What is Income Averaging for Special Professionals?
Income averaging is a tax calculation under Division 405 of the Income Tax Assessment Act 1997 that allows eligible creative professionals — including actors, directors, producers, writers, and musicians — to smooth their taxable income over a five-year period. Instead of being taxed at a high marginal rate in a big earning year, your tax is calculated on an averaged amount, which can save thousands of dollars annually.
Without any special provisions, the Australian tax system taxes each year in isolation. In your big year, you pay top marginal rates. In your quiet year, your lower tax brackets go to waste. Over a career, this means you pay significantly more tax than someone who earned the same total amount but spread evenly across those years.
Income averaging exists to fix this. Under Division 405 of the Income Tax Assessment Act 1997, eligible “special professionals” can smooth out the tax impact of fluctuating income. Instead of being taxed purely on what you earned this year, the calculation takes into account your income over a rolling period, reducing the spike in tax you would otherwise pay in a high-earning year.
As Carmel explains to clients: “Income averaging is one of the most powerful tax provisions available to people in the screen industry, and it is also one of the most underused. We regularly meet filmmakers who have been paying thousands more than they needed to, simply because nobody told them this existed.”
The concept is straightforward. Rather than paying the full marginal rate on a large sum earned in a single year, the ATO calculates what your tax would look like if your professional income had been earned more evenly. The difference is applied as a tax offset, reducing the amount you owe. For filmmakers, actors, and other creative professionals whose income swings dramatically between projects, the savings can be substantial – often several thousand dollars per year.
Who Qualifies as a Special Professional?
Not everyone can access income averaging. The ATO restricts it to specific categories of professionals whose work naturally produces uneven income. These categories are defined in the legislation, and the good news for people in film and television is that the list covers most creative roles in the industry.
The eligible occupations include:
- Authors, playwrights, and screenwriters – anyone earning income from writing original works
- Composers and musicians – including film composers and soundtrack artists
- Performers – actors, dancers, entertainers, and other performing artists
- Production associates – directors, producers, cinematographers, editors, and other key creative roles on a production
- Visual artists, sculptors, and illustrators – including concept artists and production designers creating original visual work
- Inventors – those earning income from inventions they have personally created
To be eligible, you must meet three key requirements:
- Your special professional income must exceed $2,500 in the current income year
- You must have received assessable professional income in the current year
- The income must come from personally exercising your professional skills – not from a company, trust, or partnership distribution
That third point is critical. If you are a director who operates through a Pty Ltd company (as many do – see our guide on when filmmakers should incorporate), the income your company receives does not qualify for personal income averaging. Only income you earn personally, in your own name, is eligible. This has important implications for how you structure your engagements, which we will cover below.
How Income Averaging Works – A Practical Example
The best way to understand income averaging is to see it in action. Let us follow Maya, a freelance director and screenwriter working in the Australian film and television industry.
Maya’s income over four years looks like this:
- Year 1: $45,000 (development work, writing a screenplay)
- Year 2: $180,000 (directing a feature film)
- Year 3: $30,000 (between projects, some script consulting)
- Year 4: $150,000 (directing a TV series)
Her total income across all four years is $405,000, which averages out to $101,250 per year.
Without Income Averaging
Using the 2025-26 individual tax rates (excluding the Medicare levy for clarity), Maya’s tax bill each year would be:
| Year | Income | Tax payable |
|---|---|---|
| Year 1 | $45,000 | $4,288 |
| Year 2 | $180,000 | $47,938 |
| Year 3 | $30,000 | $1,888 |
| Year 4 | $150,000 | $36,838 |
| Total | $405,000 | $90,952 |
Maya pays $90,952 in tax over four years. The damage is done in Years 2 and 4, where her income pushes into the 37% bracket and she pays $84,776 in tax on those two years alone.
With Income Averaging
Income averaging works by comparing Maya’s current year taxable professional income (TPI) against her average taxable professional income (ATPI) – the average of her TPI over the prior four years. When her current year TPI exceeds her ATPI, the excess is classified as “above-average special professional income,” and a tax offset is calculated on that portion.
The effect is that the above-average income is taxed at a lower effective rate, as if it had been spread across multiple years rather than concentrated in a single year. In Maya’s high-income years, this produces a meaningful tax offset.
In practice, across Maya’s four-year period, income averaging would save her in the order of $4,000 to $7,000 in total tax, depending on the specific years she begins claiming and her prior income history. The savings are largest in Year 2 and Year 4, where her income spikes well above her average.
To put that in perspective, the cost of having a qualified accountant prepare her return with income averaging is a fraction of the saving. It is, quite literally, money she would otherwise hand to the ATO unnecessarily.
Important note: The ATO’s income averaging calculation uses a specific formula involving your average taxable professional income over the preceding four years. The exact saving depends on your individual circumstances, including other income, deductions, and prior year history. The figures above are illustrative – your accountant will calculate the precise offset as part of your tax return.
