Tax Planning
High-Growth Companies & Thin Capitalisation: Structuring Debt to Weather Australia’s New Rules
Australia’s revamped thin capitalisation and debt deduction creation rules affect private groups and multinationals—optimising your debt strategy is now essential.
By NomadicTax Research Team • 5-8 min read • February 27, 2026
## Understanding the New Legal Landscape
Australia has overhauled its thin capitalisation rules to align with **OECD BEPS Action 4**, introducing stricter limits on debt deductions based on **EBITDA**, and expanding tests for group and third-party debt. The **Debt Deduction Creation Rules (DDCR)** also deny deductions from certain related party finance arrangements that create debt for asset acquisition or prescribed payments.([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))
These changes—**law now in force**—apply from **income years beginning on or after 1 July 2023** for the new thin capitalisation portion, and **from 1 July 2024** for DDCR.([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))
## Who’s In Scope?
- Multinational enterprises operating in Australia.
- Privately owned entities that are foreign controlled.
- Wealthy private groups with significant outbound operations or cross-border related party debt.([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 Tests Under the New Regime
| Test Type | What It Measures | Advantages / Disadvantages |
|-----------|------------------|-----------------------------|
| **Fixed Ratio** | Limits net debt deductions to 30% of EBITDA. Excess is denied but can be carried forward for up to 15 years. | Predictable cap, but strict for entities with volatile EBITDA. |
| **Group Ratio** | Net debt deductions based on ratio of worldwide group’s debt and EBITDA. | May allow higher deductions for groups with low global leverage. No carry forward of excess. |
| **Third-party Debt Test** | Deductions allowed in full for external debt, except related-party debt. | Simpler, but triggers on related-party financing. |
The **arm’s-length debt test** has been removed—replacing a framework based on benchmarking with one based more strictly on ratios and intent.([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))
## Strategies for Planning Debt Structure
- **Use third-party debt** where possible, to avoid the stricter related-party deduction limits.
- **Evaluate selecting which test works best** for your group: fixed, group, or third-party. The choice affects your future years—especially with carry forward possibilities under the fixed ratio.
- **Manage EFT-interest rates and terms** carefully—ensure documentation supports any arm’s-length position if required.
- **Prepare forecasting models**, especially around EBITDA disruptions, to anticipate limits and compare across tests.
## Example: Cross-Border Financing
GlobalCo AU is a private company with large related-party loans funding overseas investments. Under the new rules, deductions for related party debt may be denied under DDCR if used for related-party asset acquisition. If GlobalCo AU’s net deductions from related debt exceed thresholds, it may benefit from opting into group ratio or third-party debt test rather than default fixed ratio. Forecasting which yields the highest allowable deduction becomes vital. Also, excess under a test like fixed ratio can be carried forward (in that test), so even temporary overleveraging has consequences over many 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))
## Compliance Checklist
- Identify if you are “in scope” (revenues, ownership, cross-border operations).
- Gather data: group EBITDA, worldwide debt, related- vs third-party debt.
- Simulate deductions under all test options to understand binding constraints.
- Ensure compliance with new reporting for DDCR, and potential interaction with Australia’s global minimum tax rules (Pillar Two).([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))
- Keep records: terms, interest rates, related-party arrangements, and justifications for debt choices.
## Conclusion
The revamped thin capitalisation regime and DDCR impose **higher scrutiny and less flexibility** for debt financing, especially for group-based and related-party debt. Selecting the optimal test, documenting thoroughly, and incorporating robust forecasting are now fundamental aspects of tax planning for high growth entities.