ATO crackdown on income splitting: what tradies need to know now

The ATO is warning business owners not to assume they can split income freely between family members just because they operate through a trust or company.

This is particularly relevant for tradies and other small business owners where most of the income comes from one person’s labour, skill and know-how. If one person is doing the work that earns the income, the ATO expects that to be reflected in how that income is treated.

These rules fall under what is called personal services income or PSI. Put simply, PSI is income that mainly comes from an individual’s own work or expertise, rather than from a larger business structure, multiple income-generating staff or the sale of goods.

That means this is not just an issue for white-collar professionals. Sole operators and smaller trade businesses may also need to take a closer look at how their income is being distributed.

Why this matters now

The ATO has drawn a clearer line around income splitting, especially in businesses where most of the income comes from one person’s labour, skill or expertise.

That means using a trust or company does not automatically give business owners free rein to distribute profits however they like. What matters is whether the income is being treated in a way that reflects who is actually doing the work.

The good news is there is time to review your setup and make changes if needed, with businesses encouraged to get their affairs into a lower-risk position by 30 June 2027.

For tradies, this is a good prompt to review both your business structure and how income is actually flowing through it.

What income splitting can look like in a trade business

Many business owners are not deliberately trying to push the boundaries. In many cases, they are simply operating under a structure that was set up years ago. What matters now is whether the way income is being distributed matches the reality of how the business earns its money.

Here are a few examples of arrangements that may warrant a closer look:

Example 1: The solo sparky operating through a trust

An electrician does almost all the quoting, site work and client management personally. The trust invoices customers, but a large share of profit is distributed to a spouse who is on a much lower tax rate, even though the spouse is not doing work in the business that matches that level of income.

Example 2: The plumber using a company structure

A plumber works full-time on the tools and brings in nearly all business revenue. The company retains or diverts profit in a way that results in significantly less income being taxed to the person actually producing it.

Example 3: The carpenter with family members on the books

A trade business pays family members or allocates profits to them, but the payments do not reflect genuine commercial work performed or market-value remuneration for the tasks they actually do.

These kinds of situations do not automatically mean there is a problem, but they are exactly the sort of arrangements that should be reviewed carefully.

When a tradie may be less exposed

Not every trade business will fall into the danger zone. A business is generally in a stronger position where the income is not mainly tied to one person’s labour alone. For example, risk may be lower where there are multiple income-generating staff, the business has a genuine operational structure beyond one main individual, or there is a clear business reason for how profits are being treated. 

Holding profits in the business for practical reasons, such as equipment purchases, operating costs or cash flow needs, is generally easier to justify than building up profits over time without a clear business purpose.

Think about the difference between these two scenarios:

• A sole trader electrician whose reputation and labour generate almost all revenue. 
• A larger electrical contracting business with several crews, office support, systems, vehicles, equipment and multiple people bringing in income.

Those are not the same from a tax risk perspective, even if both are “trade businesses”.

The common trap for mum-and-dad operations

This is where many family-run trade businesses can get caught out. One partner may be doing the actual income-producing work on site, while the other helps with admin, bookkeeping, scheduling or phone calls. That second role is absolutely legitimate and valuable, but the amount paid or distributed still needs to make commercial sense based on the work actually done.

This is often where getting advice can help. The aim is to make sure income is being shared in a way that matches how each person contributes to the business.

What tradies should do now

This is not something to leave until the last minute. A review now gives you time to make sensible changes before the ATO’s transition window closes on 30 June 2027.

A practical starting point is:

1. Review where the income really comes from

Is the business income mainly being generated by one person’s effort, skill and reputation?

2. Look at how profits are currently allocated

Who is being paid, how much, and why?

3. Check whether family members are being remunerated on a commercial basis

If someone is genuinely doing admin, bookkeeping or operations work, that may be fine. But the payment should match the role.

4. Document the commercial reasons for the structure

Clear records matter. The new guideline highlights the importance of service agreements, invoices, minutes and documentation showing why profits are retained or why certain remuneration decisions are made. 

5. Speak to your accountant before 30 June 2027

This is an area where small differences in facts can make a big difference in outcome.

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For tradies, this is a good prompt to step back and review how your business income is being handled.

A trust or company can still be the right structure in many cases, but it does not automatically mean income can be split freely between family members. If most of the income is coming from one person’s work, skill and expertise, the way that income is treated needs to reflect that.

If your business has been running the same way for years, now is a sensible time to check that your structure still fits the way the business operates today.

Reviewing things early gives you more time, more options and fewer surprises later.

If you would like help reviewing your structure or understanding how these rules may apply to your situation, contact Bonerath & Co. Our team can help you work through it with advice tailored to your business.

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