INCOME SPLITTING IN AUSTRALIA: TIME FOR A PRINCIPLED APPROACH?

Income splitting occurs where a taxpayer diverts some of the income that they might have derived personally to a taxpayer who is on a lower tax rate. This is permitted under current tax laws, however, the Australian Taxation Office has recently asserted limits to some known methods of income splitting. This article examines the current law in relation to income splitting in Australia, including the ATO’s recent formal policies. Broadly speaking, the law allows the splitting of income from property and business income, unless that business income is generated from the taxpayers personal services. This means that salary or wage-earning taxpayers are at a relative disadvantage. One way of levelling the playing field could be to permit joint returns, allowing spouses to split their entire incomes – as is done in the USA. Alternatively, income splitting could be curtailed substantially beyond what the ATO currently permits, through legislative change. This article examines both approaches and concludes that either approach would be preferable to the current law.