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Income Tax – Taxation of Individuals

Fiscal (tax) year

  • Income tax is calculated for each fiscal year. PNG’s fiscal year begins on 1 January and ends on 31 December.
  • For salary or wage earners, who are not required to submit income tax returns, the tax period is a fortnight and tax is assessed by reference to the salary or wage income derived in that fortnight.

Residence

  • Individuals will normally be treated as a resident of Papua New Guinea in a particular year if they spend over six months in Papua New Guinea. This period does not need to be continuous it may be made up of a number of intermittent visits..
  • Residence may also be affected by the operation of a double tax agreement.

Lodging Tax Returns
The salary and wage earners are not required to submit tax returns. The tax period is a fortnight and tax is assessed by reference to the salary or wage income derived in that fortnight unless they earn other income in excess of K100.

However, if an employee incurred expenses in earning salary or wage income, and the expenses exceed K200 in any fiscal year, the employee may lodge an income tax return to claim a tax rebate calculated at 25% of the extent to which the expenses claimed exceed K200. For example, if expenses were K500 the employee would receive a refund of K75 (K300 x 25%).

Tax Rates for 2009.

Individual Residents – who have lodged a Salary or Wage Tax Declaration Form

Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From To
K K K Percent
0 7,000 0 0
7,001 18,000 2,420 22
18,001 33,000 6,920 30
33,000 70,000 19,870 35
70,001 250,000 91,870 40
250,001 No limit 42

Individual Non Residents

Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From To
K K K Percent
0 18,000 2,420 22
18,001 33,000 6,920 30
33,000 70,000 19,870 35
70,001 250,000 91,870 40
250,001 No limit 42
  • The rates are the same as for residents. But non-residents do not have the basic exemption limit of PGK 7,000.

Salary or Wages
Most individuals earn salary or wage income.

For tax purposes, salary or wages includes:-

  • salary, wages, commission, bonuses, remuneration of any kind or allowance (whether paid in cash or otherwise) paid (whether at piece-work rates or otherwise) in respect of or in relation to the employment of that person as an employee, or
  • any remuneration by way of fees or otherwise for professional services or services as an adviser, consultant or manager (whether at piece work rates or otherwise) were such remuneration is paid wholly or substantially for personal services rendered by that person in Papua New Guinea, and without limiting the generality of the foregoing, including any payment made –
  • under a contract that is wholly or substantially for the labour of the person to whom the payments are made, or
  • by a company by way remuneration to a director of that company, or
  • by way of superannuation, pension or retiring allowances, or
  • by way of commission to an insurance or time-payment canvasser or collector,
  • but does not include payments of exempt income.

Salary or wages received by an employee have tax withheld on a fortnightly basis by the employer. Your employer is to calculate the salary or wages tax due to be deducted from your fortnightly salary or wages. The tax deducted from fortnightly salary and wages is final tax and no refund is payable even if only one fortnight was worked during the year. Because the tax is final tax, salary and wage earners who do not have other income (e.g. dividends, etc.) exceeding K100 do not have to lodge any form of tax returns.

However, if an employee incurred expenses in earning salary or wage income, and the expenses exceed K200 in any fiscal year, the employee may lodge an income tax return to claim a tax rebate calculated at 25% of the extent to which the expenses claimed exceed K200.

Salary or Wage Tax Declaration Form
To help ensure that the correct amount of salary or wages tax is deducted each fortnight you must lodge a “Salary or Wages Tax Declaration†form with your employer.

A declaration may be lodged with only one employer at a time. If an employee has more than one employer at any time he should lodge a Declaration with his main employer. The Salary or Wages Tax Declaration form must be completed in full by the employee and signed by him before being accepted by the employer.

In making deductions from salary or wages paid, the employer should not give effect to a Declaration before the end of the first pay period commencing after the furnishing of that Declaration.

Under no circumstances can a new Declaration be used to recalculate tax for fortnights that have already passed. Where the Declaration is furnished by the employee on the first day of employment with the employer, the employer must give effect to that Declaration on the date of the first payment of salary of wages to the employee.

A new Salary or Wages Tax Declaration must be furnished by an employee to his principal employer when:

  • he commences employment with that employer;
  • he begins to maintain a dependant who was not included on his previous Declaration; or
  • he ceases to maintain a dependant who was included on his previous Declaration.

Claims for dependants must only be taken into account when all the details concerning that dependant have been filled out.

A person is not considered a dependant of an employee if,

  • that dependant is, at the date of lodgment of the Declaration, in receipt of a separate net income at or exceeding K 40.00 per fortnight, or
  • if the person has derived a separate net income in excess of K 1,040.00 per year, or
  • is maintained either wholly or partly from subsistence farming, or
  • if more than one member of the family or other person contributed towards the maintenance of that dependant.

Exempt income
Exempt income is income which is not subject to income tax in Papua New Guinea. Exempt income includes such things as education allowances, scholarships and bursaries, certain Papua New Guinea sourced dividends and income from activities where the law specifically exempts the income from tax.

