Special Professional Income Averaging

To avoid paying too much tax in a year when income is in a higher tax bracket than in previous years, creative ‘special professionals’ can take advantage of income averaging.

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 for their occupation.

If you engage us to prepare your tax return, we will review your eligibility and identify whether or not you will benefit from income averaging. 

Australian individuals in certain creative fields, known as Special Professionals, often earn fluctuating levels of income from year to year.

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.)
  • Inventors.
  • Sportspeople.

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 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.

So that we can identify your best potential for income averaging benefits, we 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

Customer Testimonials

We are awesome to work with.
But don’t just take our word for it, take theirs!

Monica Davidson

We have worked with Electra Frost Accounting for over ten years and are very happy with the service. Electra and her team have been an integral part of the journey of our business, including the growth we’ve experienced in the last few years. They have ensured that our financials are always in good shape when it comes to reporting time, of course, but I’ve also appreciated their time and patience when it comes to teaching us new systems and alerting us to better ways of managing our financial situation. We highly recommend Electra to our creative business clients, as we work exclusively with creative clientele, and will continue to do so.

Monica Davidson, Creative+Business

Tracey Dods

Electra has been my accountant since the early 2000’s. That speaks volumes for the service she and her team provide, and for the longevity of her career in this niche market of arts tax law and accounting. Electra has long been familiar with my arts business and this has enabled her to do the very best by me over the years, her intricate knowledge of the Australian tax law has given me great comfort in knowing I will always get the fattest tax return available, with the minimum of pain and suffering. I’ve recommended Electra to many, many of my friends and they too have praised her speed and efficiency with their various businesses.

Tracey Dods, Artist and Wildlife Rescue Non-profit

Dr Clare Milledge

Over the years my employment and my artistic practice have changed and developed and become infinitely more complex. Electra has been there to cast a light into areas unknown to me and I have always been impressed with her intricate knowledge and her deep engagement within her chosen field.
Whether it’s mortgage repayments and negative gearing, calculating HELP debt repayments or expense claims for international per diems, Electra knows exactly what to do.
Additionally, she is highly ethical and strategic when it comes to assisting her clients, she thinks long-term.
I have recommended many creative people working previously with standard accountants to Electra and those that have employed her services have been deeply thankful. Occasionally people have asked me about the costs associated with having a specialist accountant deal with my tax, but they are always negligible in perspective of what I have gained, both financially and professionally.
I now conduct all my tax dealings online via email and Skype with Electra and I couldn’t be happier. There’s no accountant I would ever more highly recommend to an artist.

Dr Clare Milledge, Artist and Academic

Ryan Van Gennip

I have been working with Electra and her fabulous team for over a decade now. They have always gone above and beyond to try and get the best results for both my personal and business tax returns. I highly recommend their services to any musician or music industry organisation looking to get the most out of their business.

Ryan Van Gennip, Rhythm Section Management

FAQs

What is a special professional?

Under Division 405 of the ITAA 1997, a special professional may include:
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.)
Inventors.
Sportspeople.
Under Division 405 of the ITAA 1997, a special professional may include:
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.)
Inventors.
Sportspeople.
But it’s not always straight forward.
To answer that question, we sometimes have to read your position description or contracts and apply some highly experienced interpretation of the tax law around your key-creative jobs. The first challenge lies in identifying whether or not your activities would be regarded as the activities of an author, performing artist, production associate or inventor. For example, some who writes computer code is an author… but whether or not they can claim income averaging depends on some interpretation of the Copyright Act. A production associate’s contribution to some web-based entertainment media, for example, should be artistic rather than technical in nature. The meaning of a special professional, contained in Division 405 of the Tax Act, was written a long time ago before modern forms of entertainment media and advances in technology led to new occupations that were not yet imagined. Or perhaps they were? Read the legislation in a meeting with us and let’s figure you out! It could be very worthwhile, especially if you have multiple years to claim.

How does income averaging work?

Income averaging is intended to spread fluctuating income over a 5 year period so that peaks in income are not subjected to the higher tax rates. People in artistic and creative fields typically experience windfalls following lean years. Primary producers (farmers), being subject to droughts and other conditions which delay their income, use a similar system of income averaging so they too can pay a fairer amount of tax in higher profit years. 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’ special professional income and taxing the “above average” amount on a concessional basis. The calculation of tax benefit also relies on identifying the first year of eligible income. Changes in tax residency alter this calculation. It’s very important to properly analyse your eligibility within the legislation and be sure that the correct figures are reported in the right sections of your tax returns, as the ATO can question the basis of any claims and penalise for mistakes.

How much is the tax offset worth?

Special professional income averaging 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. We often see tax offsets worth upwards of $20,000 being achieved in the first eligible year. In future years the tax benefit may only be a few thousand or few hundred dollars, but still worth claiming. The benefit typically diminishes in future tax returns as the prior year average income increases and the above average portion of income reduces. A level of income which is not special professional, such as rent income or teaching wages for example, also reduces the benefit in a tax return. This means if your taxable income is primarily income which is defined as special professional, and your prior year 4-year average of special professional income is in a lower tax bracket, you stand to gain more from an averaging claim. When it comes down to it, you still must lodge your tax return. An income averaging tax offset is just a bonus in the final calculation. Even in the years of no benefit, it’s worth staying on the system in case you stand to gain from it again in future.

I missed out. Can I amend my previous tax returns?

One of the first things we do when we meet a new client is to look
at their previous tax returns and check whether there is potential
for amending them to claim special professional tax offsets. Once
we have identified the first year of eligibility then we run through
the tax returns in detail to work out how much the special
professional tax offset refunds could be if we lodged amendments.
It involves a fair amount of extra work and the ATO can take more
than 6 weeks to process the refunds, which can require some
patience. But when it’s worth doing, it’s worth doing properly.