Entity Setup
Building an Effective Entity Setup in Australia Post-Thin Capitalisation Overhaul
With Australia's new thin capitalisation and debt deduction creation rules now law, structuring entities requires sharper planning — particularly for private groups and multinationals.
By NomadicTax Research Team • 5-8 min read • November 15, 2025
## What has changed under thin capitalisation & DDCR
From **1 July 2023**, new rules for thin capitalisation came into effect for income years starting then, and from **1 July 2024**, the **Debt Deduction Creation Rules (DDCR)** also apply. These affect both multinational businesses, foreign controlled Australian entities, and wealthy private groups with outbound operations.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/private-wealth-international-program/new-international-tax-measures-affecting-private-groups?utm_source=openai))
Key points:
- Net debt deductions are limited under the **30% EBITDA fixed ratio test**, or by group ratio test; excess deductions are denied or carried forward.
- DDCR deny deductions arising from loans or arrangements to fund asset acquisitions or prescribed payments (e.g. distributions), where entities attempt to “create debt” with related parties.
## Entity setup strategies in light of new legislation
### Choosing the right entity structure
- Private companies planning cross-border transactions: ensure group structures consider both who controls the company **and** where debt originates.
- If planning asset acquisitions, evaluate funding via equity vs related-party loans — DDCR may deny deductions for certain debt.
### Managing net debt levels
- Monitor leverage ratios vs EBITDA carefully: aim to stay under the fixed ratio of 30% where possible to preserve deductibility.
- If margins rise, safely ramp up debt; if margins dip, consider equity financing or intergroup capital.
### Documentation & compliance planning
- Maintain robust financial statements showing associate entity debt, equity contributions, and EBITDA calculations.
- Where appropriate, seek election to use the group ratio test. That test provides flexibility but must be supported by worldwide group data.
## Example: Private group with cross-border funding
Suppose Company A in Australia (foreign controlled), wants to acquire plant equipment. It considers two options:
1. Borrow from a related party overseas (loans)
2. Raise capital via equity infusion or third-party debt.
Under DDCR, the related-party loan may lead to denial of deductions for both the debt instrument and asset funding if categorized as “debt creation.” If instead equity is used, no deduction but avoids risks. Alternatively, use third-party debt that’s not “associate” linked.
If excess deductions under the 30% test occur, they can only be carried forward and will remain subject to annual test.
## Risks and traps
- Non-compliance around definitions: “associate entity,” “net debt,” “EBITDA” need precise definitions; mistakes could lead to unexpected denials.
- Using devices like hybrid debt or complex distribution arrangements can attract ATO attention.
## Key takeaways
- For private groups and multinationals, entity setup must be aligned with thin cap and DDCR to protect debt deductibility.
- Plan long-term: what looks cheap now with related-party financing may cost more over several years.
- Document everything and consider alternative funding sources to avoid pitfalls.
Australia’s rules are now law. Forward-looking entity structuring rich with compliance can save tax and reduce exposure to denials.