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What Is Income Averaging for Primary Producers and How Does It Work?

Agriculture · Tax

Understanding ‘Income Averaging’ for Primary Producers

Written by Tracie Milne

There are a number of tools available to accountants when calculating the taxable position for our primary production clients. Importantly, many of these are designed to recognise the large fluctuations in profit that primary producers can experience year to year.

What is a Primary Producer?

According to the Australian Taxation Office (ATO), you are a primary producer if you run a business involving:

  • Plant cultivation: Growing crops, grains, flowers, or fruit.
  • Animal maintenance: Raising livestock for sale or for their produce (like wool or milk).
  • Fisheries: Commercial fishing or pearling.
  • Forestry: Planting or tending trees for felling.

The keyword is business. Having a few chickens in your backyard doesn't count; you must show a clear intent to make a profit and have a significant scale of operation.

What is Income Averaging

Income averaging is designed to ensure you don't pay more tax over time than someone on a steady salary.

Normally, if you earn a massive windfall in one year, you get pushed into the highest tax bracket. If you earn nothing the next year, you can't “reclaim” that high tax. Averaging rectifies this by looking at a rolling 5-year window.

How does it Work?

  • The 5-Year Average: The ATO calculates your average income over the current year and the previous four years.
  • The Comparison: They compare your actual taxable income for the year against that average income.
  • The Adjustment:
    • Averaging Tax Offset: If your current income is higher than your average, you get a tax offset (a discount) so you only pay tax at the rate applicable to your average income.
    • Extra Income Tax: If your current income is lower than your average, you may have to pay a little extra (known as complementary tax) to bring your tax up to the average rate.

Key Rules to Remember

  • The First Year: Averaging doesn't “kick in” until your first year of primary production income is followed by a year where your income is equal to or higher than the first.
  • Non-Primary Income: If you have a side job, that income can sometimes be included in the averaging, but only up to a limit (usually $5,000–$10,000).
  • Opting Out: You can choose to opt out of the averaging system permanently, but you can usually only get back in if your income drops significantly due to a “permanent reduction” (like retiring from part of the business).
While confusing, this is a legal and legitimate program, backed by the ATO. Income averaging will be applied by your accountant at the time of preparing and lodging your tax, but if you have any questions, please contact our office.

Questions about income averaging?

Our team works with primary producers across the Central West to make sure your taxable position reflects the ups and downs of the season.

Contact our office

Frequently Asked Questions

According to the ATO, you are a primary producer if you run a business involving plant cultivation (growing crops, grains, flowers or fruit), animal maintenance (raising livestock for sale or produce like wool or milk), fisheries (commercial fishing or pearling), or forestry (planting or tending trees for felling). The keyword is business — you must show a clear intent to make a profit and have a significant scale of operation.

Income averaging is designed to ensure you don’t pay more tax over time than someone on a steady salary. Normally a windfall in one year pushes you into the highest tax bracket, and if you earn nothing the next year you can’t reclaim that high tax. Averaging rectifies this by looking at a rolling 5-year window.

The ATO calculates your average income over the current year and the previous four years, then compares your actual taxable income for the year against that average. If your current income is higher than your average, you get an averaging tax offset so you only pay tax at the rate applicable to your average income. If your current income is lower than your average, you may pay a little extra (known as complementary tax) to bring your tax up to the average rate.

Averaging doesn’t kick in until your first year of primary production income is followed by a year where your income is equal to or higher than the first. If you have a side job, that non-primary income can sometimes be included in the averaging, but only up to a limit (usually $5,000–$10,000). You can choose to opt out of the averaging system permanently, but you can usually only get back in if your income drops significantly due to a permanent reduction, such as retiring from part of the business.

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