Income Tax
Are amounts required to be withheld under the Pay As You Go (PAYG) system from a taxpayer's income which is exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No, PAYG amounts are not required to be withheld from the exempt income.
Facts
The taxpayer will serve as a civilian police officer in East Timor for a continuous period of 180 days after 1 July 2000.
During this period the taxpayer will be paid an allowance by the United Nations together with a fortnightly salary by an Australian Police Force.
Subject to the requirements of section 23AG of the ITAA 1936 being satisfied, the income derived from this service in East Timor will be exempt from income tax in Australia.
Reasons for Decision
Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) provides that under the PAYG system an entity must withhold amounts from salary, wages, commission , bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Subsection 12-1(1) of Schedule 1 of the TAA however, provides that an entity need not withhold an amount under section 12-35 from a payment if the whole of the payment is exempt income of the recipient.
As the taxpayer's income from service in East Timor will be exempt from tax under section 23AG of the ITAA 1936 amounts are not required to be with withheld under the PAYG system from those earnings.