Entity Setup
Entity Setup: Private Groups, Thin Capitalisation & Minimum Taxes Explained
Australia has reinforced rules for private groups in international operations—new thin capitalisation and Global Minimum Pillar Two taxes are now law and require careful entity and debt structuring.
By NomadicTax Research Team • 5-8 min read • February 20, 2026
## Key Regulatory Changes to Know
- The **new thin capitalisation rules** are now law for private groups. They align with OECD BEPS 4, tightening how much debt-deduction you can claim for international related-party loans and denying deductions made purely to generate returns of capital. ([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))
- **Debt Deduction Creation Rules (DDCR)** supplement the thin capitalisation changes. They apply to income years from **1 July 2024**, and target internal corporate arrangements that create debt without corresponding economic substance. ([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))
- Implementation of **Pillar Two / Global Anti-Base Erosion (GloBE) rules** sets a 15% global minimum tax for large multinational enterprise (MNE) groups. These include:
* Income Inclusion Rule (IIR): for fiscal years starting on/after **1 January 2024**.
* Undertaxed Profits Rule (UTPR): applying from **1 January 2025**. ([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))
## Strategizing Entity Design & Structure
- If your entity is part of a **private group or multinational**, evaluate your debt financing arrangements. High levels of related-party debt could trigger thin capitalisation limits or DDCR.
- Review whether parts of your group qualify as resident or nonresident, permanent establishment, or if tests like De Minimis thresholds apply. Some exemptions remain if debt deductions are under certain value thresholds. ([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 & Disclosure Obligations
- Entities falling under the thin capitalisation rules must maintain detailed records of related-party loans and their purposes.
- Public Country-by-Country (CBC) reporting also applies: Ultimate Parent Entities must disclose tax and financial information annually if they meet turnover and residency tests. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/new-public-country-by-country-reporting-requirement?utm_source=openai))
- Local file/master file reporting (LCMSF) schema updated to version 4.0. Starting with periods from **1 January 2024**, this schema includes additional fields for restructures, intangibles, reporting lines, etc. ([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))
## Practical Example
_The Alpha Group_ is an Australian private company with foreign operations and related party debt. Under new rules, if they hold high internal debt to acquire assets or pay dividends to foreign parents, those deductions may be denied under DDCR. They must ensure that loans have economic purpose, are properly documented, and do not exist purely to shift profits or reduce tax.
They should also examine whether they need to publish CBC reports, and ensure their LCMSF local file meets Schema 4.0 by 2025-26.
## Action Steps Before Year-End
1. **Simulate your tax under new rules**: run scenarios with related-party debt levels to see exposure.
2. **Review and document all debt/loan justification**: foreign vs. domestic counterparties.
3. **Upgrade reporting systems**: ensure you collect data needed for CBC, LCMSF, and Pillar Two reporting.
4. **Seek rulings or advice** if uncertain—these are complex areas with big penalties for misreporting.
By aligning entity structures with integrity rules, your tax setup remains safe, transparent, and minimises surprises in an era of tougher international tax reforms.