and does not constitute financial, tax or legal advice. Always consult a

One of the most effective tax planning strategies available to

Australian trade business owners is income splitting -- structuring your

business to distribute income across multiple family members, each taxed

at their own marginal rate. Instead of one person paying tax at 34.5% or

39% on a large income, the family as a unit pays less tax overall by

spreading income across multiple taxpayers on lower rates.

This isn't a loophole or a grey area -- it's a well-established and legal

approach used by thousands of Australian small businesses. But it does

need to be done correctly, through the right structure, with genuine

entitlement to the income being distributed.

Why Marginal Tax Rates Create the Opportunity

Australia's progressive income tax system creates a meaningful

difference in tax rates at different income levels. A tradie earning

$180,000 pays 47% (including Medicare levy) on every dollar above

$180,000. Their spouse earning $0 or $40,000 pays 0-19% on additional

income up to $45,000.

If that tradie can legitimately direct $40,000 of business income to

their spouse who has low or no other income, the family pays

significantly less total tax than if the full $180,000 was taxed in the

tradie's hands alone. The tax saving can be $10,000-$20,000 per year

depending on the family's income profile.

The Structures That Enable Income Splitting

Discretionary (Family) Trust

A discretionary trust is the most flexible income splitting structure

available to Australian small businesses. The trustee of the trust has

discretion each year to decide how to distribute the trust's income

among the beneficiaries -- typically family members including the spouse,

adult children, and potentially parents.

Each year, the trustee resolves how much each beneficiary receives. A

beneficiary with low other income receives more of the distribution to

maximise the tax saving. Beneficiaries pay tax on their distributions at

their individual marginal rates.

For this to work legally, the beneficiaries must be genuine

beneficiaries of the trust with no artificial arrangement restricting

their actual enjoyment of the income. The ATO watches arrangements where

distributions are made on paper but the cash all flows back to the

working member of the family.

Employing a Spouse

If your spouse or partner genuinely works in your trade business --

office admin, bookkeeping, client management, quoting, scheduling --

paying them a genuine market-rate wage is a legitimate and deductible

business expense. The key word is genuine: the work must actually be

done, and the wage must reflect what you'd pay any employee for the same

role.

An employed spouse on $50,000 per year paying tax at 19% on the marginal

portion of their income, versus that same $50,000 added to your income

at 39%, creates a meaningful family tax saving. The spouse's wage is

deductible to your business, reducing your own taxable income.

Do not pay your spouse for work they don't do. The ATO specifically

targets sham employment arrangements and will disallow the deduction and

potentially impose penalties.

Company Structure with Spouse as Shareholder/Director

If you operate through a company, having your spouse as a director and

shareholder enables dividend distributions to them from company profits.

Franked dividends carry the credit of company tax already paid (25%),

which the recipient can use to offset their income tax liability.

At lower income levels, the combination of the franking credit and a

lower personal marginal rate can make dividends to a spouse particularly

tax-effective. This requires proper company structure, genuine

shareholder status, and compliance with Division 7A and other relevant

rules -- professional advice is essential.

The ATO's Anti-Avoidance Rules

The ATO has several mechanisms to prevent artificial income splitting

that has no genuine commercial basis. Part IVA of the Income Tax

Assessment Act is a general anti-avoidance provision that the ATO uses

to disallow arrangements whose dominant purpose is tax reduction without

any real economic substance.

More specifically for trusts, Trust Tax Ruling TR 2022/4 and related

guidance sets out the ATO's current views on trust income distributions

-- particularly distributions to beneficiaries who don't have genuine

entitlement to or enjoyment of the income. The ATO has been increasingly

active in auditing trust distributions in recent years.

The safe path is: any income distribution to a family member must

reflect genuine economic entitlement -- they're a genuine worker, genuine

investor, or genuine beneficiary with real access to the funds.

Adult Children as Beneficiaries

Once children are adults (18 and over), they can be beneficiaries of a

family trust and receive distributions taxed at their own marginal

rates. An adult child at university earning $15,000 from casual work,

for example, has significant tax-free capacity. A trust distribution of

$18,000 to them might attract zero tax.

