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How to work out total tax payable with income averaging

Last updated 19 December 2006

You do not need to work out your total tax payable with income averaging. The ATO will work it out from the amount at Z item 22 on your tax return. If you want to work it out for yourself, follow these steps.

Step 1

Add your ATPI to your taxable income which is not subject to income averaging-your taxable non-professional income. The total, called your other income, is taxed at normal rates.

Step 2

Take away your ATPI from this year's TPI to give you your above-average special professional income. To work out the tax payable on this income:

  • to your other income add one-fifth of your above-average special professional income
  • work out the tax payable on this amount
  • subtract the tax payable on your other income
  • multiply the result by five.

Step 3

Add the tax on your other income and the tax on your above-average special professional income. The result is your total tax payable.

For more information, ring the Personal Tax Infoline on 13 28 61 for the cost of a local call.

Example: Working out tax payable with income averaging

Kevin has a taxable income of $40,000, including assessable professional income of $33,000. He has deductions of $3,000 that reasonably relate to his assessable professional income-this amount does not include gifts-and no other deductions. His average TPI over the last 4 years was $6,250.

Kevin's tax payable-before any Medicare levy has been worked out-is $6,430. It would have been $8,380-the tax on $40,000-if averaging had not been applied.

The following steps show you how Kevin's tax has been worked out.

Step 1

Assessable professional income

a

$33,000

Step 2

Deductions

b

$3,000

Step 3

Taxable professional income
= (a) − (b)
= $33,000 − $3,000

Kevin shows this amount at Z and at V item 22 on his tax return

c

$30,000

Step 4

Average taxable professional income = 1/4 of TPI for the preceding 4 years-not including this income year

d

$6,250

Step 5

Taxable non-professional income
= amount of total taxable income at $ on his tax return minus the amount shown at Z item 22 on his tax return
= $40,000 − $30,000

e

$10,000

Step 6

Other income
= (d) + (e)
= $6,250 + $10,000

f

$16,250

Step 7

Tax on other income at step 6 at ordinary rates

g

$1,742.50

Step 8

Above-average special professional income
= (c) − (d)
= $30,000 − $6,250

h

$23,750

Step 9

Tax on (other income plus 1/5 of above-average special professional income)
= tax on (f) + 1/5 (h)
= tax on $21,000

i

$2,680

Step 10

Tax on above-average special professional income
= [( i) − (g)] × 5
= (2,680 − 1,742.50) × 5

j

$4,687.50

Step 11

Kevin's total tax
= (g) + (j)
= 1,742.50 + 4,687.50

k

$6,430

 

End of example

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