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Does Article 23(1) of the Papua New Guinea agreement set out in Australian Treaty Series 1989 No. 37 (the PNG agreement) together with subsection 3(10) of the International Tax Agreements Act 1953 (the Agreements Act) require Australia to allow a credit for tax paid in Papua New Guinea (PNG), against Australian tax payable, including the Medicare levy?

Yes. Article 23(1) of the PNG agreement together with subsection 3(10) of the Agreements Act requires Australia to allow a credit for tax paid in PNG, against Australian tax payable, including the Medicare levy.

The taxpayer is a resident of Australia for tax purposes.

The taxpayer paid an amount of foreign income tax under the law of PNG on income derived from sources in PNG.

The PNG sourced income on which the foreign income tax was paid was included in the taxpayer's assessable income for Australian tax purposes.

The amount of foreign tax paid in PNG exceeded the taxpayer's Australian tax payable (excluding the Medicare levy).

The taxpayer is an Australian resident who paid tax in PNG under the law of PNG in respect of PNG sourced income that was also subject to tax in Australia.

In determining whether a credit is allowable for foreign tax paid against Australian tax payable it is necessary to consider not only the income tax laws but also any applicable double tax agreement.

The PNG agreement is given the force of law domestically under section 5 of the Agreements Act and is applicable to the taxpayer.

Subsection 4(1) of the Agreements Act states that the Assessment Act is incorporated and to be read as one with the Agreements Act. Where inconsistencies exist, the Agreements Act will prevail (except for some limited provisions).

Article 23(1) of the PNG agreement titled Methods of Elimination of Double Taxation states that: Subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle hereof), Papua New Guinea tax paid ...in respect of income derived by a person who is a resident of Australia from sources in Papua New Guinea shall be allowed as a credit against Australian tax payable in respect of that income.

Although Article 23(1) of the PNG agreement makes it clear that Australian residents with PNG sourced income are entitled to apply PNG tax paid (in respect of that income) as a credit against their Australian tax payable in respect of that income, it does not stipulate whether 'Australian tax payable' includes the Medicare Levy. It is subsection 3(10) of the Agreements Act which clearly states that: For the purposes of this Act, Medicare levy shall be deemed to be income tax and to be imposed as such and, unless the contrary intention appears, references to income tax or tax shall be construed accordingly.

The general principle in Article 23(1) of the PNG agreement, together with subsection 3(10) of the Agreements Act, therefore, entitles an Australian resident taxpayer to a credit for PNG tax paid on PNG sourced income to reduce their income tax liability (which includes the Medicare Levy). Note: the above analysis also applies to the Methods of Elimination of Double Taxation Article in other Australian tax treaties. However, the terms of the relevant treaty must be considered in each case.