1 Are you eligible to apply special professional income averaging under Division 405 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to payment you received in the 20XX-XX financial year in connection with your sport activities?
Yes. Question 2 Are you entitled to the foreign income tax offset (FITO) under Division 770 of the ITAA 1997 in relation to the NIL payment you received in the 20XX-XX financial year sourced from the Country Y? Answer Yes. This ruling applies for the following period Year Ended 30 June 20XX The scheme commenced on July 20XX
You play sport at an elite level. When you were X, you signed to play professional sport with Organisation 1. You played X years and signed a contract with Sporting Organisation 1 as a Memorandum of Understanding to ensure you kept your university eligibility in future years. You have played X years in Sporting Organisation 1 and X years in Sporting Organisation 2 and have received no money to play sport during this period. Your sport activities require you to use your physical prowess, physical strength and physical stamina. You are not employed to undertake any activities in addition to your sport related activities. You are now attending university in Country Y. From July 20XX to May 20XX, you attended University 1. From June 20XX to May 20XX, you attended University 2. In May 20XX, you transferred to University 3. University 3 offered you the opportunity to play in Sporting Organisation 3.
You attended the abovementioned educational institutions whilst on scholarships. You were awarded these scholarships to assist with attending the relevant educational institutions and to play sport. These scholarships directly paid for your attendance at the relevant institutions and you did not receive any direct cash benefits from these scholarships. In June 20XX, you were paid a lump sum of $X to transfer from University 2 to University 3. There were no expenses associated with this payment. You are required to pay tax with respect to this payment in Country Y. At this stage, you have not paid the relevant tax in Country Y. The arrangement you entered upon receiving the NIL payment is distinct from the arrangement you entered when you received your scholarship with University 3. The payment was made as you possessed unique abilities and traits as a university athlete and person of high standing. The entity facilitating this payment was seeking the global right to use your endorsement and services in connection with promoting and marketing its products and services. You agreed to grant these rights to that entity.
The payment is not contingent on specific activity to be performed in the future. There is no requirement to repay any amount if any conditions are not satisfied. When the study year concludes, you return to Australia and reside with your parents. You are residing in Country Y temporarily. When you complete your university degree, you intend on returning to Australia full-time. You do not own property in Australia. You do not own property overseas. The 20XX-XX financial year is the X year you are intending to apply income averaging to income you have received as a special professional.
Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1997 section 405-15 Income Tax Assessment Act 1997 section 405-20 Income Tax Assessment Act 1997 section 405-25 Income Tax Assessment Act 1997 section 405-30 Income Tax Assessment Act 1997 section 405-45 Income Tax Assessment Act 1997 section 405-50 Income Tax Assessment Act 1997 section 770-10 Income Tax Assessment Act 1997 section 770-15 Income Tax Assessment Act 1997 section 995-1
Question 1 Summary As a sportsperson, you are a special professional. You are therefore entitled to have special professional income averaging applied to the income from your sport activities. You are eligible to have the averaging applied for the 20XX-XX financial year as this is the X year you are applying averaging to your income from this activity and the income exceeds $X. Detailed reasoning Special professional income averaging An income averaging scheme applies to certain classes of special professionals. The scheme, which is contained in Division 405 of the ITAA 1997, is designed to prevent such taxpayers from being pushed into higher tax brackets when income from their professional work in a year fluctuates above the average income for such work. Under section 405-15 of the ITAA 1997, you are only subject to this concessional tax treatment if the following applies: • You are an individual. • You are an Australian resident at any time during the income year. • You are a special professional.
