Entity Setup

Entity Setup & International Structures Under Australia’s New Thin Capitalisation Rules

Australia’s updated thin capitalisation and related international tax measures are transforming how multinational and wealthy private groups must structure debt and deductions — guidance on structure, compliance, and examples inside.

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

## Overview of the New Rules Australia has reformed its **thin capitalisation regime** under the **Debt Deduction Creation Rules (DDCR)**, aligning with OECD BEPS Action 4. These rules apply now and are law. ([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 aspects include: - For most multinational businesses, foreign-controlled private entities, and 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)) - The **de minimis exemption** remains: if total debt deductions by all associate entities are less than **AUD 2 million**, the new rules don’t apply. ([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)) - Three options for general class investors to calculate net debt deduction limits: 1. **Fixed-ratio test** – up to 30% of EBITDA; excess carried forward. ([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)) 2. **Group-ratio test** – based on worldwide group financials; no carry forward. ([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)) 3. **Third-party debt test** – full credit for external debt excluding related party debt; again no carry forward. ([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)) - Removal of the arm’s length debt test; focus now squarely on these fixed methods. ([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)) --- ## Structuring and Setup Implications When setting up entities or cross-border finance, private groups should consider: **Choice of capital structure** - **Debt vs equity mix** matters more than ever: group-ratio or fixed-ratio limits mean excess debt may be non-deductible or carried forward. - **Related party debt** faces stricter treatment under third-party debt test; ensure transactions are arm’s length and well documented. **Entity locations and control** - Foreign-controlled entities need to assess whether being within or outside definitions affects rule applicability. - Use of off-shore holdings through trusts or subsidiaries may trigger DDCR; legal control and location matter. **Planning for exemptions** - Groups under AUD 2 million debt deductions still qualify for exemptions. - Where possible, schedule borrowing or debt service to stay under de minimis thresholds. --- ## Examples to Illustrate - **Family-owned manufacturing firm** (debt deductions = AUD 1.8 million): continues to use old rules until or unless group debt rises beyond threshold. Keeps simplest structure. - **Multinational with AUD 100m turnover**: uses a combination of group-ratio test and fixed-ratio test to compare outcomes; may shift part of debt onto third party sources to use third-party debt test. - **Foreign-controlled entity with internal loans**: documents rate and terms rigorously; consider equivalent third-party funding or restructuring to avoid disallowed related party deductions. --- ## Compliance Checklist - Perform a **debt and EBITDA calculation** annually per available test and choose the most favorable. - Review **related party loans**, their terms, and whether they meet rules under DDCR. - Update **transfer pricing documentation** to reflect interest rates applicable under new rules. - Use **external advisory and legal counsel** to assess risk around applicability and documentation. --- ## Effective Dates & Status - The thin capitalisation amendments are **now law**. ([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)) - DDCR apply to **income years starting 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)) --- ## Conclusion If you are planning or operating across borders, debt syndications or intercompany financing will need fresh evaluation. Structure your debt carefully, documentation needs to meet the stricter tests, and plan to stay within exemption thresholds where possible. Early consultation and modeling will save big compliance costs later.