or on behalf of, an employer who is not a resident of PNG; • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base that the employer has in PNG; and • the remuneration is subject to tax in Australia.

The taxpayer will be present in PNG for a period in excess of 90 days in the PNG year of income and therefore paragraph (2) of Article 15 of the PNG Agreement will not apply. Therefore, although the taxpayer's income is subject to tax in Australia, it may also be subject to tax in the PNG under Article 15 of the PNG Agreement.

The taxpayer's income is however exempt from tax in PNG under the MOU between Australia and PNG. The exemption provided by the MOU does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936.

As the taxpayer has been working in PNG for a period in excess of 90 days their salary and wages income will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is therefore not included in their assessable income under subsection 6-5(2) of the ITAA 1997. The income will also be exempt from tax in PNG.