Did you know that many creative professionals can average their income over 5 years to access valuable tax rebates in higher income years? New clients often ask us to amend their previous returns because their last accountant wasn’t aware of income averaging.
Australian individuals in certain creative fields, known as Special Professionals, often earn fluctuating levels of income from year to year. To avoid paying too much tax in a year when income is in a higher tax bracket than in previous years, some can take advantage of income averaging.
Generally speaking, income averaging works by reducing the amount of tax owed in a high income year by comparing it to the previous four years’ SP income and applying a tax concession on the “above average” amount. So it can be especially advantageous in the first few years of your career or start-up business in a special professional category, when the prior year average income is low or zero.
Primary producers (farmers), being subject to droughts and other conditions which delay their income, use a similar system of income averaging so they too pay a fair amount of tax in higher profit tax years.
Special professionals categories are:
- Authors of literary, dramatic, musical and artistic works. This can include graphic designers and computer programmers.
- Performing artists (e.g., music, theatre, dance, TV and radio appearances)
- Production associates who provide artistic support. (e.g. all kinds of film and TV professionals.)
Income which is earned from your special professional activities is potentially subject to income averaging. The definitions and methodologies in the legislation are very complicated, so a creative industries specialist (such as Electra Frost) is more likely to identify your eligibility.
Production associates are special professionals where artistic rather than technical skills are used in the production. Authors and artists earn special professional income when engaged to produce one or more specified works, however income derived as a result of ordinary employment is excluded.
The calculation of tax benefit is also affected by identifying the first year of eligible income and by changes in tax residency. It’s very important to properly analyse your eligibility within the legislation, and be sure that the correct income has been reported in the right sections of your tax returns, as the ATO can question the basis of your claims.
The above is not intended as advice, and it’s too complex to explain at length here. If you’d like to know whether you may benefit from income averaging, please contact us.
We will need copies of your last four to six tax returns to work out your potential overall tax savings, and to amend any prior year tax returns that aren’t outside the two year limit. So contact the ATO or your previous accountant for full copies of your tax returns as soon as possible.
So that Electra Frost can identify your best potential for income averaging benefits, she may need to see:
- Full copies of your last 6 relevant Tax Returns
- Copies of the Notices of Assessment for those years
- Job descriptions and employment agreements
- Your resume
- Links to your website, LinkedIn page and IMDB listing