Issue
Is employment income received by the taxpayer, an employee of an Australian Government organisation, while on deployment to Papua New Guinea assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), where it is exempt from taxation in Papua New Guinea under a Memorandum of Understanding?
Decision
No. The employment income received by the taxpayer, an employee of an Australian Government organisation, while on deployment to Papua New Guinea is not assessable under subsection 6-5(2) of the ITAA 1997 as it constitutes exempt income under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is not a resident or a citizen of Papua New Guinea.
The taxpayer is employed by an Australian Government organisation.
The taxpayer is deployed to Papua New Guinea to support certain developmental activities under the terms of an agreement between Australia and Papua New Guinea.
The Australian and Papua New Guinea Governments have signed a Development Co-operation Memorandum of Agreement (MOU) in relation to the project.
The taxpayer will be deployed for an initial period of 6 months. The taxpayer may be deployed for a further period of 6 months commencing at the end of the first period of foreign service.
The taxpayer will receive salary and wages, bonuses and other allowances from the Australian Government organisation.
Reasons for Decision
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 earned from employment 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 it is not included in 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 from foreign service will be exempt from tax in Australia.
Subsection 23AG(6D) of the ITAA 1936 provides that where a resident taxpayer is engaged in two periods of foreign service, the latter of which commences immediately after the end of the first period of service, the first period and second period of foreign service shall be deemed to constitute a continuous period during which the taxpayer is engaged in foreign service.
'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses and allowances (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 because of any of the conditions listed. One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).
Therefore, 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 1936 and ITAA 1997 so that those Acts are read as one
Schedule 29 to the Agreements Act contains the double tax agreement between Australia and the Independent State of Papua New Guinea, (the Papua New Guinea Agreement). The Papua New Guinea Agreement operates to avoid the double taxation of income received by resident of either Australia and Papua New Guinea.
Article 19(1) of the Papua New Guinea Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Papua New Guinea if the services are rendered in Papua New Guinea and the individual is a resident and citizen of Papua New Guinea, or did not become a resident of Papua New Guinea solely for the purpose of performing the services.
The employment income received by a taxpayer in relation to their deployment to Papua New Guinea is taxable only in Australia under Article 19(1) of the Papua New Guinea Agreement as the income is paid by Australia in respect of services rendered in the discharge of governmental functions.
As the employment income received by the taxpayer whilst on deployment in Papua New Guinea is exempt from tax in Papua New Guinea because of the operation of a double tax agreement, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936 and assessable under subsection 6-5(2) of the ITAA 1997.
However income earned by the taxpayer whilst on deployment will be exempt from taxation in Papua New Guinea because of the Development Co-operation Memorandum of Agreement entered into between Australia and Papua New Guinea, which exempts salaries and allowances the taxpayer earns, from income or other taxes in Papua New Guinea.
The exemption provided by the Development Co-operation Memorandum of Agreement would not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936, and the income will therefore be exempt from taxation in Australia under subsection 23AG(1) of the ITAA 1936.
Accordingly, as the taxpayer will be working in Papua New Guinea for a period in excess of 90 days, the employment income received by the taxpayer while on deployment to Papua New Guinea will not be assessable under sub-section 6-5 of the ITAA 1997.