ATO Targets High Earners Using Trusts: Income Splitting May No Longer Be Safe

The Australian Taxation Office (ATO) has issued updated guidance signaling a much stricter stance on the use of trusts for income splitting - a long-standing tax planning strategy widely used by high-income individuals and family-run businesses.

According to recent statements, the ATO has observed increasing levels of “excessive income splitting”, where trust distributions are directed to family members on lower tax rates who do not meaningfully contribute to the business. This practice, once seen as relatively safe, is now firmly on the ATO’s radar.

With the new guidance, thousands of individuals and businesses may need to reassess their trust structures to avoid unexpected tax outcomes.

1. Why Income Splitting Through Trusts Is No Longer Considered Safe

For years, discretionary trusts have been used to distribute income across family members, helping reduce the overall tax payable. But under the ATO’s updated approach, this flexibility is subject to far greater scrutiny, especially when:

• income is distributed to family members who play little or no role in the business

• distributions appear driven primarily by tax minimization

• trust, company, or partnership structures are used to divert income away from the primary income earner

• the distribution does not reflect genuine commercial arrangements

The ATO has made it clear: distributions that lack commercial substance may be recategorized and taxed at a higher rate, potentially back to the individual who generated the income.

2. Key Risks Highlighted by the ATO

• Distributions may be re-taxed at higher rates

If a distribution is deemed “excessive” or not commercially justified, the ATO may apply the tax rate of the person who actually earned the income - often significantly higher.

• Penalties and interest may apply

Incorrect or high-risk trust distributions can attract penalties, leading to substantial financial impact.

• Potential review of prior years (unless changes are made before 30 June 2027)

The ATO has stated it will not apply retrospective compliance if taxpayers shift to low-risk arrangements before 30 June 2027. After this date, previous distributions could be reviewed.

• Cashflow implications

If income splitting is restricted, the total tax payable for a family may increase, affecting both personal financial planning and business cashflow.

3. Who Is Most Affected?

Based on the ATO's latest guidance and industry analysis, the groups most exposed include:

1) High-income individuals using trust structures

People with significant earnings who direct income to spouses or adult children on lower tax brackets.

2) Family-run businesses operating through discretionary trusts

Particularly those distributing profits annually to family members who do not actively work in the business.

3) Trusts distributing income to beneficiaries with no genuine commercial involvement

Where the distribution is clearly aimed at leveraging lower tax rates rather than reflecting real contribution.

These individuals and businesses should consider reviewing their trust arrangements as soon as possible.

4. What Individuals and Businesses Should Do Next

✓ Review all trust distributions

Assess whether each distribution reflects real involvement, contribution, or commercial justification.

✓ Evaluate risk level under ATO’s new guidance

Determine if your trust structure falls within low-risk, moderate, or high-risk categories.

✓ Make necessary adjustments before 30 June 2027

This is a critical date. Shifting to a compliant, low-risk structure before the deadline may prevent retrospective reviews.

✓ Strengthen documentation

Ensure that trustee resolutions, beneficiary roles, and distribution reasons are clearly documented and defensible.

✓ Align distributions with genuine commercial contributions

In some cases, this may involve:

• paying appropriate wages for actual work

• limiting distributions to active participants

• reconsidering whether the current trust structure remains optimal

ZT Partners - Your Trusted Advisor in Navigating ATO’s New Expectations

The ATO’s latest position is a clear indication that trust distributions are entering a new era of heightened scrutiny. For many individuals and family-run businesses, this is the right time to:

• reassess existing trust arrangements

• understand your exposure

• and shift towards sustainable, compliant strategies

At ZT Partners, we support clients in reviewing trust structures, assessing risk levels, and implementing solutions that remain effective while aligning with ATO expectations.

If you are using a trust for income splitting, now is the moment to ensure your structure is secure - before the 2027 deadline closes the window for low-risk transition.

References

Australian Taxation Office (2025a). Practical Compliance Guideline PCG 2025/5: Trusts and personal services income. Available at: https://www.ato.gov.au/law/view/document?docid=COG/PCG20255/NAT/ATO/00001 (Accessed: 12 December 2025).

Hobbs, A. (2025). ATO targets high earners over excessive income splitting. Australian Financial Review. Available at: https://www.afr.com/wealth/tax/ato-targets-high-earners-over-excessive-income-splitting-20251126-p5ninw (Accessed: 12 December 2025).

Australian Taxation Office (2025b). Personal services income (PSI) guidance. Available at: https://www.ato.gov.au/api/public/content/0-177fb52a-c041-4c70-81b0-78eb421035d3 (Accessed: 12 December 2025).

Australian Taxation Office (2025c). Trust income schedule 2025: Instructions. Available at: https://www.ato.gov.au/forms-and-instructions/trust-income-schedule-2025-instructions (Accessed: 12 December 2025).

Australian Financial Review (2025). Worried by the ATO’s new trust crackdown? Here’s what you can do. Available at: https://www.afr.com/wealth/tax/worried-by-the-ato-s-new-trust-crackdown-here-s-what-you-can-do-20251126-p5niny (Accessed: 12 December 2025).