Using Income Splitting to reduce tax
Income splitting refers to legally directing income from a higher-earning individual to a family member in a lower tax bracket to reduce the household's overall tax liability.
It’s important to understand that you can’t simply "split" your salary with a spouse on a tax return.
Legal Methods
Lets look at 5 common legal ways you can potentially income split. Remember these must be documented and reflect real business or investment activities.
Family (Discretionary) Trusts: A trustee can distribute business or investment profits among adult family members. This is one of the most flexible and common methods for families.
Partnerships: Spouses can run a business together as a partnership, dividing profits (and losses) based on their ownership percentage. Both partners must genuinely contribute to the business.
Superannuation Contribution Splitting: You can transfer up to 85% of your before-tax (concessional) super contributions into your spouse's account. This helps balance retirement savings and may provide tax offsets.
Employing Family Members: You can pay a spouse or family member a fair, market-rate wage for actual work they perform in your business.
Investment Ownership: Holding assets like rental properties in the name of the lower-earning spouse can reduce the tax paid on the resulting income.
Critical Restrictions
Now lets look at 2 of the most common methods that don’t work regarding income splitting. It’s worth noting that the ATO has strict anti-avoidance rules to prevent artificial income shifting.
Personal Services Income (PSI): If your income is primarily a reward for your personal skills or efforts (think consultants, IT specialists and doctors), you generally cannot divert it to others via a trust or company.
Minors: Income distributed to children under 18 is often subject to penalty tax rates, making it an ineffective strategy for most families.
There has been discussion of a proposal to allow limited income splitting for couples with dependents. However, this remains a proposal and is not yet law.
If you would like to know more about how you can reduce tax through income splitting please contact me paul@congdonfuzi.com.au