1. Special Professionals
Chapter 22
Special Professionals
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2. © 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
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3. Classes of Special Professionals
s defines classes of special professionals who are eligible for the averaging scheme
Sportspersons
Performers
Writers, composers, authors
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4. Classes of Special Professionals
s defines classes of special professionals who are eligible for the averaging scheme
Art directors, costume designers, choreographers, film editors
Inventors
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5. Exclusions from Averaging
s 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
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6. Exclusions from Averaging
s 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
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7. Assessable professional income
s 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
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8. Assessable professional income
Substantial continuity exception
A taxpayer is not classified as a special professional purely by engaging in a profession listed under s if there is a substantial continuity in the rendering of those services by the taxpayer to another person
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9. 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
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10. 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)
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11. 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) ÷ 4 17,500
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12. 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, ,000) 27,500 Step 5 Tax on normal taxable income is: Tax on $27,500 1, Step 6 Tax on normal taxable income plus 1/5 of above-average special professional income is: i.e. Tax on (27, /5 x 37,500) Tax on $35,000 3,192.00
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13. Illustration: Tax Payable under the Averaging Scheme
Step 7 Tax on above-average special professional income is: (3,192 – 1,767) x 5 $ 7, Step 8 Total tax payable is: 1, ,125 8, 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).
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