Special Professionals Chapter 22 Special Professionals © National Core Accounting Publications

© National Core Accounting Publications Overview An averaging scheme applies to prevent certain taxpayers ("eligible persons") from being pushed into a higher tax bracket when their income from eligible sources in a given year fluctuates above their average income from those sources e.g. primary producers Also, certain other taxpayers may be eligible for the averaging scheme © National Core Accounting Publications

Classes of Special Professionals s.405-25 defines classes of special professionals who are eligible for the averaging scheme Sportspersons Performers Writers, composers, authors © National Core Accounting Publications

Classes of Special Professionals s.405-25 defines classes of special professionals who are eligible for the averaging scheme Art directors, costume designers, choreographers, film editors Inventors © National Core Accounting Publications

Exclusions from Averaging s.405-30 lists activities that do not result in a taxpayer being treated as a special professional Coaching, training sporting competitors Umpires/referees Member of a pit crew in motor sport Owning or training animals Sports administrators Theatrical or sports entrepreneurs © National Core Accounting Publications

Exclusions from Averaging s.405-30 lists activities that do not result in a taxpayer being treated as a special professional Coaching, training sporting competitors Umpires/referees Member of a pit crew in motor sport Owning or training animals Sports administrators Theatrical or sports entrepreneurs © National Core Accounting Publications

Assessable professional income s.405-20 defines assessable professional income as: assessable income derived in relation to activity as a special professional prizes in respect of activity as a special professional fees from endorsements, interviews, commentary, advertisement appearances, promotions which relate to activity as a special professional © National Core Accounting Publications

Assessable professional income Substantial continuity exception A taxpayer is not classified as a special professional purely by engaging in a profession listed under s.405-25 if there is a substantial continuity in the rendering of those services by the taxpayer to another person © National Core Accounting Publications

Calculation of tax payable Step 1 Divide total assessable income into: assessable professional income other assessable income Step 2 Divide total taxable income into: taxable professional income other taxable income Step 3 Calculate average taxable professional income Step 4 Divide total taxable income into: above-average special professional income normal taxable income Step 5 Calculate tax payable on normal taxable income using ordinary tax rates Step 6 Calculate tax payable on normal taxable income plus 1/5 of the sum of above-average special professional income Step 7 Deduct amount at Step 5 from amount at Step 6 and multiply the difference by 5 Step 8 Calculate total tax payable 9 © National Core Accounting Publications

Illustration: Tax Payable under the Averaging Scheme Horatio Hornblower, a musician, is a special professional. For the current income year he has taxable income of $65,000 which comprises the following: Income from musical performances $ 59,000 Interest income from investments 10,000 Deductions relating to musical performances 4,000   Taxable professional income in 2010/11 was $25,000 and in 2011/12 was $45,000. Required: Calculate tax payable (excluding Medicare Levy and any tax offsets) © National Core Accounting Publications

Illustration: Tax Payable under the Averaging Scheme Solution: Step 1 Assessable professional income $ 59,000 Other assessable income 10,000 Step 2 Taxable professional income (59,000 – 4,000) 55,000 Other taxable income 10,000 Step 3 Average taxable professional income is: (25,000 + 45,000) ÷ 4 17,500   © National Core Accounting Publications

Illustration: Tax Payable under the Averaging Scheme Step 4 Above-average special professional income is: (55,000 – 17,500) $ 37,500 Normal taxable income (17,500 + 10,000) 27,500 Step 5 Tax on normal taxable income is: Tax on $27,500 1,767.00 Step 6 Tax on normal taxable income plus 1/5 of above-average special professional income is: i.e. Tax on (27,500 + 1/5 x 37,500) Tax on $35,000 3,192.00 © National Core Accounting Publications

Illustration: Tax Payable under the Averaging Scheme Step 7 Tax on above-average special professional income is: (3,192 – 1,767) x 5 $ 7,125.00 Step 8 Total tax payable is: 1,767 + 7,125 8,892.00 Note that Horatio’s tax payable (excluding Medicare Levy and tax offsets) is $8,892. However, had income averaging not been applied tax payable would have been $12,672 (i.e. ordinary tax on $65,000). © National Core Accounting Publications