Matt Canavan is keen on income splitting. Here’s what it would mean for couples
- Written by Donovan Castelyn, Senior Industry Fellow - Taxation and Director of the UTAS Tax Clinic, University of Tasmania
Newly elected Nationals leader Matt Canavan has proposed[1] allowing couples with dependent children to split their income for tax purposes.
In simple terms, the total income of a couple could be divided between both parents before calculating tax. Similar structures already exist internationally, such as in France[2] and Germany[3].
Supporters say the change would make the tax system more “family-friendly[4]”, by recognising that many families share resources and financial responsibilities. They also say the current system can disadvantage households in which one parent temporarily leaves the workforce to care for children.
Critics[5] say it could reinforce an outdated “male breadwinner” model and reduce incentives for women to participate in paid work.
Understanding the debate requires looking at how income splitting works and where it already exists.
What is income splitting?
Income splitting refers to arrangements where income that might otherwise be earned by one person is distributed across multiple taxpayers, typically within a family.
This matters because Australia taxes people using progressive income tax rates. As income rises, the tax rate applied to the upper part of their income increases.
Spreading income across more than one person can therefore reduce the total tax paid by a household.
For example, an Australian resident taxpayer earning A$200,000 a year pays a higher proportion of tax than if that income was split between two people each earning $100,000[6]. That gap is what Canavan’s proposal aims to address.
Some households already use income splitting
Australia does not formally allow couples to split income. But some legal structures can produce similar effects.
One example is a family trust. A trust is a legal arrangement where a trustee, such as the parent(s) or nominated company, manages assets or income for beneficiaries, such as a spouse or children.
Under Australia’s trust tax rules[7], income is generally taxed in the hands of the beneficiaries who are entitled to it.
Because beneficiaries may include spouses or adult children, trust distributions can sometimes spread income across family members and produce tax savings.
Some commentators, such as independent MP Allegra Spender in her tax white paper[8], argue this means wealthier households already have access to income-splitting strategies that wage earners do not. This is the case where the main wage earner is engaged in a profession such as law, accounting and most trades, and creates an incentive to be self-employed.
Current restrictions and anti-avoidance rules
Australia’s tax system contains rules designed to stop income being shifted simply to reduce tax. These include rules to:
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discourage diverting income to children under the age of 18[10]. In these circumstances, the beneficiary is usually subject to a higher tax rate.
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restrict certain benefits or entitlements where income mainly comes from someone’s own labour[11], such as a contractor.
ATO scrutiny
The Australian Taxation Office (ATO) recently stepped up scrutiny[12] of some income-splitting arrangements, particularly those that involve trusts or business structures used to distribute income to family members on lower tax rates.
Importantly, the ATO does say ordinary family or business dealings are unlikely to trigger these rules. But where income splitting appears designed to primarily reduce tax, anti-avoidance provisions may apply.
Varying rates of tax
Advocates of income splitting often point out that two households with the same total income can pay very different amounts of tax depending on how the income is earned. Allowing income splitting, they argue, would reduce that difference and make the system more neutral between single-earner and dual-earner families.
Critics raise several concerns.
One is distributional fairness. Because income splitting reduces tax by shifting income from higher tax brackets to lower ones, the largest benefits tend to go to higher-income households.
Another issue is gender equity. In many households women are still more likely to be the second income earner or to take time out of paid work for caring responsibilities.
Household-based taxation would increase the effective tax rate[13] on that second income – thus reducing the incentive for the secondary earner to (re)enter the workforce.
Bigger policy questions
The proposal ultimately raises broader questions: should the tax system treat individuals or households as the main unit of taxation?
Australia has historically taxed individuals rather than families. But other parts of the broader tax and transfer system already consider household income when determining eligibility for benefits or subsidiaries. This includes the family tax benefit and Medicare levy surcharge.
The Nationals’ proposals therefore represent more than a technical tax change. They involve a shift in how the tax system defines fairness between individuals, families and different working arrangements.
Bottom line
Income splitting sits at the intersection of tax policy, family policy and labour market incentives.
Supporters see it as a way to make the tax system fairer for families that share income and care-giving responsibilities. Critics worry it could increase inequality and weaken incentives to workforce participation, particularly for women.
As a result, the debate over income splitting is unlikely to disappear any time soon. It reflects a deeper question about how modern tax systems balance fairness, economic participation and support for families.
References
- ^ has proposed (www.theaustralian.com.au)
- ^ France (www.welcometofrance.com)
- ^ Germany (www.dw.com)
- ^ family-friendly (www.skynews.com.au)
- ^ Critics (www.theage.com.au)
- ^ $100,000 (www.ato.gov.au)
- ^ trust tax rules (www.ato.gov.au)
- ^ in her tax white paper (drive.google.com)
- ^ Vitaly Gariev/Unsplash (unsplash.com)
- ^ the age of 18 (www.ato.gov.au)
- ^ labour (www.ato.gov.au)
- ^ stepped up scrutiny (au.finance.yahoo.com)
- ^ increase the effective tax rate (www.sciencedirect.com)
