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For decades, splitting income across a family group has sat quietly in the toolkit of most Australian small business advisors. That quiet era is ending. The ATO has put the sector on notice, and the runway to clean things up is shorter than most owners realise.

In my experience advising Perth contractors, consultants and family-run trading businesses, very few clients set out to do anything aggressive. Structures evolve. A trust gets set up at the start of a career, a spouse gets added as a beneficiary, profits build up inside a bucket company, and a decade later nobody has revisited whether the arrangement still reflects who is actually doing the work.

That kind of drift is precisely what the ATO's recent Practical Compliance Guidelines are designed to flush out. The Commissioner has been unambiguous: misuse of income splitting and the Personal Services Income (PSI) regime is a current enforcement priority, and data-matching capability has caught up with the rhetoric.

If you operate through a company or trust and the bulk of your revenue traces back to your own labour, the question is no longer whether the ATO can see your arrangement - it's whether your arrangement holds up when they do.

The Mechanics - and Why the ATO Cares

At its simplest, income splitting means routing earnings through an interposed entity so that taxable income lands with someone other than the person who generated it - typically a spouse, adult child, or related bucket company on a flatter tax rate.

Where there is genuine commercial substance behind the arrangement, that outcome can be entirely defensible. Where the substance is thin, the ATO's view is straightforward: the tax saving is the whole point, and Part IVA, the PSI rules, or both, are available to claw it back.

When Your Income Is Really Just You

PSI is income that is principally a reward for an individual's personal exertion, skill or expertise - as opposed to income earned from the use of business assets, the sale of goods, or a workforce of others. In the Perth market, the people most often caught are:

If your income is characterised as PSI, the default position is that it is attributed back to you personally for tax purposes - regardless of which entity issued the invoice. Distributions to a spouse or family member sitting on top of that arrangement are exactly the kind of feature the ATO now lists as a high-risk indicator.

Stepping Outside the PSI Net

The escape valve from the PSI rules is to qualify as a Personal Services Business (PSB). That requires you to clear at least one of four tests, each designed to evidence that you are running a real business rather than dressing up employment income:

  1. Results test - you contract to deliver a defined outcome, supply your own plant and equipment, and wear the cost of rectifying defective work.
  2. Unrelated clients test - at least 20% of your PSI comes from two or more unrelated clients, won as a consequence of marketing your services to the public.
  3. Employment test - third parties (not admin support) perform 20% or more of the principal work, or you maintain a meaningful full-time-equivalent payroll across the year.
  4. Business premises test - you operate from premises that are exclusively yours, physically separate from your home and from any client site.

Clearing one of these tests is not optional paperwork. It is the difference between income being yours alone for tax purposes and being available for legitimate distribution within a properly structured business.

Part IVA Is Still the Long Stop

Even where an arrangement ticks every PSB box, Part IVA of the Income Tax Assessment Act 1936 sits behind it as a general anti-avoidance provision. If, on an objective view, the dominant purpose of the structure was to obtain a tax benefit, the Commissioner can simply cancel the benefit and reassess.

For years, the practical question has been when Part IVA would actually be deployed against routine family arrangements - particularly where a spouse handles administration or back-office duties. The Practical Compliance Guidelines now provide the clearest signposting we have ever had on which arrangements the ATO will leave alone and which it will pursue.

Reading the Risk Map

Features That Keep You Out of Trouble

Lower-risk illustration: A Perth-based geotechnical consultant trades through a Pty Ltd company. She invoices three unrelated mining clients across the year, employs a junior engineer, takes a market-rate salary plus superannuation, and leaves a working capital buffer in the company at year end. There are no distributions to family members. The arrangement clears the unrelated clients and employment tests, the salary reflects her contribution, and the retained profit has a defensible commercial purpose. From an ATO risk perspective, this is uncontroversial.

Features That Will Attract Attention

Higher-risk illustration: A solo cyber security contractor operates through a discretionary trust, working full-time on a single long-term engagement with a single client. He draws a modest salary of around $90,000, leaves the balance of profits in the trust, and each year distributes meaningful amounts to a non-working spouse and a university-aged adult child. The income is overwhelmingly the product of his personal effort, the PSB tests are not satisfied, and the family distributions have no operational substance. This is precisely the fact pattern the ATO is now actively targeting.

Why 30 June 2027 Should Be in Your Diary

The ATO has confirmed taxpayers have until 30 June 2027 to move their arrangements into the lower-risk zone without retrospective compliance action. After that date, the standard amendment periods, penalty regimes and interest charges apply in full.

On paper that sounds generous. In practice, restructuring a trading entity, unwinding distributions, dealing with Division 7A loan accounts and transitioning remuneration arrangements can comfortably consume six to twelve months once you factor in legal documentation, ASIC notifications and the timing of profit cycles. Leaving it to the back end of FY27 is asking for trouble.

A Practical Path Forward

1. Pressure-Test the Existing Structure

Walk through your structure with your advisor against the Practical Compliance Guidelines. Look honestly at how you are remunerated, what is being distributed and to whom, and whether retained profits inside the corporate or trust layer have a story that would survive scrutiny.

2. Document the Commercial Reasoning at the Time

Where profits are deliberately retained, capture the rationale in board minutes or trustee resolutions in the same year the decision is made. Reconstructed documentation produced under audit pressure carries little weight. The ATO's current data-matching and AI-assisted review capability means quiet arrangements no longer stay quiet for long.

3. Put Family Roles on a Defensible Footing

Where a spouse or adult child genuinely contributes, document the role, the hours and the rate at something an unrelated employer would credibly pay for the same work. Where the contribution is genuinely nominal, accept that distributions on top of a token principal salary are now the textbook ATO target - and plan accordingly.

My Closing View

Income splitting itself is not being legislated out of existence. What is changing is the tolerance for structures where the legal form and the economic substance have drifted apart. The ATO has spelled out what good looks like, given the sector a transition window, and built the analytics capability to test arrangements at scale.

The clients who will come through this in good shape are the ones who treat the next eighteen months as a planning opportunity rather than a deadline. A short, frank conversation with your accountant well before 30 June 2027 is materially cheaper - and considerably less stressful - than an amended assessment, a Part IVA determination and a penalty calculation after it.