Paying salary into a family trust
In Australia, your salary generally cannot be paid directly into a family trust unless the trust is the legal employer. Salaries are typically paid to the individual employee who earns them, and redirecting wages to a trust for tax purposes is not permitted under Australian tax law. However, there are legitimate ways to structure income and assets using a family trust if set up correctly and for valid business or investment reasons.
Understanding how salary payments and trusts interact can help you avoid compliance issues with the Australian Taxation Office (ATO).
Below are key considerations and strategies for those looking to involve a family trust in their income management
Direct salary payments are not allowed
If you are employed by a company or another entity, your salary must be paid directly to you as the employee. The ATO considers this personal income, which must be declared under your individual tax return. Redirecting wages to a family trust could be viewed as tax avoidance and attract penalties.
Exceptions for business owners
If you operate a business through a company or trust structure, you may be able to distribute business income to a family trust. In this case, the trust—not you personally—earns the income. You can then receive distributions from the trust in line with the trust deed and tax laws. This is a legitimate arrangement commonly used by business owners, provided it reflects genuine business activity.
Consider the “personal services income” rules
The ATO’s personal services income (PSI) rules restrict the ability to divert income earned from your personal skills or labour into a trust or company. Even if income flows through a family trust, it may still be taxed in your name if it’s considered PSI. Understanding these rules is essential to ensure compliance and avoid ATO scrutiny.
Superannuation and PAYG obligations
When you are employed, your employer is legally required to make superannuation contributions and withhold PAYG tax. These obligations cannot be transferred to a trust. If income is legitimately earned through a family trust, the trust itself must meet relevant reporting and tax obligations, including PAYG withholding if it employs staff.
Seek professional advice
Before attempting to use a family trust in your income arrangements, it’s crucial to consult a qualified accountant or tax advisor. They can assess your circumstances, ensure your structure complies with Australian tax law, and help you make informed decisions about asset protection, tax efficiency, and succession planning.
Using a family trust can provide benefits for asset protection and managing investment income, but it must be structured correctly. Trying to channel personal salary into a trust without a legitimate business basis can result in tax penalties and legal complications.
For most employees, salary should be received personally and then contributed to the trust as after-tax funds if desired. Professional guidance will ensure your arrangements are both compliant and effective for your long-term financial goals.
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