Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

9   Section 387-505 (link note)

Repeal the link note, substitute:

[The next Division is Division 392.]

Division 392 - Long-term averaging of primary producers' tax liability

Table of Subdivisions

Guide to Division 392

392-A Is your income tax affected by averaging?

392-B What kind of averaging adjustment must you make?

392-C How big is your averaging adjustment?

392-D Effect of permanent reduction of your basic taxable income

Guide to Division 392

392-1 What this Division is about

If you are a primary producer for 2 or more years in a row, this Division evens out your income tax liability from year to year. (It does so by reducing the effect that fluctuations in your taxable income have on the marginal rates of tax that apply to you from year to year.)

Table of sections

392-5 Overview of averaging process

392-5 Overview of averaging process

How averaging adjustments work

(1) This Division reduces or increases your income tax liability to bring it closer to what it would have been if worked out using a special rate of income tax. That rate (the *comparison rate) is based on the income tax that you would pay for the *current year on the average of your taxable income for up to the last 5 income years.

Example: The graph shows how averaging taxable income reduces the effect of variations in taxable income (giving a fairly steady comparison rate from year to year).

How averaging taxable income reduces the effect of variations in taxable income (giving a fairly steady comparison rate from year to year)
              

Tax offset as averaging adjustment

(2) You may be entitled to a *tax offset if the income tax you would pay on your *basic taxable income for the *current year at the *comparison rate is less than the income tax you would pay on that income (apart from this Division and certain other provisions).

See the examples of years 5, 6, 7 and 9 in the graph in subsection (4).

Extra income tax as averaging adjustment

(3) You may be liable to extra income tax on some or all of your *basic taxable income for the *current year if the income tax you would pay on your basic taxable income for the current year at the *comparison rate is more than the income tax on that income (apart from this Division and certain other provisions).

See the examples of years 8 and 10 in the graph in subsection (4).

Example of the effect of averaging

(4) The graph shows an example of the effect of averaging, using the same income figures as the graph in the example in subsection (1).

An example of the effect of averaging, using the same income figures as the graph in the example in subsection (1)
              

Note: The example assumes that all the basic taxable income was from a primary production business, and that the taxpayer's tax-free threshold was not affected by family tax assistance (under Division 5 of Part II of the Income Tax Rates Act 1986).

Effect of non-primary production income on averaging adjustment

(5) Your income from sources other than your *primary production business may affect the adjustment of your income tax. If more than $5,000 of your *basic taxable income is attributable to those sources, your *averaging adjustment will be reduced to reflect the proportion of your basic taxable income attributable to primary production. (There are special shading-out arrangements if your taxable income from other sources is between $5,000 and $10,000.)

No adjustment in certain cases

(6) Your income tax will not be adjusted under this Division in certain cases. In particular, you can choose not to have your income tax adjusted under this Division for the rest of your life.

Subdivision 392-A - Is your income tax affected by averaging?

Table of sections

392-10 Individuals who carry on a primary production business

392-15 Meaning of basic taxable income

392-20 Trust beneficiaries taken to be carrying on primary production business

392-25 Choosing not to have your income tax averaged

392-10 Individuals who carry on a primary production business

(1) This Division applies to your assessment for the *current year if:

(a) you are an individual; and

(b) you have carried on a *primary production business in Australia for 2 or more income years in a row (the last of which is the current year); and

(c) for at least one of those income years your *basic taxable income is less than or equal to your basic taxable income for the next of those income years.

Note 1: It follows that this Division does not apply if your basic taxable income has decreased every income year since you started carrying on a primary production business.

Note 2: In working out whether this Division applies to your assessment for an income year, you may need to take account of income years before the 1998-99 income year: see section 392-1 of the Income Tax (Transitional Provisions) Act 1997.

Continued application of this Division after you stop carrying on a primary production business

(2) This Division also applies to your assessment for the *current year if:

(a) this Division applied to your assessment for an earlier income year during which you carried on a *primary production business in Australia; and

(b) you do not carry on that business during the current year; and

(c) at least one of the following conditions is met for each income year (including the current year) after the income year in which you stopped carrying on that business:

(i) your assessable income for the income year included assessable income that was *derived from, or resulted from, your having carried on that business;

(ii) you carried on a *primary production business in Australia during the income year.

Note: In working out whether this Division applies to your assessment for an income year, you may need to take account of income years before the 1998-99 income year. See section 392-1 of the Income Tax (Transitional Provisions) Act 1997.

392-15 Meaning of basic taxable income

(1) Work out your basic taxable income for an income year as follows:

Method statement

Step 1. Work out what would have been your taxable income for the income year if your assessable income for the income year:

(a) had not included any amount under subsection 27B(1A) or (3) (Assessable income to include certain superannuation and kindred payments) of the Income Tax Assessment Act 1936; and

Note: This means that certain deductions will also be excluded.

