Creative work rarely pays the same amount every year. A painter might sell a whole exhibition one year and very little the next. A writer can wait years for an advance or a strong run of royalties. Under ordinary tax rates, one big year can push much of that income into a higher bracket.
The Australian Taxation Office offers a concession called income averaging for special professionals. It suits people whose income from creative or sporting work rises and falls. This post explains who qualifies, what income counts and how the calculation works in plain terms.
Who counts as a special professional
The ATO lists the groups that can income average. They are authors, artists, composers, writers, inventors, performers, production associates and sportspeople. You also need to be an Australian resident at some time during the income year. The ATO guide on who can income average sets out these conditions for the 2026 income year.
Authors, artists and inventors
An author is the creator of a literary, dramatic, musical or artistic work. The ATO notes that the author of a musical work is generally its composer. For an artistic work, the author is the artist, sculptor or photographer who created it. Inventors sit in the same group.
Performers and production associates
A performing artist uses intellectual, artistic, musical, physical or other personal skills in front of an audience. Appearing in a film, recording or broadcast also counts. Production associates are people who use artistic rather than technical skills in a production. The ATO lists roles such as art director, choreographer, costume designer, director, film editor, lighting designer, producer and set designer.
Many creative people work as sole traders, while some team up with others. If you are weighing up the pros and cons of a partnership as your business structure, keep in mind how the ATO frames this concession. Its wording refers to an individual who is an Australian resident. A registered tax agent can explain how your structure affects the way your income is treated.
The first year rule
Your first eligible year is called professional year 1. It is the first income year in which your taxable professional income is more than $2,500. You do not need to be a resident in every later year to stay eligible. After that first year, averaging can apply whenever your professional income climbs above your recent average.
What income counts
The ATO calls the income that can be averaged assessable professional income. It includes rewards and prizes, along with royalties from copyright in literary, dramatic, musical or artistic works. Income from endorsements, advertisements, interviews and commentating is also included. For inventors, income from a patent counts.
Some income is left out. Coaching or training competitors, umpiring and administering sport are excluded. Income from being a theatrical or sports entrepreneur or from owning or training animals is excluded too. Super lump sums, termination payments, unused leave payouts and net capital gains are also left out.
The ATO page on types of professional income covers these rules in more detail. Taxable professional income is what remains after you subtract the deductions that relate to that income. Good records make this much easier at tax time. Spreadsheets and dashboards can help here, and Power BI training is one way to learn to track sales and royalties over several years.
How the averaging works
The calculation compares this year with your recent past. Your average taxable professional income is a quarter of the total from the previous four years. Any professional income you earn above that average gets special treatment. Income at or below the average is taxed at ordinary rates.
The ATO method works in a few steps. First, your average professional income is added to your other income and that total is taxed at normal rates. Next, a fifth of the amount above your average is added to that figure to work out the extra tax. That extra tax is then multiplied by five to give the tax on the amount above your average.
The early years work a little differently. In year 1 the average is treated as nil. In year 2 it is a third of the year 1 income, and in year 3 it is a quarter of years 1 and 2 combined. In year 4 it is a quarter of years 1 to 3 combined. These early year rules apply if you were a resident in the year before year 1.
Do you need to do the sums yourself
The good news is that you do not need to work it out by hand. The ATO says it will calculate the result from the amount you include in your tax return. You still need to report your professional income correctly. That means keeping invoices, royalty statements and prize records for each year.
Planning for uneven income
Averaging helps with tax, but it does not smooth out your cash flow. A strong year can be followed by months of quiet work. Setting money aside in good years gives you a buffer for leaner periods. Some creative businesses also study their sales history to plan ahead, which is the idea behind predictive marketing.
Longer term planning matters too. Super, insurance and savings all play a part for people with irregular earnings. Actuaries measure financial risk over long periods, and you can read more about actuaries and your financial future. A licensed financial adviser can help you apply these ideas to your own situation.
Frequently asked questions
Can a graphic designer use income averaging?
It depends on the work. The ATO list includes artists who create artistic works and production associates who use artistic skills, such as production designers. A designer doing general commercial work may not fit these groups. Check the ATO guide or speak with a registered tax agent about your situation.
Is there a minimum income to qualify?
Your first eligible year is the first in which taxable professional income is more than $2,500. After that, averaging applies when your professional income for the year is above your average. If it is at or below the average, ordinary rates apply.
Do I need to apply for income averaging?
The ATO says it works out tax payable with income averaging from the amount in your return. You do not need to complete the calculation yourself. You do need to report your professional income accurately.
Are capital gains included?
No, net capital gains are excluded from assessable professional income. Super lump sums and employment termination payments are also left out. Payments for unused annual or long service leave on retirement or termination are excluded as well.
This article is general information only and is not tax or financial advice. Tax rules change each year, so check the current ATO guide for the year you are lodging. Speak with a registered tax agent or qualified adviser about your own circumstances.