It’s tax time again: time for creative workers to balance earnings and outgoings, sort out receipts and shore up the next year’s financial planning. Part of this preparation may involve income averaging. But what exactly is income averaging for tax purposes?
It’s basically a method that allows you to spread your income over several years to determine your average income – this in turn can lead to lower tax liabilities.
As Michael Fox, Arts Accountant and Valuer, explains to ArtsHub, “An income averaging scheme is one where you are taxed on your average income rather than your actual income, to take into account variations in your circumstances that are out of your control.
“In the early 1990s the concept was expanded from farming to the arts, with the key difference being that the tax benefits are highest in the first year for creatives. The rationale is that a large tax refund will provide an incentive to keep producing original artistic work.”
Australian tax legislation recognises that, due to the nature of their work, certain taxpayers – including those who work in the creative industries such as authors and performing and visual artists – earn inconsistent levels of income from year to year. Thus, income averaging was introduced to reduce a high tax rate that would normally apply in higher income years.
Those who have never heard of this particular scheme before may well be suitable candidates for it, Fox says.
“There are far more people eligible for income averaging today than there were in the pre-digital era in which the scheme was created,” he tells ArtsHub.
But how exactly can you take advantage of this scheme and how can arts workers benefit from it?
“At tax time, before compiling your receipts, you should consider the nature of the work you do. If you are primarily employed to produce social media for work, you might be eligible for the scheme. Radio announcers are always eligible because every time they are on air they are creating original content, even though it can be questioned for its artistic output,” Fox says.
“In year one of the scheme, if all of your taxable income is eligible, you would expect to pay no tax on your first $90,000 or so. That is a tax saving of about $20,000.”
Asked to be given examples of how this tax-saving strategy can work for individuals with fluctuating earnings – in other words, many freelance creatives – Fox cites a case study.
“A client had two part-time jobs: as a sound engineer and as a lecturer. The first position is eligible for averaging and the latter is not. I advised him to make a contribution to superannuation equal to his lecturer salary and commenced him on averaging for the sound engineer position.
“He received a refund of about $15,000 for all of the tax that was deducted from both jobs – equal to the super contribution he made. In other words, he increased his super balance for no outlay using the income averaging scheme.”
It’s a fiddly and complicated business and there are only a handful of tax professionals who are experts in the income averaging scheme. But Fox also has skin in the game by being the owner of an art gallery and a qualified fine art valuer. In fact, he is the only tax agent in Australia to also hold such valuation accreditation. This means he is constantly considering copyright matters that lie at the heart of the income averaging scheme.
Learn more about income averaging and other tax tips for artists by contacting Michael Fox Arts Accountant and Valuer.
