As a primary producer, you can elect to pay income tax at a tax rate based on your average income over the five previous years. This tax concession is called ‘income averaging’ or your ‘five-year average’. The purpose of income averaging is to even-out the income fluctuations experienced in primary production to ensure you don’t pay more tax over time than those taxpayers who are on similar, but consistent, incomes.
How does my five-year average impact how much income tax I need to pay as a primary producer?
The amount of averaging tax offset or extra income tax you will need to pay is calculated automatically by the ATO when processing your individual tax return. When your average income is less than your basic taxable income, you’ll receive an averaging tax offset. On those years when your average income is more than your basic taxable income, you will need to pay extra income tax. Your Notice of Assessment (NOA) will show you your five-year average details.
What is an averaging component?
Taxable primary production income always forms part of your averaging component, but whether your non-primary production income is included depends on the amount.
The ATO’s income averaging rules include an ‘averaging component’. Your averaging component is the segment of your basic taxable income which may be subject to an averaging adjustment. Your averaging component is made up of both taxable primary and non-primary production income.
As per the ATO website, if your non-primary production is less than $5,000, it’s included in full in your averaging component. (In this instance, your averaging component will equal your basic taxable income).
When your non-primary production income is between $5,000 and $10,000, a ‘non-primary production shade-out’ amount is included in your averaging component, (usually the amount remaining after deducting the taxable non-primary production income from $10,000). If you make a loss from your primary production activities, the amount of the loss is deducted, however, your non-primary production shade-out amount cannot be less than nil.
When your non-primary production is more than $10,000, it is not included in your averaging component at all.
Are you aware of what your five-year average is?
Your five-year average plays a vital role in how much tax you will pay as an individual. Perhaps more importantly, your five-year average has a direct influence on the profit and tax obligations of your farm.
If you’re a client of Smith Shearer, breathe a sigh of relief in knowing that your Client Manager considers your income-averaging when looking at the bigger picture when it comes to profit maximisation and tax planning for your agribusiness.link
If your Accountant isn’t a specialist farming Accountant, however, they may not be aware of how income averaging impacts your farm’s bottom line.
Do you want a FREE assessment of your five-year average?
If you’d like us to look at your five-year average, and advise whether there are ways you can reduce your income average and overall individual tax obligations, book in a FREE consultation (for businesses who are not currently clients of Smith Shearer), or contact us to discuss your concerns.