Exempt Income, for Salary or Wages Tax purposes, includes the following:

School fees paid, on behalf of the employee, by the employer, direct to an educational institution, being an elementary, primary or secondary institution, for the education of a student child of the employee.

Annual Leave Fares paid by the employer to an employee and his family to the place of origin or recruitment.

Superannuation paid by an employer, on behalf of an employee, up to a maximum of 15% of the employee’s fully taxable salary or wages.

Employee Allowances and Benefits.
Allowances provided to employees are liable for taxation. However, certain benefits are exempted from taxation or taxed at less than their full value.

Housing
Motor Vehicle
Meals
School fees
Leave fares
Expenses for Electricity, Gas, Telephone, etc, and
Discounted Airfares – Travel Employees

Taxation of Housing benefits and allowances
The taxation treatment of the provision of housing support to employees will vary depending on whether the employee is provided an allowance to pay for the item or is provided the housing directly.

Housing supplied to an employee, by his/her employer, attracts the following benefit for Salary or Wages Tax purposes:

  • Accommodation Provided

    Type Of Housing Area 1 Area 2 Area 3
    High Cost House Or Flat 700.00 500.00 NIL
    Medium Cost House Or Flat 400.00 300.00 NIL
    Low Cost House Or Flat 160.00 150.00 NIL
    Mess/barracks Style Basic Accommodation 60.00 50.00 NIL
    Government Mess Or Barrack Style Accommodation 7.00 7.00 NIL
    Employees Involved In A “citizen Employee First Time Home Buyer Scheme” NIL NIL NIL

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  • Employees provided with accommodation outside of Papua New Guinea by their employer are automatically deemed to reside in AREA 1. They are subject to the inclusion of the taxable benefit for private high cost housing.
  • Low cost housing is any unit of accommodation which would fetch K 95,000.00 or less if sold on the open market, and in any other case for which the market rental is K 300.00 per week or less.
  • Medium cost housing is any unit of accommodation, which would fetch between K 95,000.00 and K 220,000.00 if sold on the open market, and in any other case for which the market rental is between K 300.00 and K 950.00 per week.
  • High cost housing is any unit of accommodation, which would fetch more than K 220,000.00 if sold on the open market, and in any other case for which the market rental is more than K 950.00 per week.
  • The areas mentioned in the above table refer to the area located in or within a 15-kilometre radius of the boundaries of any of the following towns.
  • AREA 1: Goroka, Lae, Madang, Mount Hagen and Port Moresby.
  • AREA 2: Alotau, Bulolo, Daru, Kainantu, Kavieng, Kerema, Kimbe, Kiunga, Kokopo, Kundiawa, Lorengau, Mendi, Popondetta, Porgera, Tabubil, Vanimo, Wabag, Wau and Wewak.
  • AREA 3: Any place within Papua New Guinea not included in area’s 1 or 2.

Housing Allowance paid to employee
Where an employer pays an employee an allowance in lieu of providing accommodation, the allowance as paid is assessable in full. This allowance and the prescribed value of that accommodation is to be included in the fortnightly salary or wages of the employee and taxed accordingly, unless a variation has been obtained from the Commissioner General.

Where a variation is obtained, the employee is taxed on the prescribed value of the accommodation and the excess of the allowance that exceeds the actual cost of the accommodation.

Employees may obtain variation on housing allowance by lodging a Housing Allowance Variation form with the Internal Revenue Commission. Citizen employee’s who are in receipt of housing allowance and are engaged in an “approved low cost housing schemeâ€, are not taxed on the allowance nor are they required to lodge a Housing Allowance Variation form.

Taxation of Motor Vehicle benefits
A Motor Vehicle supplied to an employee by an employer attracts the following benefit:

Where a motor vehicle is provided by the employer and the employee has unrestricted use of the vehicle the prescribed value for taxation purposes shall be as follows:

  • Motor Vehicle with fuel K 125.00per fortnight
  • Motor Vehicle without fuel K 95.00 per fortnight

Where the vehicle is supplied by the employer and the employee has restricted use, such value as determined by the Commissioner General, shall be included in the salary or wages of the employee. If no determination is made, then the above values apply.

Restricted usage for Income Tax purposes means that the motor vehicle is solely used by the employee during business hours for business purposes only and is garaged at the place of work not being near the place of residence of the employee.

Taxation of Meals benefits
Where meals are provided to an employee, by an employer, the following benefit applis:

Where the employee is provided with messing type meals, the sum of K 30.00 is added to the employee’s salary wage for tax calculation purposes.

In all other cases where meals are provided the actual cost to the employer is included in the salary or wage of the employee for tax calculation purposes.

Taxation of School fees
School fees paid by an employer on behalf of the employees children, are exempt from tax.

Taxation of Leave fares
One return fare per year for the taxpayer and his family for travel to the place of origin of the employee is exempt from tax.

Additional Leave Fares
Additional leave fares, under normal employment situation and conditions; are subject to salary or wages tax. The Commissioner General has the power to grant an exemption if he is satisfied that conditions warrant additional leave fares.