(b) had not included any *net capital gain for the income year.

Step 2. Subtract from the Step 1 amount any *above-average special professional income included in your taxable income for the income year under Division 405.

(2) However, your basic taxable income for an income year is nil if:

(a) you do not have a taxable income for the income year; or

(b) the amount worked out under subsection (1) for the income year is less than nil.

392-20 Trust beneficiaries taken to be carrying on primary production business

(1) You are taken to carry on a *primary production business carried on by a trust during an income year if you are a beneficiary presently entitled to all or part of the trust income for the income year.

(2) However, you are not taken to carry on the *primary production business if you are presently entitled to less than $1,040 of the trust income for the income year, unless the Commissioner is satisfied that your interest in the trust was not acquired or granted wholly or primarily to enable your income tax to be adjusted under this Division.

(3) You are not taken to carry on a *primary production business carried on by the trustee of:

(a) a corporate unit trust (as defined in section 102J of the Income Tax Assessment Act 1936, which deals with corporate unit trusts); or

(b) a public trading trust (as defined in section 102R of the Income Tax Assessment Act 1936, which deals with public trading trusts).

392-25 Choosing not to have your income tax averaged

(1) You can choose that this Division (except this section) not apply to your assessment for an income year. If you make this choice, this Division (except this section) does not apply to your assessment for the income year or any later income year.

(2) You must make your choice in writing and give it to the Commissioner by the time you lodge your *income tax return for the income year to which your choice relates. However, the Commissioner may allow you to give the choice later.

(3) Your choice cannot be revoked after it is given to the Commissioner.

Subdivision 392-B - What kind of averaging adjustment must you make?

Guide to Subdivision 392-B

392-30 What this Subdivision is about

This Subdivision explains how to work out whether you are entitled to a tax offset for the current year or whether you must pay extra income tax for the current year.

Table of sections

Tax offset or extra income tax

392-35 Will you get a tax offset or have to pay extra income tax?

How to work out the comparison rate

392-40 Identify income years for averaging your basic taxable income

392-45 Work out your average income for those years

392-50 Work out the income tax on your average income at basic rates

392-55 Work out the comparison rate

Tax offset or extra income tax

392-35 Will you get a tax offset or have to pay extra income tax?

(1) Compare:

(a) the amount (the income tax you would pay at the comparison rate) worked out using the formula:

Basic taxable income for current year * Comparison rate

(b) the amount of income tax that you would pay on your *basic taxable income for the *current year at *basic rates.

Note: You must disregard some provisions of this Act in working out amounts of income tax for the purposes of this subsection: see subsection (5).

Tax offset

(2) You are entitled to a *tax offset equal to the *averaging adjustment worked out under Subdivision 392-C if the income tax you would pay at the comparison rate is less than the amount of income tax you would pay at *basic rates.

Extra income tax

(3) You must pay extra income tax on the *averaging component of your *basic taxable income if the income tax you would pay at the comparison rate is more than the amount of income tax you would pay at *basic rates.

Note 1: Section 12A of the Income Tax Rates Act 1986 sets the rate at which you must pay extra income tax on the averaging component of your basic taxable income.

Note 2: It does so in such a way that, generally, the extra income tax you must pay equals the averaging adjustment worked out under Subdivision 392-C.

Note 3: If family tax assistance raises your tax-free threshold above your taxable income, subsections 12A(3) and (4) of that Act set a lower rate, so that the extra income tax you must pay is reduced by the amount of income tax that family tax assistance would have saved you had your taxable income been increased to equal your tax-free threshold.

Meaning of basic rates

(4) The basic rates at which you would pay income tax are:

(a) if you are a resident taxpayer as defined in the Income Tax Rates Act 1986 - the rates of income tax in paragraph 1(b) of Part I of Schedule 7 to that Act:

(i) taking into account the way it would apply with any changes to your tax-free threshold under section 20 of that Act; and

(ii) disregarding the effect of Division 5 of Part II of that Act (which provides family tax assistance); or

(b) if you are a non-resident taxpayer as defined in the Income Tax Rates Act 1986 - the rates of income tax in paragraph 1(b) of Part II of Schedule 7 to that Act.

Disregard certain provisions in working out amounts

(5) Work out the amount of income tax mentioned in paragraph (1)(b) as if:

(a) the following provisions did not apply:

(i) this Division;

(ii) section 94 (Partner not having control and disposal of share in partnership income) of the Income Tax Assessment Act 1936;

(iii) Division 6AA (Income of certain children) of Part III of the Income Tax Assessment Act 1936;

(iv) Part VIIB (Medicare levy) of the Income Tax Assessment Act 1936; and

(b) you were not entitled to any rebate or credit under the Income Tax Assessment Act 1936 or to any *tax offset under this Act.

