Private ruling: Special professional averaging
Published: November 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2009

Ruling: Q1: Is a particular artist and programmer considered a 'special professional' for the purposes of concessional tax treatment under Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Can the concessional tax treatment be applied to income derived as a freelance particular artist and programmer from the year you earned over $2,500 in taxable professional income? | A2: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. In X financial year you began operating a freelance specific business, whose services are used for advertising in all mediums. You author unique designs for clients, and a part of this process sometimes includes the writing of programs to achieve the required results. During the X financial year the taxable income from your freelance activity was more than $2,500. You were an Australian resident for income tax purposes in the preceding financial years.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 16A | Income Tax Assessment Act 1997 Section 405-15 | Income Tax Assessment Act 1997 Section 405-20 | Income Tax Assessment Act 1997 Section 405-25 | Income Tax Assessment Act 1997 Subsection 405-25(1) | Income Tax Assessment Act 1997 Paragraph 405-25(4)(b) | Income Tax Assessment Act 1997 Paragraph 405-25(5)(a)

Reasons for decision: Summary: Division 405 of the ITAA 1997 applies special rates of tax on the above-average professional income of special professionals. It reduces the effect that fluctuations in special professional income would otherwise have on the income tax liability of these persons. Under this division you are only subject to concessional tax treatment if: · you are an individual · you are an Australian resident at any time during the income year · you are a special professional, and · your taxable professional income is more than $2,500 in the current or earlier income year. Subsection 405-25(1) of the ITAA 1997 states that you are a special professional if you are the author of a literary, dramatic, musical or artistic work. | Detailed Reasoning - Definition of author: There is no definition for an 'author' in the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936), but the explanatory memorandum which accompanied the introduction of the former Division 16A of the ITAA 1936 (now Division 405 of the ITAA 1997) states that it is linked to the use of those expressions in the Copyright Act 1968. Although not specifically defined in the Copyright Act 1968, an 'author' is taken to mean the person who first brings items, such as a text or image, into existence. | Detailed Reasoning - Artistic and literary work: Section 10 of the Copyright Act 1968 contains the definitions of the terms artistic and literary work. | Detailed Reasoning - Artistic work means:: (a) a painting, sculpture, drawing, engraving or photograph, whether the work is of artistic quality or not (b) a building or a model of a building, whether the building or model is of artistic quality or not, or (c) a work of artistic craftsmanship to which neither of the two last preceding paragraphs applies but does not include a circuit layout within the meaning of the Circuit Layouts Act 1989. | Detailed Reasoning - Literary work includes:: (a) a table, or compilation, expressed in words, figures or symbols, and (b) a computer program or compilation of computer programs. In consideration of the above definitions, as a particular designer you are an author of artistic work. Further, as your freelance activity requires you to write specific programs, you are also considered an author of literary work. | Detailed Reasoning - Application of income averaging to your circumstances: As you are an author of artistic and literary work, you are considered a special professional within the meaning given by subsection 405-25(1) of the ITAA 1997. Section 405-20 of the ITAA 1997 states that you can include as assessable special professional income any assessable income that you derive as a reward for providing services relating to your activities as a special professional. Therefore you can include as assessable special professional income any assessable income that you derive in relation to your freelance activities. | Detailed Reasoning - Averaging start year: The X financial year was the first year that you earned more than $2,500 in taxable professional income from your freelance activities. Further, you were an Australian resident in the financial years preceding this year. As such, the X financial year is considered the first year for special professional averaging, and the concessional tax treatment can be applied to the special professional income you earn in this and future years.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.