Private ruling: Special Professional Income Averaging
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you 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.

Relevant facts and circumstances: For a number of years you have been carrying on a business of manufacturing a product with special characteristics. You have spent years perfecting the ingredients of the product, which is very complex in nature. Each of the products you manufacture is created by hand, varying in size and characteristics due to the layers of ingredients. As each product is hand-made and different, you believe that each individual piece is a piece of art. As the manufacturing process is so complex, no one has been able to copy the product therefore you have not patented the process. You have earned more than $2,500 in income from the business activity since you started the business. You have included the income in your income tax returns since you began the business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 405 | Income Tax Assessment Act 1997 Section 405-15 | Income Tax Assessment Act 1997 Subsection 405-25(1) | Income Tax Assessment Act 1997 Paragraph 405-25(1)(a), and | Copyright Act 1968 Subsection 10(1).

Reasons for decision: Summary: Division 405 of the ITAA 1997 provides rules for above average special professional income of authors, inventors, performing artists, production associates and sportspersons. It reduces the effect that fluctuations in special professional income would otherwise have on the income tax liability of these persons. Under section 405-15 of the ITAA 1997, you are only subject to this concessional tax treatment if: n you are an individual n you are an Australian resident at any time during the income year n you are a special professional, and n you satisfy the first year requirements, that your taxable professional income is more than $2,500, in the current year or an earlier income year, known as year one. Paragraph 405-25(1)(a) of the ITAA 1997 includes as a 'special professional', the author of an artistic work. While the term 'artistic work' is not defined in the income tax legislation, the meaning given to the term in the Copyright Act 1968 is used for the purposes of subsection 405-25(1) of the ITAA 1997. Under subsection 10(1) of the Copyright Act 1968 , the term '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 last two preceding paragraphs applies. We consider that the products you create are works of artistic craftsmanship under paragraph (c), where neither paragraphs (a) nor (b) apply. Therefore you are considered a 'special professional', being the author of artistic works. | Detailed Reasoning - Please note: Whilst you are considered a special professional and the income you derive from your business is included in your taxable professional income calculation, the calculation of special professional averaging also depends on the taxable professional income of your previous years. As the first year for income averaging is the first time your taxable professional income is more than $2,500, you need to determine what financial year this occurred, as well as the taxable professional income amounts for the years leading up to the 2013-14 financial year. There is no discretion for the Commissioner to allow any other financial year to be considered as the first year for averaging.