Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 8 - Above-average special professional income
Overview
This chapter covers the rules that allow the income of some professionals to be averaged. These rules are in Subdivision 405 of Part 3-45 of the 1997 Act.
Part A summarises these rules.
Part B identifies the changes to the 1936 Act.
Part C explains the transitional provisions which set out how and when the rewritten provisions will apply.
Part D explains the amendments that need to be made to the 1997 Act and the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the 1936 Act.
A. Summary of the new law
Division 405: Above-average special professional income
Division 405 reduces the effect that fluctuations in special professional income would otherwise have on the income tax liability of authors, inventors entertainers and sportspersons.
It does this by applying special rates of tax to taxable income that includes above-average special professional income which, when added to other income, moves the taxpayer into a higher tax bracket.
Above-average special professional income is worked out by comparing taxable professional income for the year with the average of taxable professional incomes over a maximum of the last four years. [sections 405-1 & 405- 5]
Who does this Division apply to?
This Division applies to:
- •
- authors of literary, dramatic, musical or artistic works;
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- inventors;
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- performing artists;
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- production associates;
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- sportspersons; [section 405-25]
who are Australian residents for at least part of the income year. [subsection 405-15(1)]
Joint authors and inventors are treated in the same way as sole authors or inventors. [section 405-40]
Calculating above-average special professional income
Working out taxable professional income
Taxable professional income is assessable income from the following sources:
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- services rendered;
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- prizes;
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- promotions and commentary work;
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- assigning or licensing intellectual property in a work or invention; and
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- any other assessable income from works or inventions;
(called assessable professional income ) reduced by any deductions relating to the derivation of that income. [sections 405-20, 405-35 & 405-45]
Authors and inventors who provide services to others
Income derived from rendering services to another person is assessable professional income if the service is for a specific work or invention, and is not part of a substantial continuity in services. [subsection 405-30(1)]
Assessable professional income does not include assessable income from:
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- coaching, umpiring or administering sporting activities;
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- being a member of the pit crew in motor sport;
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- being a theatrical or sports entrepreneur;
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- owning or training animals;
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- termination payments, including those in lieu of leave; or
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- capital gains.
[subsection 405-30(2)]
If an amount of assessable income consists of both assessable professional income and other income, then the amount to be attributed to assessable professional income is determined on a reasonable basis. [section 405-35]
Working out average taxable professional income
If:
- •
- taxable professional income for the year exceeds $2500 (or did in a prior year in which the taxpayer was an Australian resident); [paragraph 405-15(1)(d)] and
- •
- the first professional year was four or more years ago
the sum of all taxable professional income received over the last four income years is divided by four to arrive at average taxable professional income . [section 405-50]
Phasing-in arrangements apply if the first professional year was within four years. [section 405-50]
Above-average special professional income.
If taxable professional income exceeds average taxable professional income , the excess is the above-average special professional income . [subsection 405-10(3)]
B. Discussion of changes
Objective tests replace administrative discretions.
The following discretions have been removed and replaced with objective criteria, to be consistent with self-assessment.
| Provision | Subject | Replaced with |
|---|---|---|
| 158H(2)(c) | Where assessable income derived under an arrangement comprises eligible income and other income and the Commissioner considers the eligible component to be excessive, he may reduce this component to an amount he considers reasonable. | An objective test of reasonableness. [subsection 405-35 (2)] |
| 158J(b) | In calculating eligible taxable income, deductions (other than apportionable deductions ) are allowed to the extent the Commissioner considers they relate to the derivation of that income. | An objective test of reasonableness. [section 405-45] |
Some of the key concepts concerning the income of special professionals are given new labels.
The new terms and their 1936 Act equivalents are:
| New Term | 1936 Act equivalent |
|---|---|
| above-average special professional income | abnormal income amount |
| artistic support | recognised associated services |
| assessable professional income | eligible assessable income |
| average taxable professional income | average eligible taxable income |
| performing artist | performer |
| professional years 1, 2, 3 and 4 | For professional year 1, it is first year of income; professional year 2 - second year of income; professional year 3 - third year of income; and professional year 4 is year of income next succeeding the third year of income. |
| scheme | arrangement |
| special professional | eligible person |
| sporting competition | sport |
| taxable professional income | eligible taxable income |
The term associate is given a standardised meaning.
Under the 1936 Act, associate takes on the meaning in subsection 26AAB(14) of that Act. The rewrite uses a standardised definition. The differences are minor and have no significant effect on the treatment of income averaging for special professionals.
C. Transitional arrangements
The rewritten provisions apply to assessments for the 1998-99 and later income years.
The averaging process requires taxable professional incomes for the four income years prior to the current year to be used. For income years earlier than the 1998-99 income year, taxable professional income is what was known as eligible taxable income under the 1936 Act.
[section 405-1 of the Income Tax (Transitional Provisions ) Act 1997]
D. Consequential amendments
Amendments of the Income Tax Assessment Act 1936
Other amendments to the 1936 Act:
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- close off the application of provisions of the 1936 Act that have been rewritten in Division 405; and
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- insert references in the 1936 Act to those rewritten provisions where the 1936 Act currently refers to the existing provisions.
Closing off the eligible person averaging provisions
New section 158BA is inserted into the 1936 Act to close off the application of existing provisions that have been rewritten. This applies to assessments for the 1998-99 and later income years. [Schedule 8, Part 3: item 1]
Inserting references to the rewritten provisions
The provisions in the following tables replace references to the existing provisions with references to the rewritten provisions.
The following amendment applies to assessments for 1998-99 and later years:
| Provision | Change |
|---|---|
| Subsection 159ZR(1) (paragraph (b) of the definition of normal taxable income) | Include a reference to the 1997 Act in the 1936 Act. [Schedule 8, Part 2: item 3] |
The remaining amendments apply in working out provisional tax on income of the 1999-2000 and later income years:
| Provision | Change |
|---|---|
| Paragraph 221YBA(2)(b) | Replace a reference to the 1936 Act with references to the 1997 Act. [Schedule 8, Part 2: item 4] |
| Subsection 221YCAA(2) (paragraph (f) of the definition of adjusted preceding years tax) | Replace references to the 1936 Act with references to the 1997 Act. [Schedule 8, Part 2: item 5] |
| Subparagraph 221YCAA(3)(b)(iv) | Replace references to the 1936 Act with references to the 1997 Act. [Schedule 8, Part 2: item 6] |
| Paragraph 221YDA(1)(dab) | Replace references to the 1936 Act with references to the 1997 Act. [Schedule 8, Part 2: item 7] |
| Subparagraph 221YDA(2)(a)(iii) | Replace references to the 1936 Act with references to the 1997 Act. [Schedule 8, Part 2: item 8] |
Amendments of the Income Tax Rates Act 1986
Amendments to the Income Tax Rates Act 1986 replace references to abnormal income amount with references to above-average special professional income. [Schedule 8, Part 3: item 10]