For consideration to be given to a request for additional leave fares the request must be made in writing to :-

The Commissioner General
Internal Revenue Commission
Attention: Manager Salary and Wages Tax Administration
P.O. Box 777
PORT MORESBY NCD
T: +675 322 6600
F: +675 321 7621

Taxation of payment of expenses for Electricity, Gas, Telephone, etc.
If an employer pays an allowance to cover any of the following expenses for an employee, it is taxable. These expenses are electricity, gas, telephone, domestic servants, security services, club membership schemes. However if an employee makes the payment on the behalf of the employee, it is not taxable.

In both the cases, no deduction will be allowed to the employer except telephone where evidence of business use is provided.

Taxation of other Allowances/Benefits
All allowances/benefits, not mentioned under specific exemptions, are taxable in full and are to be included in the fortnightly salary or wages and taxed accordingly.

Unless written notification has been received to vary the tax payable, issued by the Commissioner General of Internal Revenue, all allowances must be taxed as salary or wages.

Any services, goods or other benefits provided or given to an employee which are of a domestic or private nature are to be taxed in full. The value to be included as salary or wages in the calculation of the employees’ remuneration is the actual cost to the employer.

Non Deductible Allowances
Where an employee partakes and incurs business entertainment expenditure on behalf or account of his employer the reimbursement to him by the employer of the actual expenditure is not taxable to the employee and the employee’s benefit from the partaking in that entertainment is valued at nil. Where an employee incurs any of the following expenditures on behalf or on account of his employer, the reimbursement to him, by the employer, of the actual business related expenditure is not taxable.

Club subscriptions or fees
Domestic Services
Security Services
Electricity
Gas
Telephone

Other allowances or benefits may be subject to a variation of tax deductions upon application to the Commissioner General of Internal Revenue.

Variation of tax deductions
Detailed instructions on how to apply for a variation of tax deductions are here.

Taxation of Discounted Airfares – Travel Employees
The lesser of 50% of the standard economy fare for each leg for which discount is received, or the actual value of discount provided

Variation of Salary Or Wages Tax Deduction
The Commissioner of General may vary the amount of salary or wages tax to be deducted from the salary or wages of an employee or class of employees for the purpose of meeting the special circumstances of any case or class of cases. For consideration to be given a request must be made in writing to;

The Commissioner General
Internal Revenue Commission
Attention: Manager Salary and Wages Tax Administration
P.O. Box 777
PORT MORESBY NCD
T: +675 322 6600
F: +675 321 7621

Other Income of Individuals
Tax on the income in the return is calculated in accordance with the tax rates and in addition an equivalent amount of ‘provisional tax’ is raised which represents a prepayment of the next year’s tax. An assessment notice is issued to the taxpayer advising the total amount of tax payable. Payment is due on the date shown on the assessment notice.

Non Salary Expenses & Losses
Expenses incurred in gaining non-salary income are allowable deductions only against that income. For example, costs incurred as part of carrying of the business may be deducted against income earned by that business. These deductions many include wages paid to employees, interest on borrowed funds, travelling expenses, depreciation, repairs to rental properties etc. Expenditure of a private nature such as dental or medical costs are neither deductible nor subject to rebate or credit.

Taxpayers with Combined Incomes
Taxpayers with both salary and wage income and other income (exceeding K100 per year) are required to lodge returns disclosing all income. In calculating tax, tax is assessed only on income other than Salary or Wages but at the marginal rates applicable to the combined income.

Provisional Tax
Individuals who receive more than K100 income from non salary or wages Provisional Tax may be liable to pay provisional tax on that income. Provisional tax is paid by individuals to ensure that income tax that is expected to be payable on the non salary or wages income particular fiscal year will be collected during that year. This is done by the Commissioner General issuing a provisional tax assessment based on the last income tax return lodged. If no tax was payable on the prior year return (or one was not lodged) the Commissioner General can estimate the tax that should be payable.

Provisional tax is payable in three equal instalments on or before 30 April, 31 July and 31 October. The amounts paid will reduce the individual’s tax bill when it lodges its income tax return for that year. If a taxpayer believes that the tax due for a particular year will be less than the provisional tax assessed by the Commissioner General it may apply to have the provisional tax assessment reduced to reflect the taxpayer’s estimated tax due. Penalties may apply for variations which are significantly below what is ultimately payable by the taxpayer.

Credits Allowable to Individuals
Papua New Guinea allows a unilateral credit for foreign taxes paid on foreign source income. The credit allowed equals the lesser of either-

The foreign tax; or

The average rate of Papua New Guinea tax on that foreign income.

A credit is also allowed for the dividend withholding tax deducted from dividends paid by Papua New Guinea companies’ equivalent to the lesser of either-

  • The dividend withholding tax; or
  • The average rate of tax applicable to that dividend income.

In both cases the credit is deducted from the tax payable and also reduces provisional tax, if any, payable. Credit is also allowed for any business withholding tax, interest withholding tax or prescribed royalty withholding tax deducted from payments made to the taxpayer.

Credit under Double Tax Agreement
Where a resident individual has paid tax on income derived from a source in a country with which Papua New Guinea has a double tax agreement, credit for foreign tax paid is allowed under the terms of the Double Tax Agreement.

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