Compliance

Compliance Deep Dive: Australia’s New Thin Capitalisation & Debt Deduction Rules

Australia’s amended thin capitalisation and debt deduction creation rules dramatically change how private groups and multinationals structure debt. Understand compliance risks and adjust now.

By NomadicTax Research Team • 5-8 min read • November 15, 2025

## Overview of the Changes Austral­i­a has overhauled its thin capitalisation rules and introduced **Debt Deduction Creation Rules (DDCR)**. These changes, now in law, apply differently depending on income years: - Thin capitalisation rules align with OECD BEPS Action 4. They are now law and **apply from 1 July 2023** for general thin cap provisions. The DDCR apply from **1 July 2024** for both existing and new related-party debt deductions. ([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)) - These rules affect **multinational businesses operating in Australia**, **privately owned 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 Tests in New Thin Capitalisation Framework Taxpayers must now choose among three tests for net debt deductions: 1. **Fixed-ratio test**: Limited to 30% of EBITDA; excess denied but carried forward for up to 15 years. 2. **Group ratio test**: Based on worldwide group gearing and EBITDA; no carry forward of excess. 3. **Third-party debt test**: External debt (excluding related-party debt) allowed in full; deductions from related-party portion denied. The switch eliminates the old arm’s length debt test. ([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)) ## Compliance Impact & Risk Areas - **Related-party loan structuring**: Significant changes for entities using intra-group debt; terms must be arm’s length or deductions denied under DDCR. - **Carried forward denial of excess**: Under the fixed-ratio test, excess debt must be documented and tracked to apply carry-forward correctly. - **Restructuring risk**: Transactions designed to shift debt among group entities may attract scrutiny. - **Interaction with Division 7A**: Loans between controlling shareholders and companies may fall under these rules. ([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)) ## Practical Steps to Ensure Compliance - Conduct a full **audit of intra-group and external debt**: classify related versus third-party; review interest rate terms. - Model which test (fixed-ratio, group, or third-party) yields the best outcome; document your choice and rationale. - Maintain precise financial records: EBITDA calculations; debt balances; group structure documentation. - Consult with transfer pricing and tax structuring specialists: related-party debt will need careful structuring. - Use transitional planning: some income years not yet caught; plan ahead where possible. ## Example > Global Holdings Pty Ltd, with EBITDA of A$10 million and net debt of $4 million, if using the fixed-ratio test its net debt deduction limit is 30% of EBITDA = A$3 million. The $1 million excess is **denied** but may be carried forward. If using the group ratio test could allow full $4 million depending on group gearing. Private groups must review structure early, maintain documentation, and choose the most beneficial test while staying within compliance to avoid adverse assessments.