ATO Interpretative Decision

ATO ID 2011/75

Income Tax

Allowance of credit for tax paid in Papua New Guinea, against Australian tax payable, including the Medicare Levy
FOI status: may be released
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This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

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?

Decision

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.

Facts

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).

Reasons for Decision

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.

Date of decision:  7 September 2011

Year of income:  Year ended 30 June 2010

Legislative References:
International Tax Agreements Act 1953
   subsection 3(10)
   subsection 4(1)
   section 5

Other References:
Papua New Guinea agreement [1989] ATS 37, Article 23(1)

Keywords
Double tax agreements
Foreign tax credits
Medicare levy

Business Line:  Public Groups and International

Date of publication:  23 September 2011

ISSN: 1445-2782