No adjustment

(6) This Division does not affect your income tax for the *current year if the income tax you would pay at the *comparison rate equals the amount of income tax you would pay at *basic rates.

Note: The 2 amounts will be equal if:

? your basic taxable income and your average income are both below the tax-free threshold (disregarding any alteration of the threshold by way of family tax assistance); or

? your average income equals your basic taxable income for the current year.

How to work out the comparison rate

392-40 Identify income years for averaging your basic taxable income

The income years over which you must average your *basic taxable income are:

(a) if this Division has applied to your assessment for at least 4 income years in a row (including the *current year) - the current year and the 4 previous income years; or

(b) if this Division has applied to your assessment for less than 4 income years in a row (including the *current year) - those income years and the last income year before them.

Note: You may need to average your basic taxable income for one or more income years before the 1998-99 income year. See section 392-1 of the Income Tax (Transitional Provisions) Act 1997.

392-45 Work out your average income for those years

(1) Work out your average income in this way:

Method statement

Step 1. Add up your *basic taxable income for each of the income years over which you must average your basic taxable income.

Step 2. Divide the sum by the number of those income years.

Step 3. Round the result down to the nearest whole dollar if the result is not already a number of whole dollars.

(2) Your basic assessable income for an income year is your assessable income for the income year, less:

(a) any amount included in your assessable income under subsection 27B(1A) or (3) (Assessable income to include certain superannuation and kindred payments) of the Income Tax Assessment Act 1936; and

(b) any *net capital gain included in your assessable income under Division 102 of the Income Tax Assessment Act 1997.

392-50 Work out the income tax on your average income at basic rates

Work out the amount of income tax that you would pay on your *average income for the *current year at *basic rates.

392-55 Work out the comparison rate

Work out the comparison rate using the formula:

Income tax on average income, as worked out under section 392-50 / Average income

Subdivision 392-C - How big is your averaging adjustment?

Guide to Subdivision 392-C

392-60 What this Subdivision is about

This Subdivision explains how to work out the amount of the averaging adjustment of your income tax for the current year (whether it is a tax offset or is used by the Income Tax Rates Act 1986 to set the rate at which you must pay extra income tax).

Table of sections

392-65 What your averaging adjustment reflects

Your gross averaging amount

392-70 Working out your gross averaging amount

Your averaging adjustment

392-75 Working out your averaging adjustment

How to work out your averaging component

392-80 Work out your taxable primary production income

392-85 Work out your taxable non-primary production income

392-90 Work out your averaging component

392-65 What your averaging adjustment reflects

(1) Your *averaging adjustment is a proportion of your *gross averaging amount, taking account of:

(a) your *taxable primary production income (the part of your *basic taxable income from your *primary production business); and

(b) your *taxable non-primary production income (the part of your *basic taxable income from other sources).

Your *averaging component is the means of taking into account the different parts of your basic taxable income in working out your averaging adjustment.

(2) If your *taxable non-primary production income is less than or equal to $5,000, your *averaging component equals the whole of your *basic taxable income. (In other words, your averaging component includes all of your *taxable primary production income and all of your taxable non-primary production income.)

(3) If your *taxable non-primary production income is between $5,000 and $10,000, a shading-out system applies so that your *averaging component includes some of your taxable non-primary production income as well as all of your *taxable primary production income.

(4) If your *taxable non-primary production income is $10,000 or more, your *averaging component equals your *taxable primary production income. Your averaging component does not include any of your taxable non-primary production income.

(5) The following diagram shows examples of these relationships.

The second and third columns show that as taxable non-primary production income increases above $5,000 (up to a maximum of $10,000), less of it is counted in the averaging component.

Your gross averaging amount

392-70 Working out your gross averaging amount

Your gross averaging amount is the amount of the difference between the following amounts worked out under section 392-35:

(a) the income tax you would pay at the comparison rate;

(b) the amount of income tax that you would pay on your *basic taxable income for the *current year at *basic rates.

Your averaging adjustment

392-75 Working out your averaging adjustment

Work out your averaging adjustment for the *current year using the formula:

Gross averaging amount * (Averaging component / Bsic taxable income)

How to work out your averaging component

392-80 Work out your taxable primary production income

(1) Work out your taxable primary production income for the *current year in this way:

Method statement

Step 1. Compare your *assessable primary production income for the *current year with your *primary production deductions for the current year.

Step 2. If your assessable primary production income is larger than your primary production deductions, your taxable primary production income is the difference between them.

