There are two main categories of income averaging tax rules for individuals.
The purpose of the rules is to allow the averaging of taxable income over more than one tax year in order to dilute the tax spike – the effect of higher marginal tax rates – which would otherwise be caused by an abnormal lump of income occurring in a single year.
There are a number of different occupational groups which are susceptible to lumpy income, and they are covered under differing sets of averaging rules.
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.
Basically: 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). There’s an example calculation here.
Averaging notice of assessment
From 2017 the taxpayer’s notice of assessment will contain a message when it is their first year of income for averaging calculations, or upon re-entry into averaging.
Re-entry to averaging after dropping out
Under the rules applying to 30 June 2016 farmers who opt out of the averaging system can never re-enter. However Legislation passed in February 2017 and 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
Authors and others (special professionals) income averaging
Authors and other occupations including inventors, sportspersons, composers, performing artists and production associates due to the nature of their business can have widely fluctuating income levels from one year to the next.
See also – Income averaging for special professionals.
. This page was last modified on 16 Aug 2017