You do not need to work out your tax payable with income averaging. We will work it out from the amount at Z item 24 on your tax return. If you want to work it out for yourself, follow these steps:
Add your ATPI to your taxable income that is not subject to income averaging (your taxable non-professional income). The total, called your ‘other income’, is taxed at normal rates.
Subtract your ATPI from this year’s TPI to get your above average special professional income. To work out the tax payable on this income:
Add the tax on your ‘other income’ and the tax on your above-average special professional income. The result is your total tax payable.
Example: Working out tax payable with income averaging
Kevin has a taxable income of $60,000, including assessable professional income of $45,000. He has deductions of $5,000 that reasonably relate to his assessable professional income (this amount does not include gifts) and he has no other deductions. His average TPI over the last four years was $9,000.
Kevin’s tax payable, before the Medicare levy or tax offsets are taken into account, is $7,942.00. It would have been $11,047.00 (the tax on $60,000) if income averaging had not been applied.
The following steps show you how Kevin’s tax payable has been worked out
Assessable professional income
= row a − row b
= $45,000 − $5,000
Kevin transfers the amount at row c to Z item 24 on his tax return (supplementary section) and, if he has not already included any of this amount at item 1, 2, 13, 14 or 15, he also writes it at V item 24 on his tax return (supplementary section).
one-quarter of the sum of your TPI for the preceding four years, not including this income year
= $9,000 (d)
Taxable non-professional income
amount of TAXABLE INCOME OR LOSS at $ on his tax return minus the amount shown at Z item 24 on his tax return (supplementary section)
= $60,000 − $40,000
= $20,000 (e)
= (d) + (e)
= $9,000 + $20,000
= $29,000 (f)
Tax on other income at ordinary rates
= $2,052 (g)
Above-average special professional income
= (c) − (d)
= $40,000 − $9,000
= $31,000 (h)
Tax on (other income plus one-fifth of above-average special professional income)
= tax on [(f) + 1/5 (h)]
= tax on [$29,000 + $6,200]
= Tax on $35,200
= $3,230 (i)
Tax on above-average special professional income
= [(i) − (g)] × 5
= [$3,230 − $2,052.00] × 5
= 5,890 (j)
Kevin's tax payable
End of example
= (g) + (j)
= $2,052 + $5,890
= 7,942 (k)