Step 3. If your primary production deductions are larger than (or equal to) your assessable primary production income, your taxable primary production income is nil.

Assessable primary production income

(2) Your assessable primary production income for the *current year is the amount of your *basic assessable income for the current year that was *derived from, or resulted from, your carrying on a *primary production business.

Primary production deductions

(3) Work out your primary production deductions for the *current year in this way:

Method statement

Step 1. Add any amounts you can deduct (except *apportionable deductions) for the *current year, so far as they reasonably relate to your *assessable primary production income for an income year.

Step 2. Work out the result of applying the formula:

where:

assessable PP income means your *assessable primary production income for the *current year.

Step 3. Add the sum from Step 1 to the result from Step 2 (which may be negative): the total is your primary production deductions.

392-85 Work out your taxable non-primary production income

(1) Work out your taxable non-primary production income for the *current year in this way:

Method statement

Step 1. Compare your *assessable non-primary production income for the *current year with your *non-primary production deductions for the current year.

Step 2. If your assessable non-primary production income is larger than your non-primary production deductions, your taxable non-primary production income is the difference between them.

Step 3. If your non-primary production deductions are larger than (or equal to) your assessable non-primary production income, your taxable non-primary production income is nil.

Assessable non-primary production income

(2) Your assessable non-primary production income for the *current year is the difference between:

(a) your *basic assessable income for the current year; and

(b) your *assessable primary production income for the current year.

Non-primary production deductions

(3) Your non-primary production deductions for the *current year are the difference between:

(a) the sum of your deductions for the current year; and

(b) your *primary production deductions for the current year.

392-90 Work out your averaging component

(1) Work out your averaging component for the *current year using the following table, taking into account:

(a) your *taxable primary production income for the current year; and

(b) your *taxable non-primary production income for the current year.

Note: Subsections (2) and (3) explain how to work out your non-primary production shade-out amount if your taxable non-primary production income is between $5,000 and $10,000.

Non-primary production shade-out amount if your taxable primary production income is more than nil

(2) If your *taxable primary production income is more than nil, your non-primary production shade-out amount is the amount worked out using the formula:

$10,000 - Taxable non-PP income

Non-primary production shade-out amount if your taxable primary production income is nil

(3) If your *taxable primary production income is nil, your non-primary production shade-out amount is the amount worked out using the formula:

$10,000 - Taxable non-PP income - (PP deductions - Assessable PP income)

However, if that amount is less than nil, your non-primary production shade-out amount is nil.

(4) In this section:

Assessable PP income means your *assessable primary production income for the *current year.

PP deductions means your *primary production deductions for the *current year.

Taxable non-PP income your *taxable non-primary production income for the *current year.

Subdivision 392-D - Effect of permanent reduction of your basic taxable income

Table of sections

392-95 You are treated as if you had not carried on business before

392-95 You are treated as if you had not carried on business before

Choosing to discontinue and restart averaging

(1) You can choose that this Division not affect your income tax liability for an income year (the reduction year) if you show the Commissioner that, because of retirement from your occupation or from any other cause, your *basic taxable income for the reduction year is permanently reduced during that year to less than two thirds of your *average income for that year.

(1A) You must make the choice by notifying the Commissioner in writing by the day you lodge your *income tax return for the reduction year. However, the Commissioner can allow you to make it later.

(1B) If you make a choice under subsection (1), this Division applies to assessments for later income years as if you had never carried on a *primary production business before the reduction year.

Working out the extent of the permanent reduction

(2) In working out the extent of the permanent reduction, you must work out your *average income for the reduction year on the basis that your *basic assessable income for an income year taken into account in working out your average income did not include any assessable income from sources from which you do not usually receive assessable income.

(3) In working out the extent of the permanent reduction, disregard a reduction in *basic taxable income to the extent that it results from a change of assets from which assessable income was *derived into assets from which you derive income that is not assessable income.

[The next Division is Division 400.]

Division 400 - Environmental impact assessment and environmental protection

Table of Subdivisions

Guide to Division 400

400-A Deducting expenditure on environmental impact assessment

400-B Deducting expenditure on environmental protection activities

400-C Property taken to be used for producing assessable income

Guide to Division 400

400-1 What this Division is about

This Division creates 2 capital allowances.

Note: Division 40 sets out an overview of capital allowances.

Under Subdivision 400-A you can deduct expenditure on assessing the environmental impact of an income-producing project. Generally, you deduct the expenditure over 10 years, but the period may be shorter, depending on the project's estimated life.

Under Subdivision 400-B you can deduct expenditure on preventing or treating waste and pollution of the environment connected with your income-producing activities or the site of those activities. You deduct in the income year in which you incur the expenditure.