This is legally sound when the child is a genuine beneficiary of the

trust with real access to the funds. It becomes problematic if the funds

are all handed back to the parents or used exclusively for the parents'

benefit. The ATO expects the distributions to genuinely benefit the

recipient.

Getting the Structure Right

Income splitting through a trust, company or employment arrangement

needs to be set up correctly from the start. A poorly structured trust

deed, incorrect appointment of trustees, missing or incorrect

resolutions, or an employment arrangement that doesn't stand up to

scrutiny creates significant risk.

The setup costs for a family trust typically run to $1,500-$3,500

including legal documentation, trust deed, and initial accounting.

Annual ongoing compliance adds $500-$1,500 per year for trust tax

returns and resolutions. For a tradie earning well above $120,000, the

tax saving in the first year alone will typically exceed these costs

many times over.

Speak to an accountant who specialises in small business and trust

structures -- not just any general accountant. This is a planning

conversation worth having properly, with someone who can model the

actual tax saving for your specific family income profile before you

commit to a new structure.

General Information Only: This article is for educational purposes and does not constitute financial, tax or legal advice. Always consult a qualified professional for advice specific to your situation.
## Practical Income Splitting Structures for Australian Tradies When you're running a busy trade business — whether you're a plumber, electrician, carpenter or HVAC specialist — the last thing you want is a tax bill that wipes out your profits. Income splitting lets you legitimately reduce that burden by spreading income across family members in lower tax brackets. The most common structures for tradies are: **Sole Trader with Spouse as Director of Associated Company** If you operate as a sole trader but your spouse has no other income, you can establish a separate company where they hold directorship and receive a salary or dividend. This works particularly well if your spouse has been out of the workforce or earns below the tax-free threshold. Each dollar paid to them is taxed at their marginal rate, not yours. **Family Discretionary Trust** A trust allows you to distribute income to multiple beneficiaries (spouse, adult children, even grandchildren) according to the trust deed. This is more complex to set up but offers maximum flexibility. The trustee (often you or a company) controls distribution each financial year based on family circumstances. If your adult son just finished his apprenticeship and earned minimal income, he could be a beneficiary in a low tax bracket. If your daughter earned $50k that year, she might receive less distribution that financial year. **Company Structure** Running your trade business through a company means income is taxed at the corporate rate (currently 25% to 30% depending on turnover), then you can salary sacrifice to yourself and your spouse, each taking advantage of separate tax-free thresholds. This requires more administration but offers asset protection benefits alongside tax efficiency. **Hybrid Approach: Sole Trader + Company** Many tradies operate as a sole trader for trading income but establish a company to own significant assets (vehicles, tools, equipment). The sole trader pays rent to the company, which distributes profits. This separates operating income from investment income across entities. The key to all these structures is that income distribution must be genuinely made during the financial year — you can't retrospectively split income after tax time. Your accountant needs to document everything properly. ## Setting Up Income Splitting: Step-by-Step for Tradies Before jumping into a complex structure, understand the practical requirements and ATO expectations. The Australian Taxation Office scrutinises income splitting arrangements, so legitimacy is critical. **Step 1: Document Family Involvement** If you're paying a spouse or family member, they must actually perform work or receive genuine income. You can't simply distribute profits to a non-working spouse without evidence of contribution. Document their role: does your wife manage the books? Does your adult son help on jobs? This evidence becomes crucial if the ATO ever questions your structure. **Step 2: Ensure Proper Legal Structure** Setting up a trust or company requires professional assistance. You'll need a trust deed (for trusts) or company constitution (for companies) that clearly outlines how income is distributed. This isn't something to DIY — a 30-minute consultation with a tax accountant or lawyer ($150-300) saves thousands in potential ATO disputes. **Step 3: Implement Proper Accounting Systems** You need accounting software that tracks income distribution clearly. Xero integrates well with Tradify (popular with Australian tradies for job costing) and allows you to track both business income and distributions. This creates clear audit trails the ATO appreciates. **Step 4: Pay Through Proper Channels** If paying a spouse a salary, process it through payroll with PAYG withholding. If distributing trust income, issue distribution statements showing each beneficiary's share. Don't pay cash under the table — the ATO has data-matching capabilities and will cross-reference tax returns against business deposits. **Step 5: Maintain Separate Bank Accounts** If you've established a separate entity (company or trust), operate separate bank accounts. This creates clear separation between personal and business finances, making your tax position defensible. **Step 6: Annual Review with Your Accountant** Tax laws change. The instant asset write-off (currently $20k until 30 June 2026) and superannuation contribution caps ($30k per person) affect your overall strategy. Your accountant should review your income splitting arrangement annually to ensure it remains optimal.

