Income averaging for special professionals: how the ATO's "secret club" actually works
Updated: Aug 24
Most people are paid a similar amount every year, and the tax system is built around that assumption. Some careers do not work that way at all. An author can spend three years writing a novel for almost nothing and then receive the whole advance in a single week. A tennis player can grind through years of small tournaments and then win one big one. A sculptor can sell nothing for two years and then sell everything.
Taxed as though that one year were normal, the spike lands in the top brackets and a career's worth of income is taxed as if it were a windfall.
Division 405 of the tax law exists to fix that. It is not a loophole and it is not discretionary. If you qualify it applies automatically, and it can be worth a great deal in the year you break through.
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Who counts as a special professional
There are five categories, and they are set by the legislation rather than by the ATO's judgement:
Authors. This is the copyright meaning of the word, not the everyday one. The author of a musical work is its composer. The author of an artistic work is the artist, sculptor or photographer who made it. You do not have to write books.
Inventors, of a patented invention.
Performing artists. Exercising intellectual, artistic, musical, physical or other personal skills in front of an audience, or performing in a film, recording, television or radio broadcast. Actors, musicians, singers and dancers all sit here.
Production associates. People who provide artistic support to a production. The law names art directors, choreographers, costume designers, directors, directors of photography, film editors, lighting designers, musical directors, producers, production designers and set designers, and leaves room for anyone making a comparable artistic contribution.
Sportspeople competing in a sport that primarily uses physical prowess, strength or stamina. The rules stretch far enough to include a rally navigator or a rowing coxswain.
The line that catches people out
The test for a production associate is artistic rather than technical. A director of photography is on the list. A camera operator, a sound recordist or a gaffer generally is not, unless they can show a comparable artistic contribution.
And on the sporting side, the following are specifically excluded from professional income, by name:
coaching or training sportspeople
umpiring or refereeing
administering a sporting competition
being part of a motor sport pit crew
being a theatrical or sports entrepreneur
owning or training animals
So a retired footballer's coaching income is ordinary income. It does not get averaged.
How you get in: the $2,500 first year
Averaging starts in what the law calls professional year 1: the first income year in which you were an Australian resident and your taxable professional income was more than $2,500.
Two things follow from that, and both surprise people.
The bar is very low. The $2,500 figure was set in 1998 and has never been indexed or changed. Almost any professional artist or athlete with real income clears it the first time they earn anything meaningful.
You only ever have to clear it once. Once you have had a year above $2,500 as a resident, that condition is permanently satisfied. A later year with $800 of professional income does not push you out, and if your income passed $2,500 years ago you have not missed a window.
What income actually counts
This is where the most expensive mistakes are made.
Counts as professional income:
Fees for services relating to your work as a special professional
Prize money
Royalties, including an advance on account of royalties
Income from assigning copyright or a patent, or granting an interest in one
Endorsing or promoting goods or services
Appearing in an advertisement
Appearing in an interview, or working as a commentator
That last group matters. Income you earn because you are or were a special professional, from endorsements, advertising, interviews and commentary, is professional income. A typical athlete sponsorship contract is endorsement and advertising work, so it generally counts, and it generally gets averaged. It is widely assumed to be excluded. It is not.
Does not count:
Salary from an unrelated job
The excluded sporting activities listed above
Superannuation lump sums and employment termination payments
Unused annual leave and unused long service leave payments
Net capital gains
Income earned by an author or inventor under a continuous engagement, unless the arrangement was solely to produce specified works or inventions
How the averaging is worked out
Your average taxable professional income is normally the average of your professional income over the four preceding years. In your first four years there is no full four-year history, so the law phases it in:
Professional year 1: your average is nil
Year 2: one third of year 1
Year 3: one quarter of years 1 and 2 added together
Year 4: one quarter of years 1, 2 and 3 added together
Year 5 onwards: the average of the last four years
Anything you earn above that average is above-average special professional income, and it is the part that gets the concession.
The mechanism is a five-slice calculation. One fifth of the above-average amount is added to the rest of your income, the extra tax that one fifth generates is worked out, and then that figure is multiplied by five. The effect is that a spike is taxed roughly as if it had arrived evenly over five years.
Notice what that means for year 1. Your average is nil, so the entire amount is above-average. Your breakout year is the year the concession is worth the most, not the least.
If you moved to Australia partway through your career, the first-year rule works differently again. Worth asking about before you lodge.
A worked example, on 2025-26 rates
Jane writes fiction. For years she earned under $2,500 a year from it. In 2025-26 her first novel sells and she receives a $101,000 advance. Assume no other income and no deductions, and ignore the Medicare levy.
This is her professional year 1, so her average professional income is nil and the whole $101,000 is above-average.
One fifth of $101,000 is $20,200
Tax on $20,200 at 2025-26 rates is $320
$320 multiplied by five is $1,600
Taxed the ordinary way, $101,000 would attract $21,088.
