Arts Specific Provisions
Income Averaging for Artists
How does the system work?
If you derive income from an arts business then the averaging provisions may apply. When we say “income†we are referring to income derived directly from the art practice. For example, income from the sale of paintings counts, but income from running painting workshops does not. The criteria we often use is “does the activity give rise to the creation of intellectual property (copyright)â€
The principle behind the averaging provisions is that those working in the arts may spend a number of years working on a project that will realize income at a future point in time:
- A film-maker spends four years developing, producing and distributing a film (and the writer took four years before that) and two out of three productions barely return costs
- A visual artist takes three years to create a body of work for an exhibition
- A band releases a CD every two years, every second CD fails to stir the marketplace
So, income is characterized by peaks and troughs, and for emerging artists, the troughs are longer and deeper than for established artists.
To compensate artists in the early stages of their career, the legislation provides that, in a particular income tax year, all of the income is taxed, but at a rate that would have applied if only one-fifth of the income had been received.
To give an extreme example, your artist income for the first four years is below the averaging threshold (once you hit the threshold, you start to income average) so they are taken to be $0 years. In the fifth year your net (after expenses) artist income is $30000. If that had been earned over a five year period you would have earned $6000 a year. On $6000 you pay no tax (under the tax-free threshold) and five times $0 is still $0 so there would be no tax payable. This assumes you have no other income, but that gives you an idea of how it works.
As soon as your net (taxable) income from your arts practice exceeds $2500, the net figure is recorded as Taxable Professional Income at label Z in the tax return