For occupations whose income fluctuates from year to year, there is a tax averaging regime available which reduces the higher tax rates which would otherwise apply in the high income years.
The way the concession works in principle, is to apply a special rate of tax to the special professional income for the year which is above a 4-year average.
The way tax averaging is applied
Under the concession, tax on the top 80% of above-average special professional income is calculated as 4 times that of the bottom 20% at basic rates.
If that slice of income straddles more than one marginal tax rate, then the averaging formula reduces the tax to the lower rate. (Sec 405.5)
The rules can only apply to “assessable professional income” for which there are definitions and specific exclusions – see below.
For the rules to apply there must have once been at least $2,500 of taxable professional income. Once applied, the rules can continue to apply even if assessable professional income subsequently falls below $2,500.
Assessable professional income
Only specific occupations are eligible. Relevant activities which are simply carried out as employees are not eligible for the averaging concessions. The definitions of “special professional” are provided in Sec 405-25 of ITAA 1997.
Specifically excluded items from being treated as assessable professional income are contained within Sec 405-30
Many terms within the following definitions also have defined meanings, and advice should be sought in all cases. The information here should not be solely relied on as the basis of any course of action.
A ‘special professional’ is:
The author of a literary, dramatic, musical or artistic work
Note: The expression “author” is a technical term from copyright law. In general, the “author” of a musical work is its composer and the “author” of an artistic work is the artist, sculptor or photographer who created it.
Computer programmers are considered to be ‘writers’, and therefore eligible – see TD 93/65
A tattoo artist was determined by the Tax Office to be special professional for averaging purposes.
The inventor of an invention
The definition of “special professional” includes “authors” which includes inventors of an invention.
A performing artist
(2) You are a performing artist if you exercise intellectual, artistic, musical, physical or other personal skills in the presence of an audience by performing or presenting:
(a) music; or
(b) a play; or
(c) dance; or
(d) an entertainment; or
(e) an address; or
(f) a display; or
(g) a promotional activity; or
(h) an exhibition; or
(i) any similar activity.
(3) You are also a performing artist if you perform or appear in or on a film, tape, disc or television or radio broadcast.
A production associate
(4) You are a production associate if you provide artistic support for:
(a) an activity described in subsection (2) (“performing artist”); or
(b) the activity of making a film, tape, disc or television or radio broadcast.
(5) You provide artistic support for an activity if:
(a) you provide services relating to the activity as:
(i) an art director; or
(ii) a choreographer; or
(iii) a costume designer; or
(iv) a director; or
(v) a director of photography; or
(vi) a film editor; or
(vii) a lighting designer; or
(viii) a musical director; or
(ix) a producer; or
(x) a production designer; or
(xi) a set designer; or
(b) you provide similar services relating to the activity.[/su_spoiler]
(6) You are a sportsperson if you compete in a sporting competition.
(7) A sporting competition is a sporting activity to the extent that:
(a) human beings are the only competitors in it, or it is one in which human beings:
(i) compete by riding animals or exercising other skills in relation to animals; or
(ii) compete by driving, piloting or crewing motor vehicles, boats, aircraft or other forms of transport; or
(iii) compete with natural obstacles or natural forces, or by overcoming them; and
(b) participation in it by human competitors involves primarily their exercising physical prowess, physical strength or physical stamina.
(8) However, the participation:
(a) of a navigator in the activity of car rallying; or
(b) of a coxswain in the activity of rowing; or
(c) of a competitor in a similar role in some other activity;
need not involve primarily exercising physical prowess, physical strength or physical stamina for the activity to be a sporting competition
How It Works
Step 1 – Calculate taxable professional income
Calculate the year’s taxable professional income by deducting exclusively and reasonably attributable deductions from the income. Other deductions are apportioned between the taxable professional income and other income.
For tax return purposes, the tax office work out and apply apportionable deductions from labelled information in your tax return.
Step 2 – Calculate average taxable professional income
Step 2A – Phase-in for the 1st 4 years
The first professional year for an averaging calculation to apply requires:
- Australian tax residency for at least part of the year
- more than $2,500 of taxable professional income
The following table is used to calculate average taxable professional income during phase-in period (Sec 405.50) :
|Average taxable professional income during 4-yr phase-in period|
|Professional Income Year||Average taxable professional income|
|Professional Year One||Nil|
|Professional Year Two||⅓ of taxable professional income for professional year 1|
|Professional Year Three||¼ of the sum of professional years 1 and 2|
|Professional Year Four||¼ of the sum of professional years 1, 2 and 3|
Step 2B – after 4 years
From the 5th year onwards, the average taxable professional income is simply based on the previous 4-years average – i.e. the total of the taxable professional incomes for the past 4 years divided by 4.
Any year in which taxable professional income was negative is treated as ‘nil’.
Step 3 – Calculate the ‘above average’ taxable assessable income (if any)
The above-average, or excess taxable professional income is the difference between the average taxable professional income (step 2) and the current year taxable professional income (step 1) .
If there is no excess, or if the current year is lower than average, then ordinary tax rates (i.e. not averaging) apply for that year.
Step 4 – Tax Calculation
The final stage is to calculate the tax.
This is done by adding 5 times the tax on ⅕ of the above-average income slice when added to ‘normal’ income, to the tax on the normal income. here’s how that breaks down in steps:
A – work out tax on normal income. Normal income is the average professional income added to all of your other (non-professional/non-averaging) income.
B- Divide the above-average income (the difference between this year’s professional income and the average) by 5
C – add the result from B to normal income and calculate tax at the normal scale without medicare
D – subtract tax on normal income (A) from the result in C
E – Multiply the result in D (which is tax on the 20% abnormal income slice) by 5. This gives you the total (“averaged”) tax on abnormal income.
F – Add the result in E to the result in A. This is the total tax payable.
Medicare levy is additional, and determined in the normal way on entire taxable income.
To simplify the arithmetic and clarify how the rules work, download the spreadsheet (see image).
The spreadsheet is based on simple-scenario assumptions, and should not be relied on without professional advice specific to your circumstances.
- ATOID 2014/41 – The averaging provisions can apply to income from Google for YouTube videos
- TR 92/12 – Income tax: notional averaging of net capital gains or of abnormal income to calculate the rate of tax payable on taxable income
- Income averaging for special professionals 2017
- Income averaging for special professionals 2016
- Income averaging for special professionals 2014-15
- Income averaging for special professionals 2013-14
This page was last modified 2017-12-16