Thousands of Australians Face ATO Action Over Income-Splitting Schemes

We are seeing a major change in how the ATO is dealing with income‑splitting in Australia. Recently, the ATO announced a crackdown on schemes where people split their income with family members to pay less tax. For years, many professionals and small‑business owners, from lawyers and accountants to tradies, used family trusts, companies, or partnerships to divert income to spouses or children with lower tax rates.  Now, the ATO says such practices often count as tax avoidance, not legitimate planning.

Thousands of Australians could soon face audits, extra tax bills, or penalties. It matters, especially for small‑business owners and families. We need to understand what’s changing and why.

What Are Income‑Splitting Schemes?

Income‑splitting refers to dividing income among multiple people, often family members, so that some earn less individually, which lowers the overall tax rate. In Australia, income‑splitting often happens through family trusts, companies, or partnerships. A business might declare profits under a company or trust, then distribute income to a spouse, child, or another family member,  er taxed at a lower rate. For many, it’s been a way to manage tax bills, especially in “mum and dad” small businesses. But there’s a fine line between legal income planning and income‑splitting that breaches tax rules.
It’s also worth noting that certain trust distributions have strict rules: for example, unearned income paid to minors under 18 is often taxed at very high “penalty” rates, up to66% on certain trust amounts. That means not all trust‑based income‑splitting works as a simple tax‑saving method.

ATO’s Recent Actions and Investigations

In December 2025, the ATO publicly flagged aggressive income‑splitting as a major concern.
The new guidance is especially aimed at people earning through “personal services income” (PSI), income earned through one’s own work, skills, or trade. Using a company or trust doesn’t automatically allow someone to split that income with family members arbitrarily. The crackdown could affect thousands of small‑business owners, including professionals, tradespeople, and sole operators who previously considered income‑splitting as safe.
The ATO has warned that those who continue aggressive splitting beyond guidance may face compliance action.

Reasons Behind the Crackdown

Why is the ATO doing this now? There are several reasons.

First, income‑splitting, when applied aggressively, erodes fairness in the tax system. High earners can reduce their tax burden significantly just by shifting income to lower‑tax family members. That undermines trust in the tax system. Second, the ATO says it has seen “excessive and ineffective income splitting across a range of personal services businesses.”
Third, widespread splitting reduces government revenue, money that pays for public services. By clamping down, the ATO aims to preserve revenue and discourage aggressive tax avoidance.

Implications for Taxpayers

This crackdown has real consequences for many.

Higher tax bills and back payments: Those who previously relied on splitting income may find they owe more tax. The ATO might require back‑payment of tax, and add interest or penalties for under‑payment.
Audits or compliance reviews: The ATO has warned it will scrutinise arrangements, especially for people classified under PSI rules, such as sole professionals or small‑business operators.
Trust arrangements may lose their advantage: Simple use of trusts, companies, or partnerships no longer guarantees lower tax if the income truly belongs to an individual’s personal work and cannot be legitimately split. For many small‑business owners and service providers, especially those who thought they were playing by the rules, this could be a wake‑up call to re-evaluate their tax structure.

Conclusion

The ATO’s new stance on income‑splitting marks a turning point. What was once a common tax strategy may now lead to audits, higher bills, or penalties. If you, or anyone you know in Australia’s small‑business or professional community, has been splitting income between family members, it’s time to take notice. The rules have changed. Compliance is no longer optional. Understanding the crackdown and acting early could save you from trouble down the line.

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The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.