What Income Qualifies for Averaging?
Not all income earned by a filmmaker or creative professional qualifies for the averaging calculation. The ATO draws a clear line between special professional income and ordinary income, and only the former is eligible.
Income That Qualifies
To qualify, the income must be earned by you personally exercising your professional skills. This includes:
- Directing fees paid to you as an individual
- Acting fees and performance income
- Screenwriting payments and script fees
- Composing fees for film scores and soundtracks
- Cinematography, editing, and other creative production fees paid to you personally
- Royalties from creative works you personally created
Income That Does NOT Qualify
- Rental income from investment properties
- Investment returns (dividends, interest, capital gains)
- Salary from a non-creative role (for example, if you also work part-time in administration)
- Company distributions – even from your own production company
- Trust distributions
- Income from producing or financing activities that do not involve personally exercising creative skills
The Critical Distinction for Directors and Producers
This is where it gets nuanced, and where many filmmakers trip up. If you are a director who also produces through a company, you need to separate your roles carefully. Your personal directing fee – the amount paid to you as an individual for exercising your creative skills on set – qualifies for averaging. But the income your production company earns from producing the film does not, even though you own the company and directed the film.
Carmel’s advice on this point is direct: “Structure your engagement carefully to maximise the portion that is classified as special professional income. If you are being paid a single lump sum that covers both your directing services and your producing role, you may be leaving averaging benefits on the table. We work with our clients to ensure their contracts distinguish between the two, so the maximum eligible amount flows through the averaging calculation.”
This kind of structuring is one of the reasons it pays to work with an accountant who understands the screen industry. A general accountant may not think to ask how your fee is broken down – and they may not realise the thousands of dollars at stake. Our film production accounting team deals with these arrangements regularly.
Common Mistakes with Income Averaging
Despite being available for decades, income averaging remains one of the most commonly missed tax benefits in the creative industries. Here are the mistakes we see most often.
1. Not Claiming It at All
This is the biggest one. Many general accountants simply do not know about income averaging for special professionals, or they have never had a client who qualifies. If your accountant has not asked you about your professional activities and whether you might be a special professional, there is a good chance this provision has been overlooked.
Carmel notes that roughly half of new clients who come to Count Out Loud and qualify for income averaging have never had it applied to their returns – even clients who have been working in the industry for years.
2. Including Non-Qualifying Income
Some accountants, when they do know about income averaging, make the mistake of including all of the client’s income in the averaging calculation. Only special professional income qualifies. If you lump in your rental income, your share trading profits, or your part-time teaching salary, you will get the calculation wrong and potentially attract ATO scrutiny.
3. Not Maintaining Records Across Years
Income averaging relies on your income history over the preceding four years. If you have not kept clear records of which income was special professional income and which was not, it becomes difficult to calculate the averaging offset accurately. This is especially problematic if you change accountants or if your prior returns were not prepared with averaging in mind.
4. Claiming Through a Company
Income averaging is only available to individuals. If all your creative income flows through a Pty Ltd company, you cannot claim income averaging on it. This does not mean you should avoid a company structure – there are many good reasons to incorporate, as we explain in our post on when filmmakers should incorporate. But it does mean you need to think carefully about which income streams flow through the company and which are earned personally.
5. Not Adjusting When Transitioning Between Employment Types
Filmmakers often move between being an employee on one production (with PAYG withholding) and a freelancer on the next (invoicing for services). These transitions affect how your income is classified and how the averaging calculation works. If your accountant is not tracking these changes, your averaging offset may be incorrect.
6. Assuming It Only Helps When Income Drops
Some professionals avoid claiming income averaging because they think it only benefits you in low-income years. In fact, the averaging mechanism works whenever your income fluctuates – up or down. It smooths the peaks and troughs, which means it reduces your overall tax burden across the cycle regardless of the direction of the fluctuation.
Income Averaging vs Other Tax Strategies
Income averaging is not the only tool available to filmmakers and creative professionals looking to manage their tax. But it occupies a unique position, and understanding how it fits alongside other strategies helps you build a comprehensive tax plan.
Income Averaging vs Salary Sacrifice
Salary sacrifice involves redirecting part of your pre-tax salary into superannuation (or other approved benefits) to reduce your taxable income. It works best when you are employed and earning a consistent income. Income averaging, by contrast, is designed specifically for fluctuating income and does not require you to redirect any money – it simply changes how your existing income is taxed. If you have a particularly high-income year, using both strategies together can be very effective.
Income Averaging vs Company Structure
As discussed above, income averaging only applies to personal income, while a company structure allows you to retain and manage income at the corporate tax rate. These two strategies are not mutually exclusive – you can use a company for your producing and business income while earning your creative fees personally and claiming income averaging on them. In fact, this combination is often the optimal structure for filmmakers who both produce and direct. For more on company structures, see our business advisory services.
