What is Income Averaging?

As a creative professional, it’s important that you seek to understand the concept of Income Averaging. This tax treatment offers significant concessions, and knowing how to make the most of them can save you a lot of money at tax time.

And sometimes, as a Creative Professional, your income and cash flow are ‘lumpy’, with periods of low or no income, followed by ‘the great years’. Years of effort, that result in a large cash payment in one year – and a large tax bill as a result.

It is okay if you are not familiar with this particular area of taxation. This is a highly specialised field that only a select few have expertise in. Many accountants, unless they have a specific focus on creative industries, may not be aware of it. Moreover, if you typically handle your tax returns on your own, it is unlikely that this benefit has come to your attention.

Here’s how it works: your Special Professional income from creative sources (such as writing, performing, or inventing) is isolated and taxed at a concessional or reduced rate based on a rolling 5-year average. This means you pay less tax in years where your income from these sources is significantly above average. In years where your income is below or in line with your average, you are taxed at normal marginal tax rates. Keep in mind that income from other sources is always taxed at normal rates, and income averaging may not benefit you in years where your income is below average. However, years of lower income will affect your rolling average, and reduce your tax rate in future periods when you earn above-average income.

To be eligible for income averaging, you must be considered a “Special Professional,” which includes authors, artists, composers, inventors, performers, production associates, and sportspersons. This designation may also apply to those in a “creative decision-making role” such as a director, depending on the circumstances. Eligibility is determined on a case-by-case basis, so it’s best to consult with a tax professional to see if you qualify.

One of the reasons these professions are included in income averaging, is due to the inconsistent nature of income. For example, a composer may spend years developing a project before receiving any income, resulting in large peaks and troughs of income year to year. Income averaging helps to spread this income over the entire development process, resulting in lower overall tax payments.

In simple terms, Income Averaging allows you to smooth out your taxable income over a few years, minimising the impact of any one high-earning period. By doing so, you can reduce your overall tax liability and free up funds to invest back into your creative pursuits.

In the first 4 years, the benefit can be even greater! It is quite common for the first year of averaging to result in little or no tax needing to be paid – at least on the earnings up to $90,000 (assuming no other income has been earned on salary from areas like school teaching, waiting tables or other non-artistic employment).

Keep in mind that income averaging is an opt-in system, and once you opt-in, you remain in the system. You can start using income averaging once you’ve earned more than $2,500 from creative work, and it only considers income generated from creative activities to calculate your average. Other income, such as non-creative activities or investments, is not included.

Okay, you say, so what sort of benefit can this provide?

Case Study 1

Brian Eno(1) is a successful composer, musician and recording artist. They have a stream of income coming from local and international royalties from Film and TV compositions, Gigs and CD sales annually, as well as investment and non-Artist income.

In 2021, they lodged their Income tax return without claiming Artist Averaging, as they had done in all prior years of their career.

On a total taxable income (after all deduction claims) of $219,830, they incurred a total tax liability of $67,399.81. After the tax instalments were paid through the year, they were left with a net tax liability of $12,236.30.

However, on review of their return, and implementing Artist Averaging on their Professional Income, the Total Tax payable was reduced to $21,746.80, resulting in a net benefit of $45,653 to the Artist.

This also subsequently reduced the amount of PAYG tax instalments that were needed for the following tax year.

Case Study 2

Mariah Carey(1) is a professional writer.

On their Tax year professional income of $91,500, and a net taxable income (after all deductions, and including non-business income) they paid tax on a Taxable income of $57,746.

Before using the Artist Averaging provisions, they are liable for tax totalling $9,460.65.

Artist Averaging was then applied to this return, and with the provisions for the first year of averaging, their total tax liability was reduced to $1,154.92 – a saving of $8,305.73 on the same taxable income.

It’s important to remember that you cannot opt-out of income averaging once your income normalises. Also, the concession only applies in “good” years – you will not be taxed more in years where you earn less than the rolling average.

I.e. if your income has been consistently around $80,000 p.a. but then drops in one year to under $40,000, you will pay the ‘standard’ tax you would normally pay on $40,000 for that year. Subsequently, if the following year jumps up to $120,000 (as the project you have been working on is completed and you are paid a lump sum on completion, or the unit sales happen in the following year) then Artist Averaging may reduce the tax payable on the amount ‘over’ $80,000, so your tax rate payable does not jump up significantly.

To show how this works over a number of years, let’s consider the following case study.

Case Study 3

Freddy McQueen (1), the lead singer of a hard rock band called Mercury, has income over a 5 year period that has ebbed and flowed as CD sales, royalties, writing and recording over new material and concerts were undertaken.

His Net table income after all costs and deductions were as follows:

Year 1 – $50,000

Year 2 – $75,000

Year 3 – $120,000

Year 4 – $40,000

Year 5 – $130,000

The tax payable – with and without Artist averaging over this period would look like this:

1 2 3 4 5
Taxable income   $50,000.00    $75,000.00    $120,000.00  $40,000.00    $130,000.00
Tax on normal rates  $6,717.00    $14,842.00  $29,467.00    $4,142.00  $33,167.00
Tax on averaging                          $nil(2)              $9,625.40  $22,042.00    $4,142.00(3) $32,717.00
Benefit $ 6,717.00              $5,216.60   $ 7,425.00     $nil                    $450.00

(1) Of course these are not their real names. The facts in the first two case studies are real, but the names have been changed to maintain confidentiality.

(2) Note that the tax payable amounts do not include Medicare levy and other related offsets.

(3) As the Income for the year is below the average over the prior years, there is no rebate claimable for the year, but also, no additional tax is payable on total Taxable Income.

In Summary

Overall, income averaging is a specialist area of tax that can greatly benefit those in creative professions, but it’s important to consult with a knowledgeable tax professional to determine eligibility and potential benefits.

Talk to your accountant and ensure that they understand the process and can assist you. If you need further assistance with this, contact the Guild for further advice and assistance on locating a professional adviser who can assist you with this process.

Stuart C Smith, CPA
Treasurer, Australian Guild of Screen Composers


AGSC Disclaimer: The AGSC has commissioned Stuart Smith of accounting firm Fiscal Artisans to produce this article. Stuart Smith is a specialist accountant with many years of experience working with people and businesses in the Creative Industries and their taxation matters. Whilst we have taken great care in compiling this information for our members, we are unable to guarantee that the information applies to your individual circumstances, and it is not intended as a substitute for professional legal and accounting advice. Accordingly, the AGSC provides no guarantees as to the accuracy, truth, reliability, correctness, or completeness of any information contained in this article. Members are encouraged to make their own enquiries before using or relying on the information provided in this document, and if they choose to do so, they do so at their own risk and the AGSC shall not be responsible for any errors, omissions or claims for damages arising out of the use of or with regards to the information contained in this document.