Income Splitting for Tradies: Using Family Structures to Legally Reduce Your Tax Bill

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.