Averaging saves her $19,488 in the year it matters most.
Now run it forward. In 2026-27 she has a quiet year and earns $20,000, which is below her average, so averaging does nothing and she is taxed normally. In 2027-28 her second book earns a $150,000 advance. Her average is one quarter of $101,000 plus $20,000, which is $30,250, so $119,750 is above-average and the same five-slice calculation applies to it.
When averaging is worth nothing
Worth saying plainly, because it is oversold: averaging only reduces your tax if more than one marginal rate would apply to the above-average amount. If the whole of it sits inside a single bracket, the calculation produces exactly the same result as ordinary rates. It can never make your tax worse, but it does not always make it better.
There is also a change coming that quietly reduces what the concession is worth. The 16 per cent rate drops to 15 per cent from 1 July 2026, and to 14 per cent from 1 July 2027. Averaging works by exploiting the gap between marginal rates, so flattening the bottom bracket narrows the gap it has to work with.
You cannot opt in, and you cannot opt out
There is no election, no form and no choice. The law is written as if and only if the conditions are met, and the ATO applies the calculation from the figure in your return.
A myth worth killing: there is no ten-year election to withdraw from special professional averaging. That rule belongs to primary producers, and even there it works differently from how it is usually described. A primary producer can elect to withdraw for ten years, in writing with their return, after which averaging automatically resumes. It is not a permanent exit, and it has nothing to do with Division 405.
There is also no retirement notification and no final reconciliation when you stop. What actually happens is quieter. The four-year average keeps rolling, your professional income falls, and at some point it no longer exceeds the average, so the concession simply stops applying. Four years after your last professional income, the average is nil.
One catch on the way out: under the endorsement and commentary rule above, income you earn because you were a special professional still counts. A retired athlete's commentary and sponsorship work is professional income.
Part-time jobs, loss years and company structures
A part-time job. If Jane also works in a bookshop, that salary is not professional income. It is taxed ordinarily and forms part of the non-professional income the averaging calculation sits on top of.
A loss year. If a professional's deductions exceed their professional income, taxable professional income for that year is nil. That nil then goes into the four-year average, which pulls the average down. It does not sit out. The loss itself is dealt with under the ordinary loss rules.
Companies and trusts. Only an individual can have above-average special professional income. Income taxed in a company, or retained in a trust, gets nothing from this concession. That is worth modelling before you set up a structure for asset protection or income splitting, because the averaging you give up can be worth more than the structure saves.
How it goes in your tax return
Two separate steps, and returns commonly get only one of them right.
Your taxable professional income goes at question 24, label Z in the supplementary section. This is the figure that triggers the averaging calculation.
The income itself has to be assessable somewhere. If it is not already shown at another question, it goes at question 24, label V.
Two warnings the ATO prints on the same page: do not include at label V anything you have already shown elsewhere, and do not claim the deductions you used to work out your professional income again at D1 to D15.
In myTax it appears under Other income, headed Income from activities as a special professional.
What to bring us
Your professional income for the year, itemised, and kept separate from anything that is not professional income
The deductions that relate to that professional income, kept separate from your other deductions
Your taxable professional income for each of the last four years. This is the item that most often holds up a new client, because it usually has to come from a previous accountant's returns
The year your professional income first went over $2,500, and whether you were an Australian resident then
Your residency for the current year
Whether anything was earned through a company or trust
Common questions
Does my sponsorship money get averaged?
Usually yes. Income from endorsing or promoting goods or services, and from appearing in advertisements, is professional income. This is the single most common misunderstanding in this area.
I had a huge year and then nothing. Do I have to pay something back?
No. There is no clawback. A year where your professional income is below your average is simply taxed the ordinary way.
I coach as well as compete. Does the coaching count?
No. Coaching and training income is specifically excluded, along with umpiring, refereeing and administering competitions.
I have not been in Australia my whole career. Does that matter?
It can. You need to have been an Australian resident at some point in the year, and your residency in the year before your first professional year affects how the first-year averaging is worked out. Bring us the dates.
Is it too late if I have been earning this way for years without claiming it?
Not necessarily. Amended assessments have time limits, but the first thing to establish is which year was your professional year 1, and that is usually recoverable from old returns.
Getting it right
Income averaging is one of the few parts of the personal tax system that is genuinely generous, and it is also one of the easiest to get wrong, because the categories are technical and the good guidance is thin.
If you are an artist, author, performer, inventor or athlete with an uneven income, it is worth a conversation. Book an appointment, or read more about how we work with individuals.
Prefer to listen? We covered this in The ATO's Secret Club A Guide to Income Averaging, episode 18 of the Aevum Accounting Podcast.
Disclaimer: The information and strategies shared in this article are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalised advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.
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