Special rate of income tax on above-average special professional income

Did the special rates of tax referred to in section 405-5 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a taxpayer, an author, who had assessable professional income for the income year ended 30 July 2001?

No. The special rates of tax did not apply to the taxpayer in the year ended 30 June 2001 as the taxpayer's taxable professional income for that year is not more than $2500.

The taxpayer, an individual Australian resident, commenced writing a book in July 2000.

The taxpayer received advance royalties of $600 in the year ended 30 June 2001. The taxpayer expected to receive a further advance of royalty income of $600 in the year ended 30 June 2002 and a larger, but currently unknown, amount in the year ended 30 June 2003.

Significant fluctuations can occur in the professional incomes of authors, inventors, performing artists, production associates, and sportspersons. To lessen the impact of these fluctuations on marginal tax rates, special rates of tax apply if professional income is above average (section 405-1 of the ITAA 1997).

Being an author of literary works, the taxpayer was a special professional for the purposes of Division 405 of the ITAA 1997 (subsection 405-25(1) of the ITAA 1997). The taxpayer derived assessable professional income of $600 in the year ended 30 June 2001 (section 405-20 of the ITAA 1997), the first year in which the taxpayer derived such income.

The special rates of tax apply when: • a resident individual taxpayer's taxable professional income for the current year exceeds average taxable professional income for the current year (paragraph 405-15(1)(c) of the ITAA 1997); and • the taxpayer's taxable professional income is more than $2500 for the current year or an earlier year (paragraph 405-15(1)(d) of the ITAA 1997).

In working out average taxable professional income, the phasing-in arrangements for new professionals provide that professional year 1 is the first income year for which taxable professional income is more than $2500 (subsection 405-50(3) of the ITAA 1997).

Even though there could be an amount of taxable professional income greater than $2500 in the year ended 30 June 2003, the special rates of tax did not apply to the taxpayer in the year ended 30 June 2001 as the taxpayer's taxable professional income was less than $2500 in that year.