Subdivision 400-C treats your use of property for certain environmental activities as use for the purpose of producing assessable income. (This may let you deduct expenditure on the property under other provisions).

Subdivision 400-A - Deducting expenditure on environmental impact assessment

Table of sections

400-15 Deducting your expenditure on environmental impact assessment of your project

400-20 Limits on deductions

400-15 Deducting your expenditure on environmental impact assessment of your project

(1) You can deduct amounts for expenditure to the extent that you incur it on carrying out an activity for the sole or dominant purpose of evaluating the impact on the environment (or the likely impact) of a project that is carried out, or is proposed to be carried out:

(a) for the *purpose of producing your assessable income for an income year (except a *net capital gain); or

(b) for purposes that include that purpose.

(2) However, you cannot deduct expenditure under this section to the extent that you incur it for the purpose of determining the economic feasibility of your project.

(3) The table shows the amount and timing of your deductions.

Note 1: Various provisions may reduce the amount you can deduct or stop you deducting. For example, see:

? section 400-20 of this Act (specifying amounts you cannot deduct under this Subdivision);

? Division 26 of this Act (limiting deductions generally);

? Division 245 of Schedule 2C to the Income Tax Assessment Act 1936 (which may affect your entitlement to a deduction if your debts are forgiven).

Note 2: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20-A.

400-20 Limits on deductions

No deduction for expenditure deductible under other provisions

(1) You cannot deduct an amount under this Subdivision for an income year for expenditure to the extent to which:

(a) you can deduct an amount for it under a provision of this Act outside this Subdivision for an income year; or

(b) it is taken into account in calculating an amount of depreciation that is deductible under Division 42.

Note: The fact that you can deduct an amount under section 82BB of the Income Tax Assessment Act 1936 for the expenditure does not prevent you from deducting under this Subdivision: see section 400-20 of the Income Tax (Transitional Provisions) Act 1997.

Common rule 2 applies

(2) Subdivision 41-B (which sets out Common rule 2 dealing with non-arm's length transactions) applies to expenditure for which you can deduct amounts under this Subdivision, but with the modification in subsection (3) of this section.

(3) If subsection 41-65(1) applies, it has a wider operation in 2 ways.

First, it also operates if the amount of the expenditure is less than the market value of what the expenditure is for.

Second, if the amount of the expenditure is greater than or less than that market value, the amount of the expenditure is taken, for the purposes of applying this Act to both parties, to be that market value.

No deduction for expenditure excluded from general deductions

(4) You cannot deduct expenditure under section 400-15 to the extent that a provision of this Act (except section 8-1 itself) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1.

Subdivision 400-B - Deducting expenditure on environmental protection activities

Table of sections

400-55 Deducting your expenditure on environmental protection activities

400-60 Meaning of environmental protection activities

400-65 Limits on deductions

400-55 Deducting your expenditure on environmental protection activities

(1) You can deduct expenditure to the extent that you incur it for the sole or dominant purpose of carrying on *environmental protection activities.

(2) You deduct the expenditure for the income year in which you incur it.

Note 1: Various provisions may reduce the amount you can deduct or stop you deducting. For example, see:

? section 400-65 of this Act (specifying amounts you cannot deduct under this Subdivision);

? Division 26 of this Act (limiting deductions generally).

Note 2: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20-A.

400-60 Meaning of environmental protection activities

(1) Environmental protection activities are any of the following activities that are carried on by or for you:

(a) preventing, fighting or remedying:

(i) pollution resulting, or likely to result, from *your earning activity; or

(ii) pollution of or from the site of *your earning activity; or

(iii) pollution of or from a site where an entity was carrying on any *business that you have acquired and carry on substantially unchanged as *your earning activity;

(b) treating, cleaning up, removing or storing:

(i) waste resulting, or likely to result, from *your earning activity; or

(ii) waste that is on or from the site of *your earning activity; or

(iii) waste that is on or from a site where an entity was carrying on any *business that you have acquired and carry on substantially unchanged as *your earning activity.

No other activities are environmental protection activities.

(2) Your earning activity is an activity you carried on, carry on, or propose to carry on:

(a) for the *purpose of producing your assessable income for an income year (except a *net capital gain); or

(b) for purposes that include that purpose.

(3) If *your earning activity is:

(a) leasing a site you own; or

(b) granting a right to use a site you own or control; or

(c) a similar activity involving a site;

that site is taken to be the site of your earning activity.

Note: This means you can deduct your expenditure on environmental protection activities relating to the site, even if the pollution or waste is caused by another entity that uses the site.

