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

Ruling: Q1: Is the taxpayer entitled to apply the income averaging provisions for special professionals as per Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The taxpayer works under contact to provide consulting to Companies. These services can result in the creation of documents and a sample list of documents produced was provided. Two written agreements were provided. Neither contain a list of what must be provided under the agreement and state the taxpayer is providing legal service. A third verbal agreement was entered into and the taxpayer has stated that the services provided were covered by legal practitioner's professional indemnity insurance.

Relevant legislative provisions: ITAA 1997 Division 405 | ITAA 1997 section 405-20 | ITAA 1997 subsection 405-20(2) | ITAA 1997 subsection 405-25 (1) | ITAA 1997 section 405-30 | ITAA s1997 subsection 405-30(1) | ITAA 1997 subsection 405-30(4) | ITAA 1997 subsection 995-1(1)

Reasons for decision: Summary: Section 405-30 will apply to preclude the income received by the taxpayer as being treated as assessable professional income as the agreements do not specify the literary works the taxpayer was engaged to author. | Detailed Reasoning - Detailed reasoning: Division 405 of the ITAA 1997 contains rules providing for concessional tax treatment for individuals who are 'special professionals'. A special professional may be entitled to a concessional rate of tax if their assessable income includes 'assessable professional income'. In order to qualify for averaging provisions, the taxpayer must be a 'special professional'. A special professional is defined in subsection 405-25 (1) of the ITAA 1997 and it states: You are a special professional if you are: (a) the author of a literary, dramatic, musical or artistic work; or Note: The expression ``author'' is a technical term from copyright law. In general, the ``author'' of a musical work is its composer and the ``author'' of an artistic work is the artist, sculptor or photographer who created it. (b) the inventor of an invention; or (c) a *performing artist; or (d) a *production associate; or (e) a *sportsperson. In this instance the taxpayer was engaged to provide legal services so we are looking at whether the taxpayer is an author of a literary work. As the note in paragraph 405-25 (1)(a) of the ITAA 1997 states an author is a technical term from copyright law and whether the taxpayer is an author would be a conclusion of fact. Paragraph 405-25 (1)(a) of the ITAA 1997 also requires us to look at each literary, dramatic, musical or artistic work when determining who the author is. However if we look at the definition of literary work in section 10 of the Copyright Act 1968 it states: "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 addition section 189 of the Copyright Act 1968 states: "literary work" means a literary work in which copyright subsists. Therefore without examining the documents produced we are not in a position to determine if they are in fact literary work. However given the broadness of the definition it would be reasonable to conclude that at some point the taxpayer has been involved in the production of a literary work. Without knowing the full extent of the taxpayer's input to a work we are not in a position to concluded if the taxpayer is an author (or co-author) of one or more literary works. As a project co-ordinator someone else could have been the author of a work on a project managed by the taxpayer. However although we are not in the position to determine if the taxpayer is an author of literary work we are able to conclude that Division 405 of the ITAA 1997 will not apply to the income of the taxpayer. Section 405-20 of the ITAA 1997 looks at which income is counted as assessable professional income and subsection 405-20(2) states: You count any assessable income that you *derive as a reward for providing services relating to your activities as a *special professional. Section 405-30 of the ITAA 1997 stops certain amounts from being counted and subsection 405-30(1) of the ITAA 1997 which states: You cannot count as *assessable professional income any assessable income you *derive for meeting your obligations under a *scheme to provide services to another person by engaging in activities as the author of a literary, dramatic, musical or artistic work, or as the inventor of an invention, unless: (a) the scheme was entered into solely to require you to provide services by: (i) making one or more specified literary, dramatic, musical or artistic works; or (ii) inventing one or more specified inventions; and (b) you have not been providing services, and may not reasonably be expected to provide services, to that person or his or her *associates under successive *schemes that result in substantial continuity of your providing services. This subsection is designed to exclude employees from the special professional averaging provisions assessable income derived by employed persons but it is not limited to employees. In looking at the two written agreements provided, neither contain a list of specified works to ne produced by the taxpayer . Therefore subsection 405-30(1) of the ITAA 1997 would apply to exclude the income from both agreements as being assessable professional income. Neither written agreement includes a list of works to be completed therefore it cannot be concluded that the taxpayer was engaged to be the author of specified literary works. If we look at the definition of a scheme in subsection 995-1(1) of the ITAA 1997 states: scheme means: (a) any *arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. An arrangement is defined in subsection 995-1(1) of the ITAA 1997 as: arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. An alternative argument could be that each document produced under the written agreement is a separate scheme. However if that argument was successful then paragraph 405-30(1)(b) of the ITAA 1997 would apply to exclude the income from being assessable professional income as in entering the written agreement there would be a reasonable expectation to provide services for the life of the agreement. Therefore in respect of the two written agreements the income received under those agreements cannot be counted as assessable professional income as either paragraph 405-30(1)(b) or subparagraph 405-30(1)(a)(i) of the ITAA 1997 will apply. In respect of the service provided where there is no written agreement there is no way to determine whether there was an agreement to produce specified literary works or not. However as the applicant has stated that the reason they didn't enter into a written agreement was because the taxpayer was covered by legal practitioners' professional indemnity insurance through the Legal Practitioners' liability Committee' this indicates that the services the taxpayer agreed to provide are services similar to those contained in the two written agreements rather than being engaged to be the author of a specific literary work. All these factors point to a conclusion that the service provided by the taxpayer under all three agreements is legal services which could include being the author of documents subject to copyright. The purpose of subparagraph 405-30(1)(a)(i) of the ITAA 1997 is to only count as assessable professional income any income produced under an agreement where that agreement clearly states the taxpayer was engaged to provides the literary work to be produced and states those works they are to produce. In other words it excludes literary work produced as a consequence of performing other services. In addition subsection 405-3(4) of the ITAA 1997 states that section 405-30 of the ITAA 1997 takes precedence over section 405-20 of the ITAA 1997. This means that although section 405-20 of the ITAA 1997 may allow a taxpayer to include income as special professional income, if section 405-30 of the ITAA 1997 does not allow the taxpayer to include that income, that income will not be able to be considered to be special professional income. As concluded above the income received by the taxpayer cannot counted as special professional income under subsection 405-30(1) of the ITAA 1997. As a result subsection 405-40(4) will apply and none of the income received by the taxpayer can be considered to be special professional income. Therefore the averaging provisions cannot apply.