Compliance

Compliance Essentials: Staying Ahead of OECD Pillar Two & Thin Capitalisation Rules

Major businesses face new global minimum tax and thin capitalization changes in Australia—understand the obligations now to avoid costly penalties.

By NomadicTax Research Team • 5-8 min read • November 19, 2025

## Overview of Pillar Two & Global Minimum Tax Australia has implemented the OECD’s Pillar Two framework, including both the **Income Inclusion Rule (IIR)** and the **Domestic Minimum Tax (DMT)**, which came into effect for fiscal years starting **1 January 2024**.([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/international/implementation-of-a-global-minimum-tax-and-a-domestic-minimum-tax?utm_source=openai)) The **Undertaxed Profits Rule (UTPR)** applies from income years starting **1 January 2025**.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai)) These laws ensure that MNEs pay at least **15% tax** in every jurisdiction where they operate.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai)) ## Thin Capitalisation & Debt Deduction Creation Rules (DDCR) These rules limit deductions on interest where debt is used in a manner that harms tax base. They apply to income years from **1 July 2023**, and the DDCR for existing and new arrangements took effect **1 July 2024**.([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: - Applies to both multinational and privately owned entities with foreign control, or wealthy 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)) - Exemption if **debt deductions** of all associate entities together do not exceed **AU$2 million**.([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)) - **Division 7A loans** are not excluded—making internal structuring strategies more important.([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 Requirements & Reporting ### For Pillar Two (Global & Domestic): - In-scope MNEs (global revenue ≥ EUR 750 million) must lodge a **GloBE Information Return (GIR)** to the ATO.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai)) - Develop, use, and file local forms for IIR, UTPR, and DMT dealings by required deadlines.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai)) - The ATO is using soft landing approach for penalties during transition periods up until **31 December 2026** for FYs that don’t end after 30 June 2028.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/consultation-open-for-guidance-about-pillar-two?utm_source=openai)) ### For Thin Capitalisation / DDCR: - Disclose restructures in Reportable Tax Position schedule where DDCR impacts arrangements.([ato.gov.au](https://www.ato.gov.au/about-ato/consultation/in-detail/stewardship-groups-key-messages/large-business-stewardship-group/large-business-stewardship-group-key-messages-5-march-2025?utm_source=openai)) - Use updated LCMSF Schema 4.0 for country-by-country reporting (local & master file) for FYs from **1 January 2024**, with full deactivation of V3.0 by **1 January 2026**.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/pricing/transfer-pricing/country-by-country-reporting/country-by-country-reporting-guidance/local-file-changes-from-1-january-2025?utm_source=openai)) ## Actionable Advice & Examples - If you’re part of a multinational group and revenue exceeds the threshold, begin collecting data for GIR now—don’t wait until last year. Ensure systems can identify low-taxed jurisdictions. - Review internal financing: large related party loans may trigger restrictions under DDCR. Think whether debt restructuring can avoid triggering exclusion thresholds. - For smaller private groups, the AU$2 million de minimis threshold is critical. Monitor debt to associates annually. - Use software compliant with Schema V 4.0 to file LCMSF reports correctly. Update digital service providers early. ## Risk Areas & Penalties - Failure to lodge or lodging incorrectly exposes you to penalties—though transition relief is available.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/consultation-open-for-guidance-about-pillar-two?utm_source=openai)) - Dividends or royalty payments misclassified may attract withholding obligations or treaty disputes. The ATO is reviewing arrangements where royalties or intangible payments are structured to reduce tax.([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai)) ## Summary These compliance changes are not optional—they affect many large entities and private groups in Australia. Early preparation for Pillar Two, UTPR, DDCR, and updated reporting schemas substantially lowers regulatory risk and keeps you aligned with global standards.