ATO Intensifies Scrutiny on Income Splitting via Family Trusts: What Professionals Need to Know

At Wealth Effect Group, we are committed to keeping our clients informed of regulatory developments that may impact their financial strategies. The Australian Taxation Office (ATO) has recently signalled a significant shift in its approach to the use of family trusts by professionals, with a renewed focus on anti-avoidance provisions and personal services income (PSI) rules.

Key Developments

The ATO is preparing to release a final “practical compliance guide” (PCG) for personal services entities, with an initial focus on education for tax agents and professionals. However, this will be followed by increased scrutiny and enforcement from the next financial year. The ATO’s concern centres on the use of companies and trusts by professionals—such as doctors, lawyers, accountants, consultants, and even tradespeople—to distribute income derived from their personal skills and efforts to family members, thereby reducing overall tax liabilities.

What’s Changing?

While the use of family trusts and companies has long been a legitimate part of business structuring in Australia, the ATO is now taking a firmer stance on arrangements that seek to “alienate” personal services income. In practical terms, this means that income generated directly from an individual’s professional expertise—rather than from business assets or trading activities—should be taxed in the hands of the individual, not distributed to family members on lower tax rates.

The ATO’s definition of “professional” is broad, encompassing not only white-collar professionals but also skilled tradespeople. The new guidance will clarify the boundaries of acceptable income splitting and reinforce the application of anti-avoidance rules (notably Part IVA of the tax law) where the dominant purpose of a structure is to obtain a tax benefit.

Practical Implications

For example, if an accountant operating through a family trust earns $200,000 and distributes this equally to a spouse and adult children, the ATO is likely to view this as a breach of anti-avoidance provisions. The same principle applies to other professionals and consultants who may have established trust or company structures to manage their income.

It is important to note that the ATO recognises legitimate commercial reasons for service trusts—such as housing administrative staff or specialist equipment. However, excessive charges or artificial arrangements designed primarily to divert income away from the individual professional will attract scrutiny.

Distinguishing Business Income from Personal Services Income

The ATO continues to accept that trusts are appropriate vehicles for trading businesses (e.g., retail, logistics) or property holdings, where income is generated from assets or the sale of goods rather than personal exertion. In these cases, income can be distributed to family members in accordance with the trust deed. The distinction lies in the source of the income: business profits versus personal services.

Our Perspective

At Wealth Effect Group, we believe that most clients are genuinely seeking to comply with the law while optimising their financial outcomes. However, the increasing complexity and cost of compliance—particularly for small business owners and sole practitioners—underscore the importance of tailored advice.

We encourage all clients who operate through trusts or companies, or who are considering such structures, to seek professional guidance. The forthcoming ATO guidance will provide greater clarity, but also raises the stakes for those with existing arrangements.

Next Steps

• Review your current structures: Ensure that income derived from personal services is being treated in accordance with ATO guidelines.

• Document commercial rationale: If you have service trusts or similar arrangements, maintain clear documentation of their commercial purpose and the basis for any charges.

• Stay informed: We will continue to monitor ATO developments and provide timely updates.

If you have any questions about how these changes may affect your situation, or if you would like a confidential review of your current arrangements, please contact your Wealth Effect Group adviser.

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