• You satisfy the first-year requirements, that is, your taxable professional income is more than AU$2,500 in the current year or an earlier income year, known as year 1. Once this qualifying event has occurred, you will remain eligible for the operating of averaging even though your taxable professional income in subsequent years may not exceed AU$2,500. Australian resident Subsection 995-1(1) of the ITAA 1997 defines an Australian resident as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). The terms resident and resident of Australia, regarding an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides 4 tests to ascertain whether you are a resident of Australia for income tax purposes. One of these tests is the domicile test. This test is based on the concept that if you have your domicile in Australia, you will be an Australian resident, unless the Commissioner finds you have a permanent place of abode outside of Australia. Special professional As per subsection 405-25(1) of the ITAA 1997, the classes of special professionals subject to the income averaging scheme are:
a) authors of literary, dramatic, musical or artistic works, b) inventors, c) performing artists, d) production associates, and e) sportspersons. Subsection 405-25(6) of the ITAA 1997 defines a sportsperson as someone who competes in a sporting competition. Subsection 405-25(7) of the ITAA 1997 defines a sporting competition as an activity to which extent: a) a human being is the only participant involved or the human being: i. rides animals or exercises other skills in relation to animals, ii. drives, pilots or crews motor vehicles, boats, aircraft or other forms of transport, or iii. encounters natural obstacles or forces or tries to overcome them, and b) participation involves the primary use of physical prowess, strength or stamina. Assessable professional income
The amount of above-average special professional income is the difference between your taxable professional income and average taxable professional income. Subdivision 405-C of the ITAA 1997 contains the rules for calculating taxable professional income (section 405-45 of the ITAA 1997) and average taxable professional income (section 405-50 of the ITAA 1997). Specifically, taxable professional income is calculated as assessable professional income less expenses associated with that income. Under section 405-20 of the ITAA 1997, you can include in assessable professional income any assessable income derived: • as a reward for providing services relating to your activities as a special professional, • as a prize received because of your activities as a special professional, • for promotions or commentaries received because you are a special professional, • for assigning copyright or granting a license in a literary, dramatic, musical or artistic work, • for assigning or granting patent rights in relation to an invention you invented, and
• either as royalites or otherwise, for the work or invention or in relation to copyright in the work or a patent for the invention. Subsection 405-20(4) of the ITAA 1997 specifies your assessable professional income will include income that you derive because you are or have been a special professional for: a) endorsing or promoting goods or services, b) appearing or participating in an advertisement, c) appearing or participating in an interview, d) providing services as a commentator, or e) providing similar services. Where an amount of assessable income is derived partly from services relating to activities as a special professional and partly from other services, it is necessary to quantify the part that can be counted as assessable professional income. Application to your circumstances
You are intending on returning to Australia to live with your parents once you complete your university degree. You are in Country Y specifically for completing your university degree and you have been returning home to visit your parents. Australia is your domicile of choice and you do not have a permanent place of abode outside Australia. Therefore, you are a resident of Australia for taxation purposes. Your payment is therefore assessable income in Australia. In your case, you have received a payment from the facilitating entity in exchange for providing endorsement and services in connection with promoting and marketing its products and services. This payment was made to you specifically as you were a person of high standing. You are holding this position in society due to your unique abilities and traits as a sportsperson. You have received the payment for endorsing and promoting goods and services. You have been selected as a candidate for this payment because of the activities you are undertaking as a special professional. The payment does not fall under any of the exclusions specified under section 405-30 of the ITAA 1997.
The payment is therefore regarded as assessable professional income. You have received the payment in the 20XX-XX financial year. This is the X year you are applying special professional income averaging. The payment was received in June 20XX and amounted to $X. You have no expenses associated with the payment. You have received above $X in assessable professional income this financial year. You satisfy the first-year requirements for income averaging. Your payment is therefore subject to the special professional income averaging provisions. Question 2 Summary Under the foreign income tax offset rules, you will be entitled to a tax offset for the income year in which your assessable income included an amount in respect of which you paid foreign income tax, even if you paid the foreign income tax in another income year. Detailed reasoning Foreign income tax offset rules The purpose of the foreign income tax offset rules in Division 770 of the ITAA 1997 is to protect a taxpayer from the double taxation that may arise where the taxpayer pays foreign tax on income that is also taxable in Australia.
Subsection 770-10(1) of the ITAA 1997 provides that you are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. The tax offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another income year. Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains - section 770-15 of the ITAA 1997. The amount of your tax offset for the year is the sum of the foreign income tax you paid that counts towards the offset for the year - section 770-70 of the ITAA 1997. The offset amount you are entitled to will not always be the same amount of the tax paid overseas. If you are claiming more than $1,000, you will first need to work out your foreign income tax offset limit to determine your entitlement. The foreign income tax offset is limited by section 770-75 of the ITAA 1997.
Subsection 770-75(1) provides that there is a limit (the offset limit) on the amount of your tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess. Subsection 770-75(2) provides that your offset limit is the greater of: a) $1,000, and b) this amount: i. the amount of income tax payable by you for the income year, less ii. the amount of income tax that would be payable by you for the income year if the assumptions in subsection 770-75(4) were made. The general guidelines including the record keeping requirements are contained in the Guide to foreign income tax offset rules 2025, ATO document QC 104349. Convert foreign income to Australian dollars You must convert all foreign income, deductions and tax offsets to Australian dollars in your tax return. Depending on your circumstances and the type of income, you will need to use either the: • specific prevailing exchange rate, or • average exchange rate. Reporting foreign income
Unlike Australia, most countries do not have an income year ending on 30 June. As such you may need to report your foreign income and any associated tax offsets in multiple tax returns in Australia. You will need to work out which income years the income amounts align to and apportion them accordingly. This information can be found by going to our web site at www.ato.gov.au and typing in the search field QC 72091. The link to Converting foreign income to Australian dollars is also found in this document. Application to your circumstances Under the foreign income tax offset rules, you will be entitled to a tax offset for the income year in which your assessable income included an amount in respect of which you paid foreign income tax, even if you paid the foreign income tax in another income year. You need to convert your foreign income to Australian dollars, determine your tax offset entitlement and report your foreign income and associated tax offsets by working out which income years the income amounts align to and apportion them accordingly.