What Changed and Why
Australia introduced new thin capitalisation rules (aligning with OECD BEPS Action 4) that apply from income years starting 1 July 2023. Alongside, the debt deduction creation rules (DDCR) became law for income years from 1 July 2024, reducing the ability to generate artificial debt arrangements to claim tax deductions.(ato.gov.au)
The Tests You Need to Know
- Fixed Ratio Test: Limits net debt deductions to 30% of EBITDA. Excess may be carried forward for up to 15 years.(ato.gov.au)
- Group Ratio Test: Based on a worldwide group's debt-to-EBITDA ratio—helps entities that borrow heavily overseas. No carry-forward of denied deductions.(ato.gov.au)
- Third-Party Debt Test: Allows external debt deductions fully unless related-party terms violate transfer pricing.(ato.gov.au)
Actionable Compliance Tips
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Audit your debt structure now
- Identify related-party loans and internal financing streams that could trigger DDCR. Restructuring may help avoid denial of deductions.
- Check pricing and terms of loans for arm’s length; document thoroughly.
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Select the optimal test annually
- Default is fixed ratio test, but group ratio or third-party debt options may yield better outcomes depending on your group’s mix.
- Do fresh analysis each year; what was optimal in 2023-24 may not be in 2024-25.
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Work with financial modelers and tax agents
- Model EBITDA impacts, carry-forwards, cross-border debt, and foreign taxes.
- Ensure tax software supports reporting of the new schedule forms accurately.
Example: Private Group with Associate-Party Loans
Consider ABC Pty Ltd, an Australian private group with a related-party loan from an offshore associate at a low interest rate. Under the third-party debt test, related part interest is disallowed. Under fixed ratio, high net interest expense may trigger disallowance beyond 30% of EBITDA. ABC should: restructure to convert that related-party portion to equity or repay, or change to group ratio test if group-wide borrowing structure supports that path.
Stakes for Non-Compliance
- Denied deductions can’t always be carried forward—especially under group ratio or third-party debt tests.(ato.gov.au)
- Inaccurate disclosure in the Reportable Tax Position (RTP) schedule could lead to penalties.
- Risk of audits and ATO investigations of interest expenses, foreign-controlled entities, and treaty misuse.
Bottom Line Checklist
| Area | What to Check | Documentation Needed |
|---|---|---|
| Entity-level debt | Amount, related parties, external debt composition | Loan agreements, interest schedules, repayment history |
| Earnings (EBITDA) | Stability and volatility across years | Financial statements, forecasts |
| Test election | Which test gives least exposure and cost | Tax plan memos, board minutes |
| Disclosure | Accurate schedules and forms | RTP schedule, international dealings schedule |
Compliance under the new rules is complex—but manageable with timely action, good advice, and clean structures.