How to work out total tax payable with income averaging

You do not need to work out your total tax payable with income averaging. The Tax Office will work it out from the amount at Z item 22 on your tax return. If you want to work it out for yourself, follow these steps.

Step 1

Add your ATPI to your taxable income that is not subject to income averaging - your taxable non-professional income. The total, called your other income, is taxed at normal rates.

Step 2

Take away your ATPI from this year's TPI to get your above-average special professional income. To work out the tax payable on this income:

• to your other income, add one-fifth of your above-average special professional income
• work out the tax payable on this amount
• subtract the tax payable on your other income, and
• multiply the result by five.

Step 3

Add the tax on your other income and the tax on your above-average special professional income. The result is your total tax payable.

For more information, phone the Business Tax Infoline on 13 28 66.

The following steps show you how Kevin's tax has been worked out.

Kevin has a taxable income of $40,000, including assessable professional income of $33,000. He has deductions of $3,000 that reasonably relate to his assessable professional income - this amount does not include gifts - and no other deductions. His average TPI over the last four years was $6,250.

Kevin's tax payable - before any Medicare levy is worked out - is $5,780. It would have been $8,172 - the tax on $40,000 - if averaging had not been applied.

Assessable professional income	(a)	$33,000.00
Deductions	(b)	$3,000.00
TPI = (a)− (b) = $33,000 − $3,000	(c)	$30,000.00

Kevin shows this amount at Z item 22 on his tax return and, if he has not already included the amount at items 1, 2, 12, 13 or 14, also at V item 22 on his tax return.

ATPI = one-quarter of TPI for the preceding four years - not including this income year	(d)	$6,250.00
Taxable non-professional income = amount of total taxable income at $ on his tax return minus the amount shown at Z item 22 on his tax return = $40,000 − $30,000	(e)	$10,000.00
Other income = (d) + (e) = $6,250 + $10,000	(f)	$16,250.00
Tax on other income above at ordinary rates	(g)	$1,742.50
Above-average special professional income = (c) − (d) = $30,000 − $6,250	(h)	$23,750.00
Tax on [other income plus one-fifth of above-average special professional income] = tax on [(f) + 1 ÷ 5 (h)] = tax on $21,000	(i)	$2,550.00
Tax on above-average special professional income = [(i) − (g)] × 5 = [$2,550.00 − $1,742.50] × 5	(j)	$4,037.50
Kevin's total tax = (g) + (j) = $1,742.50 + $4,037.50	(k)	$5,780.00

If you are an artist, composer, writer, inventor, performer, production associate or sportsperson, this guide will explain special averaging provisions which may apply to your income. NAT 2475-6.2005.