Income Averaging vs Trust Distributions
Family trusts allow income to be distributed to beneficiaries in lower tax brackets, reducing the overall family tax burden. However, income averaging applies only to personal income earned from exercising your professional skills – trust distributions do not qualify. If you use a trust, the income distributed to beneficiaries is taxed in their hands at their individual rates, without the benefit of the averaging offset.
Carmel’s View
“Income averaging is the single most overlooked tax benefit for creative professionals in Australia,” Carmel says. “It costs nothing to implement, it requires no restructuring of your affairs, and it can save you thousands every year. If you are a filmmaker, actor, musician, or writer with fluctuating income and you are not using it, you should be asking your accountant why.”
How to Apply for Income Averaging
One of the things that makes income averaging attractive is that it is not a separate application or registration. It is applied through your individual tax return. There is no form to submit to the ATO in advance, no approval process, and no waiting period.
Here is how it works in practice:
- Your accountant identifies your eligibility – they determine whether you meet the criteria for being a special professional and whether your income exceeds the $2,500 threshold
- Your special professional income is separated – your accountant isolates the income that qualifies from your non-qualifying income
- The averaging offset is calculated – using the ATO’s formula, your accountant calculates your average taxable professional income over the prior four years and determines the tax offset
- The offset is included in your tax return – the averaging offset reduces your tax payable for the current year
To get it right, your accountant needs:
- Accurate records of your special professional income for the current year and ideally the prior four years
- A clear understanding of which income qualifies and which does not
- Your prior year tax returns (or the relevant data from them)
If you are a first-time claimant, you need at least one prior year of income data for the calculation to work. The more years of data available (up to four), the more accurate the averaging calculation will be.
The ATO may request evidence of your status as a special professional, particularly if it is the first time you are claiming. This could include contracts showing your role on a production, credit lists, payment records, or other documentation confirming that you earned the income by personally exercising your professional skills.
If you have been lodging returns without income averaging and want to go back and claim it for prior years, you can amend prior year returns within the standard amendment period, which is generally two years from the date the ATO issued the original assessment for individuals (or four years in some circumstances). This means you may be able to recover overpaid tax from previous years.
Frequently Asked Questions
Can I claim income averaging if I am also employed part-time?
Yes. Having a part-time job does not disqualify you from income averaging. The averaging calculation applies only to your special professional income – your part-time employment income is taxed at normal rates. As long as your qualifying professional income exceeds $2,500, you can claim the offset.
Does income averaging work if my income is going up?
Yes. Income averaging works whenever your income fluctuates in either direction. If your income is consistently increasing, the averaging mechanism smooths the rate at which you move into higher tax brackets. If your income spikes and then drops, it smooths the peak. The benefit exists whenever there is meaningful variation between your current year income and your average over the prior four years.
I am a producer – do I qualify?
Producers can qualify as “production associates” if they are personally exercising creative skills in the production. If your role involves creative decision-making – selecting scripts, shaping the creative vision, overseeing the creative output – you may qualify. If your role is purely on the business and financing side, without personal exercise of creative or artistic skills, it may not apply. The distinction can be nuanced, and it is worth getting professional advice to assess your specific situation.
Can I backdate an income averaging claim?
You can amend prior year tax returns to include income averaging, provided you are within the amendment period. For most individuals, this is two years from the date the ATO issued the original assessment, though it can extend to four years in some cases. If you have been missing out on income averaging for several years, the combined refund from amending multiple returns can be significant.
What if I have not claimed income averaging before and have no prior year data?
You can start claiming income averaging from the first year you are eligible. If you have no prior history of special professional income, your average will be based on whatever data is available. The more years of data your accountant can work with, the more beneficial the calculation tends to be. Even with limited history, it is worth claiming from the earliest eligible year to build up the data for future years.
Does income averaging affect my super obligations?
No. Income averaging is a tax calculation mechanism that affects how your income tax is computed. It does not change your superannuation obligations or entitlements. If you are an employee, your employer still pays super on your ordinary time earnings regardless of whether you claim income averaging. If you are self-employed, your voluntary super contributions are unaffected.
Get Expert Tax Advice for Creatives
Income averaging is one of those provisions that seems simple on the surface but requires genuine expertise to apply correctly. The difference between an accountant who understands the screen industry and one who does not can be worth thousands of dollars a year in tax savings you are either capturing or leaving on the table.
Carmel and the team at Count Out Loud have been working with filmmakers, actors, musicians, and creative professionals for years. We understand the unique income patterns of project-based creative work, and we know how to structure your tax affairs to take full advantage of every provision available to you – including income averaging, but also the broader strategies around business structure, superannuation, and industry-specific compliance.
If you are a creative professional with fluctuating income and you are not sure whether income averaging is being applied to your returns, get in touch. A quick review of your situation could uncover significant savings.
Contact Count Out Loud to book a consultation. Call us on (02) 9043 1525, or visit our film production accounting page to learn more about how we support the screen industry.