Some categories of taxpayers, known as “Special Professionals”, may be eligible for concessionary tax treatment by the ATO due to inconsistent levels of income on an annual basis.
Where applicable, these concessions allow for a reduction of potentially unreasonable tax rates which would apply in higher income years to account for lower income years. Essentially, it’s a way to smooth out spikes in income and tax to reach a fairer level of tax over a four-year period.
Who is eligible?
‘Special Professionals’, a specified category of income earners are eligible for income averaging and include:
- Production associates such as those providing artistic support to performing artists
- Performing artists
- Inventors
- Sports people
- Authors including literary, dramatic, musical and in some cases others such as computer programmers
Criteria for eligibility includes at an individual level:
- Is an Australian resident at any time during the income year;
- Earns income from one of the ‘special professional’ categories; and
- Satisfies the first-year requirements in either the current income year or an earlier income year
Why does the ATO allow income averaging and on what income does it apply?
The premise behind income averaging is that many working in the fields above can spend numerous years working on a project which will only realise income at a future point in time. For example, an author may receive income upon publication, a filmmaker upon release, sports people during a particular season or competition. Overall, income needs to be defined by peaks and troughs.
Only ‘special professional income’ made from the specific category of professional activity is involved meaning that, for example, income earned from a performance but income from providing acting lessons does not. All ‘other income’ is taxed in the usual way, at usual rates.
What are the benefits?
Typically, income averaging provisions will benefit a ‘special professional’ in the first few years of application by resulting in significant tax savings in those years. The benefit often reduces when income smooths – being the intent of the legislation.
Other considerations on eligibility
The first year a ‘special professional/ taxpayer becomes eligible for income averaging is the year they have more than $2500 taxable professional income. This becomes year one of the four-year period taxable professional income is averaged over.
What is assessable professional income?
According to the ATO, assessable special professional income includes:
- Income from providing a professional service
- Rewards and prizes
- Income from promotional activities, advertisements, endorsements, interviews, commentating and similar services
- Income from assigning a patent, or the right to apply for a patent, or granting a licence for an invention
- Income from granting a licence or assigning copyright of a literary, dramatic, musical or artistic work
- Other assessable income from a literary, dramatic, musical, or artistic work, from copyright in such a work, or for an invention.
Calculating ‘taxable special professional income’ and determining income averaging is a complicated area of taxation so we recommend discussing your professional services and income highs and lows with a professional to get the right advice to work out your eligibility. Our director Patrick has been collaborating with special professionals on their income averaging and eligibility since 2004 so he’s extremely clear on the current requirements. Get in touch to discuss your income averaging options.