400-65 Limits on deductions

Expenditure you cannot deduct

(1) You cannot deduct an amount under this Subdivision for an income year for:

(a) expenditure for acquiring land; or

(b) expenditure to the extent to which it is taken into account in calculating an amount of depreciation that is deductible under Division 42; or

(c) capital expenditure for constructing a building, structure or structural improvement; or

(d) capital expenditure for constructing an extension, alteration or improvement to a building, structure or structural improvement; or

(e) a bond or security (however described) for performing *environmental protection activities; or

(f) expenditure to the extent that you can deduct an amount for it under a provision of this Act outside this Subdivision.

Note: You may be able to deduct expenditure described in paragraph (1)(c) or (d) under Division 43 (which deals with capital works).

(2) In particular, you cannot deduct under this Subdivision expenditure to the extent that you incur it on carrying out an activity as mentioned in subsection 400-15(1) (about deductions for environmental impact assessment of your project).

Common rule 2 applies

(3) Subdivision 41-B (which sets out Common rule 2 dealing with non-arm's length transactions) applies to expenditure for which you can deduct amounts under this Subdivision, but with the modification in subsection (4) of this section.

(4) If subsection 41-65(1) applies, it has a wider operation in 2 ways.

First, it also operates if the amount of the expenditure is less than the market value of what the expenditure is for.

Second, if the amount of the expenditure is greater than or less than that market value, the amount of the expenditure is taken, for the purposes of applying this Act to both parties, to be that market value.

No deduction for expenditure excluded from general deductions

(5) You cannot deduct expenditure under section 400-55 to the extent that a provision of this Act (except section 8-1 itself) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1.

Subdivision 400-C - Property taken to be used for producing assessable income

Table of sections

400-100 Use for environmental impact assessment or environmental protection activities taken to be use for purpose of producing assessable income

400-100 Use for environmental impact assessment or environmental protection activities taken to be use for purpose of producing assessable income

(1) For the purposes of this Act, you are taken to use property for the *purpose of producing assessable income if you use it for:

(a) carrying out an activity as mentioned in subsection 400-15(1) (about environmental impact assessment of your project); or

(b) *environmental protection activities.

Note: This may let you get a deduction relating to the property under a provision of this Act outside this Division (such as Division 42, which allows deductions for depreciation of plant used for the purpose of producing assessable income).

(2) However, subsection (1) is subject to a provision of this Act that expressly provides that a particular use of property is taken not to be for the *purpose of producing assessable income.

Note: There is a list of some provisions of that kind in Note 2 to the definition of purpose of producing assessable income in subsection 995-1(1).

[The next Division is Division 405.]

Division 405 - Above-average special professional income of authors, inventors, performing artists, production associates and sportspersons

Table of Subdivisions

Guide to Division 405

405-A Above-average special professional income

405-B Assessable professional income

405-C Taxable professional income and average taxable professional income

Guide to Division 405

405-1 What this Division is about

Significant fluctuations can occur in the professional incomes of authors, inventors, performing artists, production associates and sportspersons.

To lessen the impact of these fluctuations on your marginal tax rates, special tax rates apply if your professional income is above your average.

This Division explains how the scheme works and sets out the rules for working out your above-average special professional income.

Table of sections

405-5 Special rate of income tax on your above-average special professional income

405-10 Overview of the Division

405-5 Special rate of income tax on your above-average special professional income

(1) If you have *above-average special professional income, the Income Tax Rates Act 1986 generally sets a special rate so that the amount of income tax you pay on the top 4/5 of your above-average special professional income is effectively 4 times what you would pay on the bottom 1/5 of that income at *basic rates.

Note 1: Your overall income tax will be less only if 2 marginal rates of income tax would apply to your above-average special professional income if it were treated as the top slice of your taxable income.

Note 2: Section 20F of the Income Tax Rates Act 1986 sets a different special rate if:

? family tax assistance (under Division 5 of Part II of that Act) would increase your tax-free threshold (apart from that section); and

? any of your above-average special professional income would be below the adjusted tax-free threshold if that income were treated as the top slice of your taxable income.

(2) The following diagram illustrates how the special rate works.

How the special rate works
              

405-10 Overview of the Division

For which income years do you have above-average special professional income?

(1) The first income year for which you have *above-average special professional income is the first income year (*professional year 1):

(a) for which your *taxable professional income is more than $2,500; and

(b) during all or part of which you are an Australian resident.

(2) After *professional year 1, you have *above-average special professional income for any income year for all or part of which you are an Australian resident.

Note: You need not have been an Australian resident for every income year since professional year 1.

What is above-average special professional income?

(3) Your *above-average special professional income for the *current year is the amount (if any) by which your *taxable professional income exceeds your *average taxable professional income.

See Subdivision 405-A.

What is taxable professional income?

(4) Your *taxable professional income depends on your *assessable professional income.

