Thousands of accountants, lawyers, engineers and tradespeople may soon face closer scrutiny as the ATO launches compliance efforts aimed at curbing tax minimisation through trust arrangements. The initiative aims to discourage what the ATO considers aggressive income-splitting, particularly when significant income is directed to spouses or children in lower tax brackets.
Trusts, companies and partnerships have long been used by professionals who generate personal services income to simplify tax obligations or claim business deductions. However, under revised ATO guidance, simply running a business does not automatically entitle a person to distribute income among family members or retain profits in lower-tax entities. The ATO is now reviewing these arrangements against set criteria for “personal services businesses.”
The main issue is whether the income is primarily the result of individual skill or effort. If it is, the law requires that profits be allocated to the person doing the work rather than being shared or held in a corporate entity to reduce tax. The guidelines include examples from various fields such as medicine, IT, accounting and plumbing, showing that the changes apply to both white-collar and blue-collar roles.
Taxpayers who are affected still have options. The ATO has provided a grace period and stated that no retrospective penalties will apply to those who adjust their structures to a “low-risk” classification by 30 June 2027. How these new rules are applied will depend on each business's financial arrangements, sources of income and whether the structure appears to be aimed at deliberately lowering personal tax obligations.
This broad initiative could change how thousands of small and medium service-based businesses approach tax planning. It appears the ATO is increasing efforts to ensure income-splitting practices remain within legal limits, even if they have been commonplace for years. Professionals may need to reconsider their business setups to comply with the new standards.
