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Edited version of private ruling

Authorisation Number: 1011573475347

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Ruling

Subject: Income Averaging - eligibility for special professional averaging

Question 1

Is the income you receive as a computer programmer eligible for the special professional income averaging system under Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The rulee migrated into Australia as a permanent resident.

Their profession is a computer programmer.

Later, they started a company, through which they have taken up a contracting assignment with an implementation program.

To date, since X, they have been working in the program purely in a contractual nature. Once implementation of the program is complete, there will be no successive employment.

Under the present circumstances, their income varies from year to year.

According to the rulee's income tax return lodged for the relevant income year, they declared their income from the company as salary and wages.

The company tax return also states the salary amount in the relevant income year in their financial statement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 405-15

Income Tax Assessment Act 1997 Section 405-20

Income Tax Assessment Act 1997 Section 405-25

Income Tax Assessment Act 1997 Section 405-30

Reasons for decision

Division 405 of the ITAA 1997 contains rules providing for concessional tax treatment (averaging system) for 'special professionals'. The basis for averaging is to provide a tax concession to taxpayers with fluctuating income.

In order to qualify for the averaging provisions, the taxpayer must be an individual and have been an Australian resident for all or part of the current year. A special professional may be entitled to the averaging system if their assessable income includes 'assessable professional income': subsection 405-15(1) of the ITAA 1997.

Subsection 405-25(1) of the ITAA 1997 provides that a special professional is:

Subsection 405-20(2) of the ITAA 1997 provides that assessable professional income includes any assessable income that is derived as a reward for providing services relating to activities as a special professional.

However subsection 405-30(1) of the ITAA 1997 provides that assessable professional income excludes any assessable income derived for meeting your obligations under a scheme to provide services to another person by engaging in activities as the author of a literary work etc. unless:

The provision is designed to exclude from the averaging provisions those persons who are no more than employees but whose activities give rise to the technical production of literary works, dramatic works, musical works or inventions. Successive engagements or commissions will result in continuous employment over a substantial period of time, leading to a normal income pattern.

Is the taxpayer a special professional?

Division 405 of the ITAA 1997 does not provide a statutory definition of the term 'author', but in referring to the author of a literary, dramatic, musical or artistic work, the term is designed to incorporate the meaning of those latter words as used in the Copyright Act of 1968. Literary work is defined by the Copyright Act 1968 at section 10 to include:

Taxation Determination TD 93/65 further states that a computer programmer is a writer and thus qualifies for concessional treatment under Division 16A of the Income Tax Assessment Act 1936 (ITAA 1936), which was the equivalent provision in the ITAA 1936. Division 16A of the ITAA 1936 defined a writer as the 'author of a literary or dramatic work'. Paragraph 4 of TD 93/65 provides that a computer program is a literary work for the purposes of Division 16A of the ITAA 1936.

Accordingly, a computer programmer will be an author of a literary work for the purposes of the provisions in Division 405 of the ITAA 1997.

Assessable professional income

Pursuant to subsection 405-30(1) of the ITAA 1997, income will not constitute assessable professional income where a taxpayer provides services to a person under successive schemes that result in substantial continuity of providing services to that person.

The Small Taxation Claims Tribunal case Re Finlayson and Federal Commissioner of Taxation (2002) AATA 836; (2002) 51 ATR1029; 2002 ATC 2197 examined both provisions in relation to a computer programmer.

The taxpayer was employed as a computer programmer with a software company and derived salary and wage income. He was not able to demonstrate to the Tribunal that his employment was sufficiently limited to specific tasks to meet the test in paragraph 405-30(1)(b) of the ITAA 1997. The Tribunal considered that the term 'scheme' could not be applied as narrowly as the taxpayer argued. He was in fact engaged under successive schemes. He was required to work as part of a team on successive schemes, being each of the various products and modifications he was responsible for.

Ultimately, he fails in having the averaging provisions apply because he did not reach the $2,500 taxable professional income level required to enter the system. This failure occurred because the income from his regular employment could not be counted in determining his taxable professional income. Since his eligible activity derived an overall loss, he could not meet the $2,500 target.

Accordingly the AAT found that the income derived from his employment did not constitute 'special professional income'.

In addition, TD 93/65 provides an example of a computer programmer who is employed (for example, by either a government or non-government body) and in the course of that employment writes a computer program. The income derived from that source is not subject to concessional treatment because the employment results in the programmer continuing to render services to the employer.

Conclusion

In your case, there is no doubt that you are a special professional as defined in paragraph 405-25(1)(a) of the ITAA 1997, being an author of literary work.

However, on the basis of the above exclusion provision, your income is excluded from the averaging system as you are engaged in a successive scheme.

In your ruling application, you stated that you commenced a company who is contracted to do the work for an implementation program. The issue in doing this is that you are therefore rendering your services as an employee of the company and earning a salary and wages from the company rather than the program. The engagement then becomes in the nature of continuous employment. Therefore, when the program ends, the contract will end for the company and you will still be employed under a continuous employment.

Accordingly the income derived from the writing of the computer programme does not constitute professional income for the purposes of Division 405 of the ITAA 1997.

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