Compliance

Compliance Focus: Thin Capitalisation & Debt Deduction Rules for Private Groups

Australia’s new thin capitalisation rules and Debt Deduction Creation Rules (DDCR) significantly reshape how private groups manage interest deductions—compliance is now more complex than ever.

By NomadicTax Research Team • 5-8 min read • November 21, 2025

## 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](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)) ### 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](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)) - **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](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)) - **Third-Party Debt Test**: Allows external debt deductions fully unless related-party terms violate transfer pricing.([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)) ## Actionable Compliance Tips 1. **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. 2. **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. 3. **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](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)) - 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.