Freelancing and tax

Income averaging

Income averaging is an option for some professionals in the media and entertainment industries, and is designed to prevent those professionals from being taxed at higher tax rates in a year when their income may be above average.

Income averaging allows those who are eligible to pay tax based on their ‘average’ income over the previous five years. Any employer super contributions, though, would be based on the current financial year’s income.

Specific conditions need to be met to be eligible for income averaging; more information is on the Australian Taxation Office (ATO) website at ato.gov.au. You may want to seek advice in relation to your personal circumstances before using this strategy.

Small businesses and Capital gains tax

If you operate a small business, whether as a sole trader, partner in a partnership or under a trust or company structure, you may be entitled to concessions to reduce the capital gains on the sale of active assets of the business.

If you are selling active assets, that is assets that are used or held ready to use in the course of carrying on your business, you may be entitled to one, or a combination, of the following four concessions:

  • Small business 15-year exemption – allows a business person to disregard the entire capital gain for tax purposes.
  • Small business 50% reduction – in relation to active assets.
  • Small business Retirement exemption – allows a business person to disregard up to $500,000 of capital gains for tax purposes.
  • Small business rollover – allows deferral of the capital gain realised on the sale of active assets of the business where the proceeds are used to purchase replacement assets.

In addition, a small business owner who is an individual taxpayer may also be eligible for the 50% discount for CGT assets held for longer than 12 months.

Contributing capital gains to super

If you sell off an asset that qualifies for the Retirement exemption, you have the option of contributing all or some of the exempted capital gain to super, subject to a lifetime limit of $500,000.

The amount of the capital gain that is contributed to super will not be treated as a concessional or non-concessional contribution, provided the contribution counts towards and does not exceed your lifetime CGT cap.

You need to advise your super fund using the approved ATO form.

Learn more about capital gains and small business at the ATO website.