Income averaging for special professionals

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Introduction

Who is a special professional?

A special professional is an author of a literary, dramatic, musical or artistic work, an inventor, a performing artist, a production associate or a sportsperson.

Author or inventor

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.

Performing artist

You are a special professional if you use intellectual, artistic, musical, physical or other personal skills in the presence of an audience, or you perform or appear in a film, on a tape or disc, or in a television or radio broadcast.

Production associate

You are a special professional if you use artistic rather than technical skills in the production. The people who qualify as production associates are specified in the definition of artistic support to be:

  • an art director
  • a choreographer
  • a costume designer
  • a director
  • a director of photography
  • a film editor
  • a lighting designer
  • a musical director
  • a producer
  • a production designer
  • a set designer
  • any person who makes an artistic contribution similar to that made by any of these people.

Sportsperson

You are a special professional if you compete in sporting activities where you primarily use physical prowess, physical strength or physical stamina. A navigator in car rallying, a coxswain in rowing or a similar competitor is also a special professional.

Who is subject to income averaging?

You are eligible for special professional income averaging (a concessional tax treatment) if:

  • you are an individual who is an Australian resident at any time during the income year
  • you are a special professional, and
  • you satisfy the first year requirements (see below) in either the current income year or an earlier income year.

The first year you are eligible for special professional income averaging is the first income year for which the taxable professional income (TPI) you earned as a resident special professional individual is more than $2,500. This is known as year 1.

Taxable professional income

TPI is the amount (if any) remaining after taking away from your assessable professional income:

  • the total of the deductions that reasonably relate to your assessable professional income
  • the part of any apportionable deductions (for example, gifts to charity which you have shown at item D9 on your tax return) that are to be taken into account in calculating your TPI.

Assessable professional income

Assessable professional income is used in calculating your TPI. It is income arising directly from the activities of a special professional and includes:

  • rewards and prizes
  • income from endorsements, advertisements, interviews, commentating and any similar service
  • royalties from copyright of a literary, dramatic, musical or artistic work
  • income from a patent for an invention.

If you are an author or inventor only count as your assessable professional income the income you derive from the activities of a special professional where you have been engaged or commissioned to produce one or more specified works, or to invent one or more specified inventions, and any previous or successive engagements or commissions do not result in continuous engagement over a substantial period of time.

The following are specifically excluded from assessable professional income:

  • any income you derive from
    • coaching or training competitors
    • umpiring or refereeing sport
    • administering sport
    • being a member of the pit crew in motor sport
    • being a theatrical or sports entrepreneur
    • owning or training animals
  • a superannuation lump sum or an employment termination payment
  • payments for unused annual or long service leave on retirement or termination
  • a net capital gain.

Average taxable professional income

Generally, average taxable professional income (ATPI) in an income year is one-quarter of the sum of your TPI for each of the preceding four years. Special rules apply for working out the ATPI if your first income averaging year was less than four years ago. So, in the first four years, ATPI is worked out as follows if you were an Australian resident during the year immediately before your year 1:

  • year 1 = nil
  • year 2 = one-third of TPl in year 1
  • year 3 = one-quarter of the sum of your TPI in years 1 and 2
  • year 4 = one-quarter of the sum of your TPl in years 1, 2 and 3.

If you were not a resident at any time during the year immediately before your year 1, phone us on 13 28 66.

Above-average special professional income

Your above-average special professional income is the amount of TPI you earned during the income year that is more than your average TPI. Your tax payable is the sum of tax on your above-average special professional income and tax on your other income (step 1 explains 'other income'). If there is no above-average special professional income (that is, your TPI is equal to or less than your average TPI) you will pay tax at ordinary rates on your taxable income.

Completing your tax return

For us to work out your income averaging, you must complete Z item 24 on your Tax return for individuals (supplementary section) 2019. See step 3 item 24 in Individual tax return instructions supplement 2019 and read the following:

The amount to write at Z item 24 on your tax return (supplementary section) is your assessable professional income less the total of your deductions that reasonably relate to this income. Do not deduct any apportionable deductions, for example, gifts to charity that you have shown at item D9 on your tax return. We will take these into account to work out your TPI and your income averaging.

At V item 24 on your tax return (supplementary section), write the total of your category 2 other income (see step 1 item 24 in Individual tax return instructions supplement 2019), including the amount you wrote at Z item 24. Do not include any amounts already shown at item 1, 2, 13, 14 or 15 on your tax return. If you have not shown your TPI at other items on your tax return, you must include it at V item 24. If you include your TPI at V, do not claim any deductions you used to work out your TPI at items D1 to D10 or D11 to D15 on your tax return.

How to work out tax payable with income averaging

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:

Step 1

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.

Step 2

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:

  • 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, phone 13 28 66.

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.

RowCalculation elementAmount
aAssessable professional income$45,000
bDeductions$5,000
cTPI

= row a - row b

= $45,000 - $5,000
$40,000

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).

ATPI

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)

Other income

= (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] × 5

= 5,890 (j)

Kevin's tax payable

= (g) + (j)

= $2,052 + $5,890

= 7,942 (k)

More information

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ATO references:
NO QC 55223

Income averaging for special professionals
  Date: Version:
  1 July 2013 Original document
  1 July 2014 Updated document
  1 July 2015 Updated document
  1 July 2016 Updated document
  1 July 2017 Updated document
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