If you’re making original, artistic content in your profession, you could be eligible for income averaging, saving you big bucks at tax time.
If you have an income that can vary from year to year, then you’ll know that your tax bill can fluctuate dramatically, too.
But depending on your job, you might be eligible for a little-known tax concession that averages out your income and the tax you owe. (And, depending on your situation, it could save you money — but more on that in a minute.)
The scheme is called ‘income averaging’ and it’s available for a category of people known as “special professionals”.
What’s a ‘special professional’ when it comes to income averaging?
According to the ATO, special professionals are inventors, performing artists, production associates or sportspeople, and authors of literary, dramatic, musical or artistic works.
You need to “compete in sporting activities where you primarily use physical prowess, physical strength or physical stamina” if you’d like to income average as a sportsperson. This means coaches and sports educators don’t cut it.
But it’s slightly trickier to work out which creative professionals can opt in.
Arts accountant Michael Fox says eligibility is primarily based on the work you do, not your job title.
“It’s more to do with people who make original content, rather than those who use technical skills,” he says.
For example, Mr Fox says a camera person who’s directed to point a camera at a guest wouldn’t qualify for income averaging because they’re not making the artistic decision.
“But if that camera person goes out with a film crew and says, ‘I think this shot will look great if we have trees in the background’ — or whatever else — they’re making the decision as to how it will be broadcast on TV, and that’s original content.”
Similarly, a fiction writer is viewed as eligible, but a journalist who’s filing articles to their editor or writing scripts for presenters isn’t. Their skills are viewed as technical, not original.
But creative control isn’t the only caveat.
In order to income average, you need to earn at least $2,500 from your creative or sporting endeavour over the financial year.
So, if you’re a budding actor who has only worked in unpaid films while earning an income from a bar, you’re ineligible. And remember, the ‘averaging’ only applies to your creative income, not your various side hustles, which are taxed as usual.
Who does income averaging benefit most?
The concession is designed for people who have “lumpy incomes” because of the nature of their industry.
For example, if you’re working on a major creative work, like a novel, you might write that for three years.
All your income comes in your third year, and then you don’t have income from the book during the other two.
By averaging out your income across a period of up to four years, it means you won’t be hit with a huge tax bill when that five- or six-figure book deal goes through.
On the flipside, you’ll probably need to pay a little more tax in the years you don’t earn much as a special professional.
The scheme is usually more beneficial to people starting out their careers because established artists are likelier to have a ‘name’ in the industry and, hence, a steadier income.
However, it’s wise to avoid income averaging if you’re only making a few thousand dollars a year from your creative pursuits.
When you commence income averaging, the very first year is essentially what one would describe as a ‘windfall gain’.
Your tax-free threshold, under the right set of circumstances, could be as high as $90,000.
Basically, the higher your income is when you start income averaging, the larger your tax return will be in ‘year one’.
From farms to fine arts
Interestingly, income averaging was originally created to help Australia’s agricultural producers — not artists.
Originally the scheme was designed for farmers who have years of drought, when their income is low, and years of “boom” when it’s great.
Farmers are actually automatically signed up for income averaging and must request to opt out. Special professionals, on the other hand, are required to opt-in.Bottom of Form
Getting financially savvy
Despite the potential benefits of using the scheme, there are only approximately 16,000 special professionals taking part each year; not a huge number in the scheme of 10 million individual tax payers.
So, why aren’t more people accessing income averaging? It’s largely because most tax agents don’t know it exists.
The whole area of tax in the art world is a bit of a mess, but [income averaging] is a very important concession that should be there. It’s not an easy industry to get a start in, so these kinds of concessions are a great helping hand for younger people chasing their big break.
While it’s possible to do tax by yourself and opt-in to income averaging, it’s recommended that you speak to a professional to ensure that a) you’re definitely eligible, and b) the scheme is in your best financial interests.