See section 405-45.

(5) Your *assessable professional income is assessable income from your work as an author, inventor, *performing artist, *production associate or *sportsperson.

See Subdivision 405-B.

How do you work out your average taxable professional income?

(6) Generally, your *average taxable professional income for the *current year is the average of your *taxable professional income for the last 4 income years.

See section 405-50.

(7) However, special phasing-in arrangements apply to work out your *average taxable professional income for an income year that is less than 4 income years after *professional year 1.

These arrangements favour people who were Australian residents for at least part of the income year before professional year 1.

See section 405-50.

Subdivision 405-A - Above-average special professional income

Table of sections

405-15 When do you have above-average special professional income?

405-15 When do you have above-average special professional income?

(1) Your taxable income for the *current year includes above-average special professional income if and only if:

(a) you are an individual; and

(b) you have been an Australian resident for all or part of the current year; and

(c) your *taxable professional income for the current year exceeds your *average taxable professional income for the current year; and

(d) either:

(i) your *taxable professional income for the current year is more than $2,500; or

(ii) your *taxable professional income for an earlier income year was more than $2,500 and you were an Australian resident for all or part of that income year.

Note: Your taxable income for an income year can include above-average special professional income even if you meet the requirement in subparagraph (1)(d)(ii) for an income year before the 1998-99 income year: see section 405-1 of the Income Tax (Transitional Provisions) Act 1997.

How much above-average special professional income do you have?

(2) The amount of *above-average special professional income in your taxable income for the *current year is the difference between:

(a) your *taxable professional income for the current year; and

(b) your *average taxable professional income for the current year.

Subdivision 405-B - Assessable professional income

Table of sections

405-20 What you count as assessable professional income

405-25 Meaning of special professional, performing artist, production associate, sportsperson and sporting competition

405-30 What you cannot count as assessable professional income

405-35 Limits on counting amounts as assessable professional income

405-40 Joint author or inventor treated as sole author or inventor

405-20 What you count as assessable professional income

(1) Work out your assessable professional income for an income year by adding up all your assessable income for the income year that you count under this Subdivision.

Note 1: Section 405-30 may stop you counting an amount.

Note 2: Subsection 405-35(1) stops you counting an amount more than once, even if it is described in more than one subsection of this section.

Note 3: Subsection 405-35(2) may affect the amount you count.

Assessable income from professional services

(2) You count any assessable income that you *derive as a reward for providing services relating to your activities as a *special professional.

Assessable income from prizes

(3) You also count any assessable income that you *derive as a prize for your activities as a *special professional.

Assessable income from promotions and commentary

(4) You also count any assessable income that you *derive, because you are or were a *special professional, for:

(a) endorsing or promoting goods or services; or

(b) appearing or participating in an advertisement; or

(c) appearing or participating in an interview; or

(d) providing services as a commentator; or

(e) providing similar services.

Assessable income from assigning copyright or granting a licence

(5) You also count any assessable income that you *derive:

(a) as consideration for:

(i) assigning all or part of the copyright in a literary, dramatic, musical or artistic work of which you are the author; or

(ii) granting an interest in the copyright in such a work by granting a licence; or

(b) as an advance on account of royalties relating to such a copyright.

Assessable income from assigning or granting patent rights

(6) You also count any assessable income that you *derive:

(a) as consideration for:

(i) assigning all or part of the patent for an invention that you invented; or

(ii) granting an interest in the patent for such an invention by granting a licence; or

(iii) assigning the right to apply for a patent for such an invention; or

(b) as an advance on account of royalties relating to such a patent.

Other assessable income from works or inventions

(7) You also count any assessable income that you *derive (as *royalties or otherwise):

(a) for a literary, dramatic, musical or artistic work of which you are the author; or

(b) in relation to copyright in such a work; or

(c) for an invention that you invented; or

(d) in relation to a patent for such an invention.

405-25 Meaning of special professional, performing artist, production associate, sportsperson and sporting competition

Special professional

(1) You are a special professional if you are:

(a) the author of a literary, dramatic, musical or artistic work; or

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.

(b) the inventor of an invention; or

(c) a *performing artist; or

(d) a *production associate; or

(e) a *sportsperson.

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.

Production associate

(4) You are a production associate if you provide *artistic support for:

(a) an activity described in subsection (2); 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.

Sportsperson

(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.

405-30 What you cannot count as assessable professional income

Assessable income from continuous service as author or inventor

(1) You cannot count as *assessable professional income any assessable income you *derive for meeting your obligations under a *scheme to provide services to another person by engaging in activities as the author of a literary, dramatic, musical or artistic work, or as the inventor of an invention, unless:

(a) the scheme was entered into solely to require you to provide services by:

(i) making one or more specified literary, dramatic, musical or artistic works; or

(ii) inventing one or more specified inventions; and

(b) you have not been providing services, and may not reasonably be expected to provide services, to that person or his or her *associates under successive *schemes that result in substantial continuity of your providing services.