TIP: Combine income splitting with superannuation planning. If you're in the 39% tax bracket and contribute to super at 15% tax, that's a 24-percentage-point saving. Your lower-income spouse might contribute personally at their 21% rate instead. Over 10 years, this stacks significantly.

## Income Splitting vs. Other Tax Strategies: Quick Comparison Income splitting isn't your only option. Here's how it compares to other strategies Australian tradies commonly use: | Strategy | Tax Saving Potential | Complexity | Risk Level | Best For | |----------|---------------------|-----------|-----------|----------| | **Income Splitting** | 10-20% of distributed income | Medium | Low-Medium | High-income tradies with working spouse/family | | **Vehicle Depreciation** | 5-15% of vehicle costs | Low | Very Low | All tradies with work vehicles | | **Instant Asset Write-Off** | 15-30% (at your MTR) on assets under $20k | Low | Very Low | Equipment/tool purchases | | **Superannuation Contributions** | 24-39% saving depending on MTR | Low | Very Low | All tradies (ongoing) | | **Home Office Deduction** | 2-5% of home expenses | Low | Medium | Tradies with dedicated workspace | | **Contractor vs. Employee Payments** | Varies by circumstance | Medium | Medium-High | Mixed workforce scenarios | | **Trust Discretionary Distributions** | 15-25% if beneficiaries in lower brackets | High | Medium | High-income, complex family situations | The most tax-effective tradies typically combine multiple strategies: superannuation contributions, asset write-offs, vehicle deductions, AND income splitting through a trust or company structure. ## Frequently Asked Questions About Income Splitting for Tradies

Can I split income with my adult children even if they don't work in the business?

The ATO allows income distribution to adult children through a trust structure, but there must be a genuine reason tied to the trust deed. Purely gifting income to avoid tax is "income splitting" the ATO challenges. However, if your adult child receives education payments from the trust, or if they genuinely work in the business (even part-time), distribution is defensible. The key is documentation — keep records of work performed or legitimate distributions. A family discretionary trust is designed for this flexibility, but consult your tax advisor on specifics for your situation.

What's the difference between income splitting and income redistribution?

The ATO distinguishes between these terms. "Income splitting" (distributing one person's income to lower-bracket family members) is what we've discussed and is generally acceptable if structured properly. "Income redistribution" (artificially diverting income that should be taxed to you) is viewed more sceptically. The distinction hinges on whether the structure is genuinely used for business/family purposes versus purely tax-driven. Legitimate business reasons — such as a spouse managing finances, an adult child working part-time, or asset ownership by a separate entity — make income splitting defensible.

Do I need business insurance (like BizCover) if I set up a company or trust structure?

Yes. The business structure (sole trader, company, or trust) doesn't change your insurance requirements — it only affects liability protection and tax treatment. You still need public liability, tool coverage, and vehicle insurance regardless of structure. In fact, some structures may require specific policy wording (e.g., if a trust or company is the legal entity operating the business, the policy should reflect that). Check with your insurer when changing structures.

--- **Disclaimer:** This article provides general information and does not constitute financial, tax or legal advice. Income splitting rules are complex and individual circumstances vary significantly. Before implementing any structure, consult a qualified tax accountant or financial advisor registered with relevant Australian authorities (Tax Board Australia, FPA, or CPA). Tax law changes frequently — ensure your strategy is current before implementation.