Introduction to Income Tax

1.Principles of PNG Income Tax

 What is Income Tax?

Income Tax is a tax on the income of

individuals, companies and other legal bodies.
The main purpose of income tax is to raise
revenue to finance government expenditure.
Income tax is a direct tax and the tax payer
‘bears the burden’ of tax.
Income tax paid by individual is normally
‘progressive’ in nature.
 Income Tax Law
Income Tax Law is a product of income tax
legislation and case law (court decisions).
The Papua New Guinea Income Tax Act was
passed in 1959.
Other income tax laws are;
 Income Tax and Dividend (Withholding)
Tax Act 1984
 Income Tax (Salary or Wages) (Rates) Act
1979
 Income Tax Regulations 1959 as amended.
 Terms used in Income Tax Law

The rules for applying the correct meaning of

words are: the meaning of a word as applied
in normal usage should be used except where
it differs from a general or specific definition
in the Act.
 Assessable Income
This is income that is taxable, or assessable,
before any deductions are made.
Some assessable income are;
 Salary or wages  Partnership Income
 Interest  Rent
 Dividends  Commissions
 Business Gross  Bonuses
Income
 Allowable Deductions(s.66-s.68)
These are sums which are allowed to be
deducted from assessable income in order to
arrive at a figure which represent taxable
income. Most expenditure in profit and loss
statement are allowable deductions. They are
 purchase of trading stock
 manufacturing, trading and administrative
expenses
 interest, rentals and royalties paid
 Taxable Income
This is actual income subject to tax after
allowable deductions have been subtracted.
Taxable Income is quite often different to
‘accounting income’ due to different
treatment on certain items between the Tax
Act and GAAP.
 Derived Income
Income must normally be earned/derived to
be subject to tax. Income need not be actually
received to be derived.
The accrual method of accounting is
generally the required basis for the disclosure
of assessable income.
 Exempt Income
This is income which is not included in a
taxpayer’s assessable income. However it
must be disclosed in a tax return. They are;
 education allowances, scholarships etc
 export sales of certain qualifying goods
 certain government pensions
 income of religious institutions, hospitals
and charitable bodies.
 Non Allowable Deductions
- Capital expenditure
- Loses and outgoings ‘not incurred’
- Loses and outgoings of a private or
domestic nature.
 Capital Expenditure

Expenditure of a capital nature (purchase of

machinery) even though incurred in the
course of producing assessable income is not
deductible under the tax act. However
depreciation is allowed.
Losses and out goings ‘not incurred’
Certain expenditure provisions, eg. provisions
made in the company’s accounts for expected
future liabilities or bad debts.
When such liabilities are discharged and
payment is made a tax deduction is allowed.
 Loses and outgoings of a
private or domestic nature.
Expenditure on the day to day necessities of
life. eg. Purchase of food, medical expense,
life insurance, expenditure to earn income ie.
travelling expense to work, wages paid to
domestic servants etc.
 Permitable Deductions
The Tax Act looks the scope of the activity to
determine whether loss was relevant to the
production of assessable income. Thus a
deduction will be allowed for business
takings lost through robbery or certain legal
costs expenses in refuting allegations of
dishonest business practices.
 Evidence of Expenditure
Before a deduction is allowable, a liability for
the actual expenditure must have been
incurred. Proper record of proof must be
kept by the taxpayer.
 PNG Resident and Non Resident
The distinction between a PNG resident and non
resident is important for tax purposes because they
are taxed at different rates.
Residents are taxed on their worldwide income,
whereas non residents are taxed only on their PNG
sourced income.
Normally, person who has lived for at least 6
months can claim, for tax purposes to be a resident.
A resident company is one that has either its central
management and control here or whose majority of
shareholders who control the company are resident
here.
 Capital and Income
Before a deduction is allowable, a liability for
the actual expenditure must have been
incurred. It is important that proper record
of proof must be kept by the taxpayer.
 Capital and Income
Receipt of capital nature will not under any
circumstances be taxable, because it is not a
receipt of income.
Examples of capital gains
 Sale of private property purchased without
 Sale of private car the intention to sell

 Sale on shares at profit

 Capital and Income
The distinction between income and capital is
not always clear.
‘Windfall gains’ are similar to capital gains
and therefore not taxed. Examples are;
 Lottery win
 Betting win
 Gifts from one person to another
 Capital and Income
There are two guidelines for deciding
whether a receipt is income or capital:
1. What was the intention of the taxpayer?
2. How often did he conduct the same
transaction?

eg; a win by betting punter and professional

punter or gifts and tips.
 Financial Year
‘Year of income’ for tax purposes runs from
1st January to 31st December.
 Internal Revenue Commission
The Internal Revenue Commission is
responsible for administering the income tax
system as well as indirect taxes – value added
tax, and customs and excise tax. There are
office branches of IRC in all major towns.
The main office is situated in Port Moresby in
Champion Parade.
Internal Revenue Commission
P.O. Box 777
Port Moresby
The Income Act lays down that officers of the
Internal Revenue Commission must not
reveal information submitted by the
taxpayers in their tax returns (s.9) Also, they
must not assist tax payers to prepare their tax
returns (s.10(2)).
 How Taxable Income is
Determined
Gross Income from all sources
Less: exempt income (if any)
= Assessable income
Less: allowable deductions
= Taxable Income

Tax payable will depend on the tax rate

applied, less tax rebates or credits if any.
 Example

Kina
Gross Income 20,000
Exempt Income
Allowable deductions 2,000
Tax Rebate
Rate of tax 30% 10,000
50
Calculation of taxable income and tax payable
Example
Kina
Gross Income 20,000
Exempt Income 2,000
Assessable Income 18,000
Less: Allowable deductions 10,000
Taxable Income 8,000

Tax payable
8,000 x 30% 2,400
Less: tax rebate 50
Net tax payable 2,350
 End of Topic 1

g/Classroom: loq55ar
Mobile: 73614894
sammyjohn2013@gmail.com