Assessability of professional services income earned by Australian resident in Papua New Guinea

Is the income received by the taxpayer, a resident of Australia, earned as legal counsel in the Independent State of Papua New Guinea (PNG), assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The income received by the taxpayer, a resident of Australia, earned as legal counsel in PNG is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer earned income as legal counsel practicing in PNG.

The fee received by the taxpayer was paid by a resident of PNG.

The fee received by the taxpayer exceeded $A8,000.

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.

The fee received by the taxpayer is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign source 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 incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the 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.

Article 14(1) provides that income derived by a resident of Australia in respect of professional services performed in PNG shall be taxable only in Australia unless: • the individual has a fixed base regularly available in PNG for the purpose of performing their activities; • the individual derived an amount exceeding $A8,000 from a resident of PNG in any one 12 month period; or • the individual's stay in PNG exceeds 90 days in any year of income.

In these circumstances, the income may be subject to tax in PNG, but only so much as is attributable to activities undertaken in PNG.

Article 14(2) of the PNG Agreement states that the term 'professional services' includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as in the exercise of the independent activities of physicians, lawyers, engineers, architects, dentists and accountants .

Fees earned as legal counsel in PNG are considered to be in respect of 'professional services'.

As the fee received by the taxpayer exceeded $A8,000, the fee may be taxed by Australia and by PNG under Article 14(1) of the PNG Agreement.

Article 23(1) of the PNG Agreement provides, subject to the provisions of the law in Australia, a credit for any tax paid in PNG will be allowed against Australian tax paid on income from PNG.

As the taxpayer is a resident of Australia for income tax purposes, the fee received by the taxpayer earned as legal counsel in the PNG is assessable under subsection 6-5(2) of the ITAA 1997. The taxpayer will be entitled to a foreign tax credit for PNG tax paid on that income.