Private ruling: Special Professional Averaging
Published: November 2011
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2007

Ruling: Q1: Are you a 'special professional' for the purposes of Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Can you count your architectural income derived as a sole trader as 'assessable professional income' for the purposes of Division 405 of the ITAA 1997? | A2:  | Q3: Can you count your architectural income derived as an employee as 'assessable professional income' for the purposes of Division 405 of the ITAA 1997? | A3: 

Relevant facts and circumstances: You are an Australian resident for tax purposes. You have been employed full time as an architect with architectural firms and other organisations for a number of years, while at the same time providing architectural services to clients under your sole trader activity. While employed as an architect with an architectural firm, you completed approximately five to six projects in a period of approximately four years. During the 2011-12 financial year you have been employed on a 12 month fixed remuneration contract with a government agency providing architectural services. As a sole trader you have completed four projects since the 2008-09 financial year. Remuneration for your services is agreed upon prior to commencing the projects, and is paid to you either after completing the project or as you progressed through progression payments. You are not an employee of your sole trader clients.

Relevant legislative provisions: 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 Section 405-30, | Income Tax Assessment Act 1997 Section 405-45, | Income Tax Assessment Act 1997 Section 405-50 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: An architect is considered an author of an artistic work and therefore a special professional. As such you include as assessable special professional income any assessable income that you derive in relation to your activities as an architect, provided it is not excluded by legislation. | Detailed Reasoning - Income derived as a sole trader: Architectural income derived as a sole trader is to be included as 'assessable professional income' for the purposes of Division 405 of the ITAA 1997. | Detailed Reasoning - Income derived as an employee: Architectural income derived as an employee is not to be included as 'assessable professional income' for the purposes of Division 405 of the ITAA 1997, as it is derived in the ordinary course of your employment under successive schemes, which is considered substantial continuity in the provision of those services. | Detailed Reasoning - Detailed reasoning: 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 section 405-15 of the ITAA 1997, you are only subject to this concessional tax treatment if: · you are an individual · you are an Australian resident at any time during the income year · your are a special professional, and · 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. Section 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. The note to this subsection states that the expression 'author' is a technical term from copyright law. In general the 'author' of an artistic work is the artist, sculptor or photographer who created it. The expression 'artistic work' is defined in section 10 of the Copyright Act 1968 and includes (whether the work is of artistic quality or not) a painting, sculpture, drawing, engraving or photograph. In your case you are an architect who provides architectural services. As such you are considered an author of an artistic work and therefore 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 include as assessable special professional income any assessable income that you derive as a reward for providing services relating to your activities as an architect, including any assessable income that you derive as a prize from your activities. However you do not include income excluded by section 405-30 of the ITAA 1997. | Detailed Reasoning - Exclusions: Section 405-30 of the ITAA 1997 provides details of the exclusions from what can be counted as amounts of assessable special professional income. This section effectively excludes from the special professional averaging provisions, assessable income derived by employed persons who use their technical skills in the provision of architectural services. Where a person engages in activities as an architect, in meeting his or her obligations under a scheme to provide services to another person, any assessable income derived from those activities cannot be included in assessable professional income unless the following conditions are satisfied: (a) the scheme was entered into solely to require services to be provided by creating one or more artistic or architectural works, and (b) the services have not been, and may not reasonably be expected to be, provided to the other person (or that person's 'associates') under successive schemes that result in substantial continuity in the provision of those services. A 'scheme' is defined in section 995-1 of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. The term also applies to any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. Taxation Determination TD 93/65 provides an example of a computer programmer who is employed and in the ordinary course of that employment writes a computer program. The income derived from that source is not subject to concessional treatment because the employment results in the programmer continuing to render services to the employer. | Detailed Reasoning - Architectural services provided as a sole trader: As a sole trader you complete a number of projects per year for various clients, and are paid a predetermined amount for each project. You are not considered to be an employee of these clients. The income you derive as a sole trader is not excluded from concessional treatment under section 405-30 of the ITAA 1997, and is considered special professional income subject to concessional treatment under division 405 of the ITAA 1997. | Detailed Reasoning - Architectural services provided as an employee: For some time you have provided architectural services as a full-time employee with architectural firms, and are currently employed on a 12 month contract with a government agency. Like the example above, in the ordinary course of your employment you provide one or more architectural works to your employer under successive schemes, which is considered substantial continuity in the provision of those services. As such the income you derive as an employee is excluded from the calculation of your assessable special professional income, and is not subject to concessional treatment under division 405 of the ITAA 1997. | Detailed Reasoning - Other information: Although the income you derive as a sole trader is considered assessable professional income, it does not mean that you will receive an averaging benefit each year that you derive that income. The calculation of special professional averaging depends on the taxable professional income for the previous year/s and current year. For more information on the calculation of your taxable professional income and special professional averaging, please see the enclosed document - Income averaging for special professionals 2011 - which is available on our website www.ato.gov.au.

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.