Paying your spouse through your business? The ATO is watching.

A lot of Australian business owners pay their spouse through the business. Some have them on the payroll. Others distribute income through a family trust or leave profits sitting in a company at the lower tax rate. For years, this was standard practice -recommended by accountants, rarely questioned, and genuinely effective at reducing the household tax bill.

The Australian Taxation Office (ATO) has had enough of it.

Income splitting was named as one of the ATO’s seven compliance targets for 2026, and they’ve released a detailed enforcement guideline to back it up. If your spouse is on the books in any capacity, this is aimed directly at you.

Why it became so common

The maths has always made sense. Say your business turns a profit of $300,000. If all of that comes to you personally, you’re paying close to $117,000 in tax. But if you can split that income – pay $150,000 to yourself and $150,000 to your spouse – the household tax bill drops significantly. You could save $30,000 to $40,000 a year just by having two people in lower tax brackets instead of one person at the top rate.

Accountants have been recommending this for decades, and for good reason. Done properly, it’s legitimate. But the ATO’s concern – and the reason they’re now acting – is that in a lot of cases, the spouse isn’t actually doing work that justifies the pay. The income is being shifted to them purely to save tax, not because their contribution to the business reflects what they’re being paid. That’s what the ATO is targeting

The three arrangements they’re looking at

Paying your spouse a salary

If your spouse is on the payroll as a bookkeeper, office manager, or admin assistant, the ATO’s question is simple: would you pay a stranger the same amount for the same work?

If your spouse is earning $80,000 for a role that involves five hours a week, and the market rate for that work is $25,000 to $30,000, the ATO can disallow the deduction and add that income back to your tax return. The extra $50,000 to $55,000 gets assessed at your marginal rate, plus interest and potentially penalties.

The arrangement isn’t the problem. The pay being disconnected from the actual work is.

Distributing to your spouse through a family trust

Trust distributions to a spouse where the money genuinely ends up with them are generally fine. The issue arises when distributions are made to adult children or other family members and the cash doesn’t actually land with them – it flows back into the business or gets used to cover expenses that benefit you.

The ATO can reclassify those distributions and tax the trustee at the top marginal rate. There’s no practical limit on how far back they can look.

Retaining profits in your company

If your income comes mainly from your own skills and effort – you’re a consultant, a contractor, a tradie, a professional – the ATO’s position is that the income belongs to you personally, regardless of whether it sits in a company and gets taxed at 25%.

If you’ve been accumulating significant profits in a company and the business is essentially you, the ATO can reassess that income at your marginal rate. The difference between 25% and your top rate, plus interest, can be substantial.

What ‘ok’ actually looks like

Paying your spouse through the business is completely legitimate when the arrangement is genuine. The test the ATO applies is straightforward: does this look the same as if you’d hired a stranger?

A practical example: a trades business turning over $700,000 where the owner’s spouse genuinely manages the operation – scheduling, supplier relationships, invoicing, staff. She has an employment contract, works documented hours, and is paid $95,000, which is consistent with what an operations manager in that industry earns. If the ATO reviewed that tomorrow, there’s nothing to find. The pay reflects the work. The work is real.

That’s the standard. Not whether your spouse is involved, but whether the involvement and the pay genuinely match.

You have a window – but it’s not open forever

The ATO has confirmed a transition period to 30 June 2027. If you make a genuine attempt to restructure before that date, they’ve indicated they won’t pursue past arrangements. That’s a meaningful concession, but it has a hard end date.

There’s also a broader structural shift coming. The 2026 federal budget confirmed a 30% minimum tax on discretionary trust distributions, effective 1 July 2028. If you currently distribute to a spouse or family member on a lower tax rate, the tax saving from doing so disappears under that change. Trusts are now under pressure from the ATO on enforcement and from the government through legislation – at the same time.

What to do now

If you pay your spouse through your business, or retain significant profits in a company, it’s worth reviewing the arrangement against the ATO’s current position before the transition window closes.

The questions the ATO is asking are simple: Is the work real? Is the pay what you’d pay a stranger? Can you document it?
The LINK Advisors team works with business owners to assess their current structure, identify any exposure, and put them in a position that’s genuinely defensible. If you’re not sure whether your arrangement holds up, now is the right time to find out.