Assessable income from certain activities

(2) You cannot count as *assessable professional income any assessable income that you *derive for:

(a) coaching or training *sportspersons; or

(b) umpiring or refereeing a *sporting competition; or

(c) administering a *sporting competition; or

(d) being a member of the pit crew in motor sport; or

(e) being a theatrical or sports entrepreneur; or

(f) owning or training animals.

Payments at end of employment, and capital gains

(3) You cannot count as *assessable professional income:

(a) an eligible termination payment as defined in Subdivision AA (Superannuation and kindred payments) of Division 2 of Part III of the Income Tax Assessment Act 1936; or

(b) a payment for leave that is covered by section 26AC or 26AD of the Income Tax Assessment Act 1936; or

(c) a net capital gain under Part IIIA (Capital gains and capital losses) of the Income Tax Assessment Act 1936.

This section prevails over section 405-20

(4) You cannot count particular assessable income as *assessable professional income if this section says you cannot, even if section 405-20 says you count it.

405-35 Limits on counting amounts as assessable professional income

No double-counting

(1) You cannot count the same amount as *assessable professional income more than once, even if it is described in more than one subsection of section 405-20.

Amounts that are partly assessable professional income

(2) If:

(a) you *derive assessable income under or as a result of a *scheme; and

(b) the assessable income consists of a part that is counted as *assessable professional income and another part that cannot be; and

(c) one component is unreasonably large and the other component is unreasonably small, for reasons that are directly or indirectly related to one another;

you must work out your *assessable professional income as if the unreasonably large component were reduced by a reasonable amount and the unreasonably small component were increased by the same amount.

(3) Subsection (2) affects your *assessable professional income:

(a) whether you *derived the assessable income directly or indirectly under or as a result of the *scheme; and

(b) whether or not a reason mentioned in paragraph (2)(c) is the only reason why a component is unreasonably large or small.

405-40 Joint author or inventor treated as sole author or inventor

(1) If you are a joint author of a literary, dramatic, musical or artistic work, work out your *assessable professional income as if you were the author of that work.

Note: This section means that you are treated as a special professional, even if you have never been the sole author of a work.

(2) If you are a joint inventor of an invention, work out your *assessable professional income as if you were the inventor of that invention.

Note: This section means that you are treated as a special professional, even if you have never been the sole inventor of an invention.

Subdivision 405-C - Taxable professional income and average taxable professional income

Table of sections

405-45 Working out your taxable professional income

405-50 Working out your average taxable professional income

405-45 Working out your taxable professional income

Your taxable professional income for an income year is the amount (if any) by which your *assessable professional income for that year exceeds the amount of your deductions for that year worked out as follows:

Method statement

Step 1. Add up any amounts you can deduct for that year (except *apportionable deductions), so far as they reasonably relate to your *assessable professional income for the year.

Step 2. Work out the amount using the formula:

Note: The result may be greater than the apportionable deductions. Also, it may be negative.

Step 3. Add the sum from Step 1 to the result from Step 2. If the result is more than nil, it is the amount of your deductions to be subtracted from your *assessable professional income.

Note: To work out your taxable professional income for income years before the 1998-99 income year: see section 405-1 of the Income Tax (Transitional Provisions) Act 1997.

405-50 Working out your average taxable professional income

It is generally a 4-year average

(1) Work out your average taxable professional income for the *current year by:

(a) adding up your *taxable professional income for each of the last 4 income years before the current year; and

(b) dividing the total by 4.

Note: You may need to work out your average taxable professional income taking into account your taxable professional income for income years before the 1998-99 income year: see section 405-1 of the Income Tax (Transitional Provisions) Act 1997.

Phasing-in arrangements for new professionals

(2) However, if the *current year is less than 4 income years after *professional year 1, work out your average taxable professional income using the table in subsection (5).

(3) Professional year 1 is the first income year:

(a) during which you were an Australian resident (for all or part of the income year); and

(b) for which your *taxable professional income was more than $2,500.

Note: Your professional year 1 may be before the 1998-99 income year: see section 405-1 of the Income Tax (Transitional Provisions) Act 1997.

(4) Professional year 2, professional year 3 and professional year 4 are respectively the next 3 income years after *professional year 1.

(5) The table is as follows:

Note: If you were not an Australian resident for any part of the income year immediately before professional year 1, the effect of item 1 of the table is that your taxable income for professional year 1 will not include above-average special professional income.

[The next Chapter is Chapter 4.]