Tax averaging for primary producers

Overview of tax averaging

Tax averaging allows you to even out your income and tax payable over a maximum of 5 years to take good and bad income years into account. This ensures you don't pay more tax over time than taxpayers on similar, but steady, incomes.

To help work out if you are eligible for an averaging tax offset, or need to pay extra income tax on the averaging component of your basic taxable income, see our examples.

Your basic taxable income is your taxable income excluding:

• net capital gains
• certain superannuation lump sums and death benefit termination payments
• above-average income of an author, inventor, sportsperson or other special professional.

Deductions that are excluded under the non-commercial loss provisions are also excluded from the calculation of basic taxable income.

The averaging rules take into account the:

• comparison rate of tax – the rate of tax that you would pay in the current year at basic rates of tax on your average income (Medicare levy is not included in the basic rate of tax)
• averaging component – the part of your basic taxable income that can be subject to an averaging adjustment and is made up of both taxable primary and non-primary production income
• gross averaging amount – the difference between the tax payable at the comparison rate and the tax payable at basic rates.

Averaging tax offset or extra income tax

When your average income is:

• less than your basic taxable income – you will receive an averaging tax offset
• more than your basic taxable income – you must pay extra income tax on the averaging component of your basic taxable income.

The amount of your averaging tax offset or extra income tax is calculated automatically. Your notice of assessment will show you the averaging details.

Averaging calculations require you to have primary production income or loss (excluding a non-commercial loss) in the years subject to averaging. The calculations won’t start until the first year that your basic taxable income is greater than or equal to your basic taxable income from the year before. This means that your first averaging adjustment is always a tax offset (or nil). Use our Simple tax calculator to calculate the basic rate of tax.

Taxable primary production income

A primary producer has a taxable primary production income when their assessable primary production income exceeds their deductions. Assessable primary production income is the part of the basic assessable income derived from carrying on a primary production business. This includes interest on your term deposit account if it was opened as a condition of obtaining finance to purchase a new farming property.

If you are not sure if you are carrying on a business of primary production, see TR 97/11 Income tax: am I carrying on a business of primary production?

Primary production income does not include income support payments made to primary producers (for example, the former exceptional circumstances relief payments).

When your income is less than deductions, the taxable primary production income is treated as being nil. Similar rules apply for calculating taxable non-primary production income.

Taxable primary production income always forms part of the averaging component. Whether your taxable non-primary production income will be included in the averaging component will depend on the amount. If your taxable non-primary production income is:

• less than $5,000 – it is included in full (so the averaging component will equal basic taxable income)
• between $5,000 and $10,000 – a non-primary production shade-out amount (a reduced amount) is included (this is generally the amount remaining after deducting the taxable non-primary production income from $10,000). If you make a loss from your primary production activities, the amount of that loss is also deducted. But the non-primary production shade-out amount cannot be less than nil.
• $10,000 or more – it is not included at all.

Opting out of the averaging system

You may choose to withdraw from the averaging system for 10 income years and pay tax at ordinary rates. This means you will be taxed on the same basis as taxpayers who are not eligible for averaging provisions.

You can tell us you are withdrawing from income averaging when you:

• lodge your tax return via the relevant channel, or
• write a letter and send it to:

Australian Taxation Office
PO Box 1130
PENRITH  NSW  2740

Once you make this choice, it will affect all your assessments for 10 income years and it cannot be revoked. After this period, your income will again be subject to tax averaging. This means that year 11 will be the first year of income included in averaging calculations and you may be entitled to a tax offset as early as year 12.

Choosing to restart averaging in certain circumstances

You may choose to recommence the averaging system if you show us that, because of retirement from your occupation or from any other cause, your basic taxable income for the reduction year is permanently reduced during that year to less than two thirds of your average income. This will affect all of your assessments for subsequent years as if you had not been in the averaging system prior to that year, but you will still be taxed using the averaging provisions.

How to work out tax payable with income averaging

The following examples use tax rates for the 2023–24 income year.

Note that the calculations are estimates only. The exact amount of your income tax can only be calculated on the basis of all of the information disclosed in your income tax return.