Issue
Are salary and wages derived in Papua New Guinea (PNG) by an Australian resident taxpayer assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer works under a cyclical roster, and spends their time off in Australia engaged in business activities not related to the employment by the Papua New Guinean company?
Decision
No. The salary and wages received by an Australian resident taxpayer from employment in PNG are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is employed in PNG by a Papua New Guinean company for more than 90 days.
The taxpayer works under a cyclical roster where they work for a continuous period of 28 days and then has 28 days off, consisting of travel time and recreational leave.
The taxpayer spends the time off in Australia.
During the time off, the taxpayer engages in business activities unrelated to the foreign service.
The taxpayer pays Papua New Guinean Tax on the salary and wages received from the Papua New Guinean company.
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 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. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).
Subsection 23AG(6) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person is absent on recreation leave in accordance with the terms and conditions of the foreign service.
Paragraph 7 of Taxation Ruling IT 2441 states that where an Australian resident taxpayer is employed on a project in a foreign country, leave taken in circumstances similar to those outlined in IT 2015 will be treated as recreation leave, thus forming a part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.
Taxation Ruling IT 2015 discusses the application of paragraph 23AF(3)(d) of the ITAA 1936 to the situation where employees are engaged on an onshore oil drilling project on the basis of uninterrupted cycles of 5 weeks work on site and 5 weeks leave in Australia. IT 2015 states that the employees will be taken to have been engaged on an approved project for a period of qualifying service equal to the total number of days they are engaged under the 5 weekly cyclical arrangements.
The taxpayer's circumstances are similar to that described in IT 2015 except for the fact that the taxpayer engages in business activities during the time off in Australia. Paragraph 11(b) of Taxation Ruling TR 96/15 provides that a period of foreign service is taken to include rostered days off provided that this time off is authorised by the terms and conditions of the foreign engagement.
The taxpayer's participation in business activities during his time off in Australia will not result in a break in the period of foreign service. The taxpayer is free to utilise the time off in Australia as he/she wishes as long as this does not involve activities related to the foreign service with the Papua New Guinean employer. Since the business activities in Australia are not related to the taxpayer's foreign service in PNG, the period of foreign service for the purposes of subsection 23AG(1) of the ITAA 1936 will include the 28 day periods of time off spent in Australia by the taxpayer.
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.
One of the listed reasons 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 tax treaty 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 of 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 Papua New Guinean residents.
Article 15(1) of the PNG Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of an employment shall be taxable in Australia unless the employment is exercised in PNG. If the employment is exercised in PNG, the salary and wages may be taxed in PNG.
Article 15(2) of the PNG Agreement provides that notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of Australia in respect of an employment exercised in PNG shall be taxable only in Australia if: (a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 90 days in the year of income of that other State; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State; and (d) the remuneration is, or upon the application of this Article will be, subject to tax in the first-mentioned State.
Since the taxpayer is employed in PNG for more than 90 days of the Papua New Guinean year of income, Article 15(2) of the PNG Agreement will not apply. Therefore Article 15(1) of the PNG Agreement will apply, and the salary and wages derived in PNG by the taxpayer may be taxed in PNG.
Accordingly, paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in PNG because of the PNG Agreement.
As the taxpayer is engaged in foreign service for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in PNG because of the PNG Agreement, the income received from PNG will be exempt from tax under subsection 23AG(1) of the ITAA 1936.
Therefore, the salary and wages received by the taxpayer from working in PNG will not be assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1) of the ITAA 1936.