How Smart Families Save on Tax: A Guide to Income-Splitting in 2025
- Marketing Manager
- Jun 12
- 3 min read
Intro: A Family That Plans Together, Saves Together
Income-splitting is a powerful tax planning strategy that more Aussie families are starting to explore and for good reason. When done right, it can legally reduce your household’s overall tax burden by distributing income among family members in lower tax brackets. Sound clever? It is.
But before you start writing cheques to your teenage kids, it’s important to understand how income-splitting works, what’s allowed, and what can land you in hot water with the ATO.
What Is Income-Splitting?
At its core, income-splitting means redistributing income from a profitable trust entity to family members to share the tax load in lower income tax brackets. The goal? Reduce the overall tax paid by singular individual. In Australia’s progressive tax system, spreading income more evenly across lower tax brackets can mean serious savings.
This strategy often works best in family-run businesses or investment income management through trust structures but the rules are strict, and the ATO is watching.
Why the ATO Cares: General Anti-Avoidance Rules (GAAR)
If the ATO thinks you’re shifting income purely to dodge tax, you could face penalties under the General Anti-Avoidance Rules. That’s why income-splitting must be backed by legitimate business or investment activity and fair compensation for any work done.
Translation? You can’t just give your partner or child a slice of income unless they’ve earned it or are entitled to it based on a formal agreement.
Smart (and Legal) Ways to Split Income
Here are three tax-smart, ATO-compliant ways families are splitting income in 2025:
1. Family Trusts: The Classic Income-Splitting Vehicle
Discretionary (family) trusts allow you to distribute income each year to beneficiaries at your discretion. That means you can shift more income to lower-earning family members, as long as they’re legitimate beneficiaries who have been declared to receive distributions.
Tip: Distribute trust income thoughtfully minors have strict low limits on how much they can receive before penalty tax rates kick in.
2. Hiring Family Members in a Business
Got a small business? You can employ your partner or adult children if they actually work in the business. Wages must be:
Reasonable for the work done
Paid regularly, and
Properly documented
This method turns income into deductible business expenses and puts money in lower-taxed hands. Win-win if done properly.
3. Joint Investment Accounts & Asset Ownership
Holding income-producing assets like shares or rental properties in the name of a lower-income spouse can reduce the tax payable on dividends or rental income.
Example: If your partner earns less and holds the investment, they may pay little or no tax on that income. Just be sure to declare the correct ownership percentage and meet all legal obligations.
What Not to Do: Red Flags for the ATO
Making paper-only arrangements with no real work or risk
Paying minor children large “wages” with no proof of work
Distributing trust income to someone who never sees the money
The ATO is particularly alert to these tactics post–2022 changes in trust tax guidance. If it looks like tax avoidance, it likely is.
Should You Try Income-Splitting?
If your household income is lopsided and you're running a business or managing investments, income-splitting could help. But it needs to be structured properly—with advice, records, and compliance.
A strategic consult with a tax advisor can help you:
Model the tax benefits
Understand ATO guidelines
Set up structures like trusts or partnerships correctly
Final Word: Don't DIY This One without some professional input
Done right, family group income-splitting is a savvy way to optimise your tax position and improve household cash flow. Done wrong, it’s a fast-track to an ATO audit.
Need help reviewing your income-splitting opportunities? Book a consult with ProfitCloud and get clarity before EOFY creeps up.
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