What is income averaging and how do I apply?

By Michael Fox on 19/8/2017 in Income averaging, Individual tax returns, Taxation of the arts industries, Artists

What is income averaging and how do I apply?

It is not widely publicised, but Australia has a great taxation incentive for young people starting out in the creative industries – income averaging.

The scheme has been around for 30 years and is roughly equivalent to the primary producer averaging scheme. It recognises that in the arts there are lean years and there are bountiful years, so taxation should only apply to the average income.

It can be particularly generous on entering the scheme, despite the only qualifying factor being to have at least $2,500 taxable income as a ‘special professional’ in one tax year.

In fact, income averaging may result in an effective tax-free threshold of $90,000. For this reason, it may be better to delay the election of entering the scheme until you have a larger taxable income to maximise the tax benefits.

The term ‘special professional’ is a catch-all phrase to describe artists, musicians, actors, writers and production associates. A better term might be ‘creative professionals’, because the key to eligibility is having artistic input in your occupation, whether you are self-employed or not.

Often, new clients come to me on referral because their tax agent is unaware of income averaging. I recently amended a radio program producer’s 2016 tax return and generated a tax refund of $45,000 for him. He would never have known that he was entitled to this refund if he did not contact me.

The averaging scheme for creative professionals has requirements that are quite different to the averaging scheme for primary producers. As an example, you cannot receive artistic income from a trust distribution whereas you can receive primary production trust income.

I have taken on many film production companies that were set up as trusts by their former accountants where the creative professionals are missing out on the averaging scheme. The re-organisation of these companies’ affairs has created substantial tax benefits for the owners.

Please contact me if you would like to enquire whether or not you are eligible for income averaging as a creative professional.

Image: Nigel Sense, Used to like Warney but now like beer (2017)



Please note: This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.