Income Averaging | Taxrates.info

Income averaging for primary producers is a method of managing the tax effect of irregular income.

By averaging taxable income over more than one tax year the effect of higher marginal tax rates arising from abnormal lumps of income is diluted..

There are differing sets of averaging rules for farmers, and others

Primary Producers Averaging

Farmers have variable incomes due to fluctuating seasonal conditions and the effects of natural disasters such as floods, drought or fire.

Eligibility for income tax averaging, the benefit of which is calculated and applied as a tax offset, requires:

primary production business for at least two years; and
at least one year with basic taxable income lower than the next

‘Basic taxable income’ is essentially taxable income excluding net capital gains, certain superannuation lump sums and death benefit termination payments, non-commercial losses and any above-average ‘special professional’ income.

The averaging tax rebate is determined by calculating the tax applicable to the average income as a percentage, and applying that average percentage to current year income.

The difference between the averaged tax and normal tax is the gross rebate (offset), which is then apportioned according to the current year’s primary production income (including non-primary production according to a formula for amounts under $10,000).

See further: Income averaging | Australian Taxation Office

Re-entry to averaging after dropping out

Under the rules applying up to 30 June 2016 farmers who opt out of the averaging system can never re-enter.

Legislation applying from 1 July 2016 allows re-entry to the averaging system after a period of 10 years, subject to satisfying the eligibility conditions afresh.

Income earned in the opt-out period is not taken into account for the purposes of income tax averaging. For a summary of the new rules see: Tax Averaging For Primary Producers

See also: Farm Management Deposits Scheme

This page was last modified 2021-05-19