Had a big year financially? It can be great: until tax time, when you not only need to pay more, but may also get slugged with a PAYG instalment for next year based on that big income. It’s enough to make you cry into your popcorn.
Some of your creative professional friends might have been whispering the words “income averaging”. But what is it? And is it applicable to filmmakers?
Let’s break it down.
What is Income Averaging?
Special Professional Income Averaging is a tax concession available to individuals in specific professions like artists, writers, inventors, production associates and sportspeople who earn fluctuating income from year to year.
The system smooths out the tax impact of a high-income year by comparing it with the average income earned over the prior four years. As a result, it reduces the likelihood of being pushed into a higher tax bracket due to a sudden income spike.
The aim is to ensure fairer tax treatment for those with variable earnings, aligning their tax obligations more closely with their long-term income capacity.
Related article: Income averaging: The concessional tax treatment every creative should understand
Are filmmakers eligible?
To be eligible, you must be working in the media and meet the criteria of a “special professional” under the Production Associate classification, according to the ATO’s guidelines.
So, if you’re in a key creative in a production role where you use artistic skills, you’re likely to be eligible for income averaging. But if you are an assistant, or in a technical or administrative support role, such as grips, production managers or other secondary roles, then you’re usually not eligible.
To be eligible, you can be engaged either as a contractor or an as employee. But because income averaging takes an average over multiple years, your employment needs to be dependent on future project-based work. So, for example, as a producer you need to be going from project to project to be eligible. If you were employed and were working on company administration and not going project to project you are unlikely to be eligible.
Can I apply at any time?
You become eligible for income averaging when you earn over $2,500 as a special professional in any given year. You can opt in to the system at any point from that time onwards. (You do need to be an Australian Resident for tax purposes.)
You may elect to enter in the current financial year, or if you were eligible in earlier years, you may choose to go back and enter from a prior period. The benefits are very much dependant on personal circumstances; your accountant will help you decide the optimal time to enter into the system.
It’s important to note that once you opt into the system, averaging needs to be included in your tax return each year moving forward. You can opt out of the system, but if you wish to re-enter down the track at some point you will need to apply to the ATO to include averaging in any intervening years that have been overlooked.
This can be an issue if you change accountants, and they are not across the mechanics of how income averaging works.
What do I need to apply?
You should be able to provide documentary evidence that you meet the criteria of a special professional according to the ATO’s guidelines.
This can include contracts, job descriptions, deal memos and letters of offer. Alternatively, you can provide a formal letter from a current or previous employer stating your job role and duties.
What are my next steps?
If you’re ticking all these boxes, chat with your accountant to help you switch over to Income Averaging:
☐ You fit the ATO’s definition of a “special professional”
☐ You an Australian Tax Resident
☐ You earned more than $2,500 in eligible creative income
☐ You are in a creative decision-making role
☐ You work on a project-to-project basis
☐ You can show contracts or proof of work
Get in touch with our expert team, who understand filmmaking, production budgets, and, of course, income averaging. We’re here to focus on the numbers (and the forms!) so you can focus on telling stories.
Disclaimer:
This information is general in nature and does not consider your individual circumstances. For personal tax advice, please speak to a registered tax agent.