Edited version of private advice

Authorisation Number: 1051590187742

Date of advice: 17 October 2019

Ruling

Subject: Assessable professional income

Question

Is the income you received as an individual from a company eligible for the special professional income averaging system under Division 405 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a writer.

Your income is received from a company.

You are the sole director, employee and shareholder of the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 405

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

Summary

You receive salary and wages from a company as an employee. The salary and wages are excluded from assessable professional income provisions as you are engaged in a successive scheme.

Detailed reasoning

Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997) allows special tax rates to apply to certain above-average special professional income.

Division 405 of the ITAA 1997 only applies to assessable professional income derived by an individual Australian resident who is a special professional. As such, where the provisions refer to 'you', they do not apply to companies, trusts or partnerships.

Subsection 405-25(1) of the ITAA 1997 states that you are a special professional if you are an author of a literary, dramatic, musical or artistic work. Therefore as a freelance writer you are considered to be a special professional for Division 405 of the ITAA 1997 purposes.

Although you are a special professional, it does not follow that all your income would necessarily qualify as assessable professional income.

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

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.

Section 405-30(1) of the ITAA 1997 provides that 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.

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 (eg. 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.

Application to your situation

In your case, as a writer 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 as a permanent employee of a company.