Compliance

Entity Compliance in the Age of Pillar Two & Thin Capitalisation: What Private Groups Must Do

Private Australian entities and multinational groups face stricter rules around debt deductions and international tax minima under BEPS Pillar Two. Learn what compliance steps you need now.

By NomadicTax Research Team • 5-8 min read • March 7, 2026

## Overview of new entity obligations Australia has introduced stringent international tax measures via its **Global and Domestic Minimum Tax (Pillar Two)** rules and revised **thin capitalisation and Debt Deduction Creation Rules (DDCR)**. These are now law and apply to in-scope entities. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-19a11d5f-5a98-4cff-ba03-5aea1b50aaf2?utm_source=openai)) ### Key changes - Thin capitalisation rules now use a **30% of EBITDA fixed ratio test** as the default for net debt deduction limitations. Entities may instead opt for 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)) - The **Debt Deduction Creation Rules** disallow deductions for certain interest or financing expenses from related-party arrangements that essentially fund distributions or capital reductions. ([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)) - Pillar Two imposes a **15% global minimum tax** under the Income Inclusion Rule (IIR) from income years starting 1 January 2024, and an Undertaxed Profits Rule (UTPR) from 1 January 2025. A domestic minimum tax also applies. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-19a11d5f-5a98-4cff-ba03-5aea1b50aaf2?utm_source=openai)) ## Who is affected? - Multinational enterprise (MNE) groups with revenue globally exceeding **EUR 750 million**. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-19a11d5f-5a98-4cff-ba03-5aea1b50aaf2?utm_source=openai)) - Privately owned Australian entities that are foreign-controlled, 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)) ## Compliance and planning actions - **Review debt and financing structures**: Entities must evaluate cross-border and related-party debt to avoid unallowable deductions under DDCR. Restructuring may be needed. - **Opt for alternative tests**: If your entity expects fixed ratio test results to be overly restrictive, evaluate whether group ratio or third-party debt tests may produce more favourable limits. - **Document and prepare**: For Pillar Two in scope entities, establish data flow and reporting systems now, especially for Global Information Return (GIR) due 30 June 2026 for some in-scope entities. ([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai)) - **Private rulings and guidance**: ATO is updating rulings like TR 2006/11DC and issuing Practical Compliance Guideline PCG 2025/D3. Entities should monitor and engage in consultation where possible. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/consultation-open-for-guidance-about-pillar-two?utm_source=openai)) ## Example scenario > *A foreign-controlled Australian group earns AUD 50 million in EBITDA and has AUD 25 million of interest payments to related parties.* Under the fixed ratio test, net interest deductions would be limited to 30% of EBITDA = AUD 15 million. The excess (AUD 10 million) could be carried forward (for fixed ratio method). Under group ratio or third-party debt tests, this may differ. ## Risk areas & penalties - **Penalties** may be imposed for under‐lodgement of GIR or UTPR where reasonable measures weren’t taken during the transitional period. But ATO has indicated a softened approach during transition. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/consultation-open-for-guidance-about-pillar-two?utm_source=openai)) - **Audit risk** for intangible migration or royalties mischaracterisation. ATO published guidance via PCG 2024/1 and draft rulings like 2024/D1. ([ato.gov.au](https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia?utm_source=openai))