Ever hoped you could split your income with your partner so you could pay less taxes? That’s basically what income splitting is: a legal way for family members or business owners to share income among themselves so that each person pays different taxes, which could lower the total tax bill.
It sounds simple, right? It can get a little tricky in real life. The Australian Taxation Office (ATO) keeps a close eye on these deals to ensure they’re real and not just a sneaky way to avoid paying tax.
If you own a small business, invest, or belong to a family trust, you should understand how income splitting works and where the rules are drawn to use it legally.
Let’s break it down.
What Is Income Splitting (and Why It Matters)
You can split your income with someone else if you have a lower tax rate than the other person. This is usually a spouse or family member.
The goal? To reduce the total amount of tax the household or group pays.
For example:
If one partner earns $180,000 and the other earns $20,000, transferring part of the income to the lower-earning partner could save thousands in tax.
While the idea is easy, the rules are not. This is because not all income can be split. The ATO lets some types of income splitting happen but not others, especially when there isn’t any real business reason for it.
Ways to Split Income in Australia
1. Through a Family Trust
A family (discretionary) trust is one of the most common and legitimate ways to split income. The trustee can distribute profits among family members, such as a spouse or adult children, to take advantage of lower tax rates.
It’s perfectly legal, provided distributions are genuine, well-documented, and supported by trust minutes.
2. Paying Family Members for Real Work
You can pay your partner or family member a fair wage if they work for you, even if it’s just part-time.
This shifts income legally while compensating them fairly for their contribution. Make sure the payment matches the work done and is at market rates.
3. Partnerships Between Spouses
Running a business as a partnership allows profits to be divided between partners based on ownership percentage or contribution.
For example, a 50:50 partnership lets both spouses report equal profit shares. However, the ATO expects both partners to genuinely contribute to running the business.
4. Superannuation Contribution Splitting
Some couples split their concessional (before-tax) contributions to super. A partner with a higher income can put up to 85% of their contributions into their spouse’s super fund. This helps the couple save for retirement while also lowering their tax bill.
5. Spouse Super Contributions
If your spouse earns under $37,000, you can contribute to their super and claim a tax offset of up to $540.
This isn’t traditional income splitting, but it’s another way to manage household tax strategically.
What's Not Allowed
Not every attempt to shift income passes the ATO’s test. Here’s where things get risky:
- Artificial arrangements — paying family members who don’t actually work.
- Loans or “fees” disguised as income transfers.
- Personal Services Income (PSI) — if you earn most of your income from your skills or effort (like a consultant or freelancer), the ATO won’t let you divert it to someone else.
- Schemes with the sole purpose of avoiding tax — these can trigger Part IVA (general anti-avoidance) rules, leading to heavy penalties.
The key rule? If the arrangement doesn’t reflect genuine work, risk, or contribution, it’s likely to be rejected.
Who Can Benefit from Income Splitting
- Small business owners — through family trusts or partnerships.
- Investors — by holding assets jointly or via trusts.
- Families — distributing income among adult children.
- Sole traders — limited options, but possible if spouses provide genuine assistance.
Australia doesn’t allow joint tax returns like other countries, so individuals are taxed separately. Income splitting only works through valid structures and arrangements.
| Advantages and Drawbacks | |
| Advantages | Drawbacks / Risks |
| Lowers overall family tax liability | May attract ATO scrutiny if not genuine |
| Encourages family involvement in business | Requires extra documentation and record-keeping |
| Offers flexibility in family trusts | PSI and Part IVA can limit benefits |
| Can boost long-term wealth management | Professional advice is essential |
ATO Compliance: Keep It Genuine
If you’re considering income splitting, documentation is your best defence.
- Maintain written agreements, job descriptions, timesheets, and trust minutes.
- Provide services at market rates.
- Ensure trust and partnership funds are distributed consistently.
A skilled tax agent in Melbourne can help review your setup and ensure you’re operating safely within ATO guidelines.
Future Outlook: The 2025 Proposal
How to Structure Income Splitting Safely
- Seek advice before you act — don’t risk a costly audit.
- Use legitimate structures such as trusts or partnerships.
- Ensure all payments and distributions are justifiable and recorded.
- Review arrangements annually — tax laws evolve quickly.
- Work with experienced accounting services in Melbourne who understand compliance and smart planning.
Looking to make your income work smarter?
At Leading Tax Experts, our experienced tax agents in Melbourne specialise in income splitting, trust structuring, and business tax planning. We’ll guide you through what’s legal, effective, and right for your situation. We make compliance easy for everyone, whether you’re an individual, a couple, or a business owner.
Get in touch today and start planning your tax smarter, not harder.
Summary
In summary, income splitting can be a smart and legal way to reduce taxes, but only when done right. With the ATO watching closely, cutting corners isn’t worth it. Genuine arrangements, solid documentation, and professional advice are the keys to making it work.
If you want to split your income or review how things are set up now, talk to the best tax accountant in Melbourne, like Leading Tax Experts, to ensure your plan will work in the long run
Frequently Asked Questions
Is income splitting legal in Australia?
Can I transfer part of my salary to my spouse?
How can a tax agent help with income splitting?
A registered tax agent in Melbourne can evaluate your situation, set up legal arrangements, and ensure you safely claim benefits without raising red flags or facing penalties from the ATO.
