Family Trust Income Splitting in Australia: How It Works, Who It Suits, and What the ATO Is Watching

Family trust income splitting is one of the most effective legal strategies available to high-income Australians — and one of the most misunderstood. Done correctly, it shifts assessable income to lower-taxed family members and dramatically reduces the household tax bill. Done incorrectly, it can trigger an ATO audit, a substantial land tax bill, or both. Here is what you need to know.

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How a Discretionary Trust Works for Income Splitting

Each financial year, the trustee has legal power to distribute trust income to beneficiaries in any proportion. Before 30 June, the trustee resolves which beneficiaries receive how much; each is then taxed at their own marginal rate. Income is taxed once — at the beneficiary level — unlike a company structure where income is taxed at the corporate rate and again when distributed as dividends. Beneficiaries can be individuals (spouse, adult child, parent), companies, or other trusts. [LINK: tax minimisation pillar]

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The Tax Savings: A Worked Example

Let me show you exactly what the numbers look like using 2025-26 Australian tax rates.

The scenario: You earn $350,000 from your business or investment income. Your spouse earns no other income. The family trust has $80,000 of investment income available for distribution.

Without the trust

If the $80,000 is assessed in your hands at $350,000 total income, every dollar of that $80,000 is taxed at the top marginal rate of 45%, plus 2% Medicare levy — that is 47 cents in the dollar.

Tax on the $80,000 at your marginal rate: $37,600

With the trust — distributing $80,000 to your spouse

Your spouse receives the $80,000 as their only income for the year. Under the 2025-26 tax scales, they pay:

Household tax saving: $21,212 on this distribution alone.

Your spouse's effective tax rate on the $80,000 is just 20.5%, compared to 47% in your hands.

Across a full financial year, if the trust is distributing $120,000–$200,000 across multiple family members in lower brackets, the savings can be significantly larger.

This is why the ATO pays attention to these structures.

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The CGT Splitting Advantage

When a trust sells an asset held for more than 12 months, the 50% CGT discount applies at the trust level. The discounted gain is then distributed to lower-taxed beneficiaries. A $400,000 capital gain, discounted to $200,000 and distributed equally across four adult children each earning $50,000 (30% marginal rate), generates total CGT of ~$60,000 — versus $94,000 had the same gain accrued personally to a 47% taxpayer. This double advantage — the discount plus income splitting — is why trusts outperform companies for property and investment sales.

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Section 100A: The ATO's Crackdown on Trust Distributions

Section 100A applies where a beneficiary is made entitled to trust income but someone else (typically the high-income earner) actually receives or controls that money. The ATO can disregard the distribution and tax the income to the trustee at 47%.

The ATO's guidance on reimbursement agreements identifies:

Lower risk: Distributions to a spouse or adult child who genuinely receives and controls the funds — money in their account, used for their benefit.

Higher risk: Beneficiaries who gift funds back; beneficiaries never told of their entitlement; loan-backs without commercial terms; corporate beneficiary distributions never actually paid out.

Distributions must represent genuine economic outcomes, not just entries in a minute book.

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The NSW Land Tax Trap for Family Trusts

Under the Land Tax Management Act 1956, NSW classifies family trusts as "special trusts" — they receive no land tax threshold. Individual investors pay zero land tax until their total NSW land value exceeds $1,075,000 (2026). A family trust pays 1.6% from dollar one. [LINK: NSW land tax article]

The numbers: A Sydney investment property with an $800,000 land value: individual owner — $0 land tax. Family trust — $12,800/year. Over ten years: $128,000 in additional land tax.

I have seen clients establish trusts for NSW property investment without being told about this. The income splitting benefit was more than offset by land tax from year one. Also check for surcharge land tax exposure — trust deeds that do not explicitly exclude foreign beneficiaries can attract surcharge land tax on NSW residential property. Model the land tax position before committing to any structure. [LINK: investment property structuring pillar]

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Who Should (and Shouldn't) Use a Family Trust

A discretionary trust is a powerful structure — but not a universal one. Here is the decision framework I use with clients.

A family trust is likely to suit you if:

• You have business income or investment income of $120,000 or more that you can legitimately distribute
• You have a spouse, adult children, or parents who are on lower marginal tax rates and who will genuinely receive their distributions
• You are building long-term family wealth across multiple income sources
• You have flexibility about when and how you receive income from year to year
• You may want to transfer assets to the next generation without triggering a CGT event on a specific date (note: there are CGT considerations on trust wind-up that need careful planning)

A family trust is unlikely to suit you if:

• You are a sole income earner with no genuine lower-income beneficiaries to distribute to — there is no splitting benefit
• Your primary investment is property held in NSW — the land tax treatment as a special trust will cost you more than the income splitting saves in most scenarios
• You want simplicity — trusts require annual resolutions, separate tax returns, and ongoing administration
• You are primarily chasing the 50% CGT discount — individuals and SMSFs hold CGT assets more cleanly; trusts do pass through the CGT discount, but the mechanics are more complex
• Your business income is below $100,000 — the compliance costs may exceed the tax savings

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Costs and Timing

Setup: Trust deed preparation varies; corporate trustee company (strongly recommended to limit personal liability) $600–$1,000. A trust can be established within one to two weeks once structural decisions are made.

Ongoing annual compliance: Trust tax return and distribution resolution $1,500–$2,500; corporate trustee accounting $500–$1,000; ATO/ASIC fees ~$300–$600. Total ongoing cost: roughly $2,300–$4,100 per year depending on complexity.

Critical timing rule: The trust must be established and the distribution resolution formally recorded before income is earned. Trust distributions cannot be back-dated — getting this wrong is one of the most common and costly mistakes I see, and it results in the entire trust income being taxed at 47% under section 99A.

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Is a Family Trust Right for You?

The $21,212 saving in the example above is real. So are the Section 100A risks and the NSW land tax exposure for property investors. The right answer depends on your income sources, your family situation, your state of residence, and your long-term goals. A trust that saves $25,000/year in income tax can still be the wrong choice if $12,800/year in NSW land tax is eating half the benefit.

If you are earning above $200,000, running a business, or holding investment income and you have not reviewed your structure, book a Discovery Call. I will model the actual tax numbers for your situation and give you a clear recommendation on whether a trust genuinely makes sense.

Apply for a Strategy Session with Andrew Romano

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This article is general information only and does not constitute financial or tax advice. Your individual circumstances will determine the strategies available to you. Speak to a qualified tax adviser before making any structural decisions.