In 2026, many small business owners use the strategy of "income splitting" by hiring their husband, wife, or children. This can be an efficient tax move, as it allows your family to effectively use their low-tax thresholds while reducing your company's taxable profit. But the ATO is not stupid. If you hire your spouse and pay them $80,000 to "vacuum the office once a week," you're cruising for a bruising in a tax audit. Here is our 2026 guide to hiring family legally.
The ATO's golden rule is that the expense must be **"necessarily incurred in carrying on a business."** To pass this test when hiring a spouse, you should have:
In 2026, you cannot just "write a check" at the end of the year. Your spouse must be on your regular payroll software (Xero or MYOB). This means:
The ATO focuses on businesses that attempt to "transfer" profit into a low-tax hand without any work being performed. If they disqualify your spouse's salary, they will **deny the deduction** to your business, but the spouse may still have to pay tax on the money they received. This is a double-taxation trap.
💡 Pro Tip: If your spouse performs legitimate work but is also a shareholder, you might find it more efficient to pay them a **Dividend** instead of a salary. This saves you from paying Superannuation and WorkCover, but it depends on your company's "Franking Account" balance.
Hiring family is one of the best ways to keep wealth inside your household, provided you follow the 2026 payroll rules. At PrepMyBook, we help our clients audit their family payroll to ensure every entry is audit-proof and tax-efficient. Let's make 2026 your most profit-efficient year yet.
Our payroll specialists can help you review your spouse's job description and salary level, ensuring you're not at risk of an ATO "excessive salary" claim. Let’s protect your family's wealth.
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