Entity Setup
How Thin Capitalisation Changes Reshape Cross-Border Debt for Private Groups
New thin capitalisation reforms in Australia restrict net debt deductions for private groups and multinationals, introducing stricter rules from 1 July 2023 and 2024—essential for cross-border financing planning.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## Overview of the Reform
Australia has recently overhauled its thin capitalisation rules to align with OECD Base Erosion and Profit Shifting (BEPS) Action 4. These changes primarily affect private Australian entities that are foreign-controlled, wealthy domestic groups with outbound operations, and most multinational businesses. Key legislative changes apply from income years starting 1 July 2023, with new rules on debt deductions kicking in from 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))
## Main Rule Types and Their Impacts
There are three new tests proposed for limiting debt-related deductions:
- **Fixed Ratio Test**: Caps net debt deductions at 30% of EBITDA. Any excess is denied, but can 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 global group net debt to EBITDA—useful for globally leveraged groups. This method **does not** allow excess deductions to be 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))
- **Third-Party Debt Test**: Allows full deductions for external debt (excluding related-party debt), with no carry-forward of excess 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 previous arm’s length debt test is removed entirely under the new regime. Furthermore, debt deduction creation rules (DDCR) disallow debt deductions from related-party loans used to fund asset acquisitions or distributions. ([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))
## Practical Examples and Planning
| Scenario | Old Law Outcome | Under New Rules |
|---|---|---|
| A foreign-controlled private group has high related-party loans funding outbound acquisitions. | Full deductions up to arm’s-length interest. | DDCR disallows such related-party funding deductions if used for assets or distributions. Fixed- or group-ratio test likely applies. |
| A multinational group with low overseas effective tax rate. | Only Australian law limits. | Global minimum tax rules also apply with both Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai))|
### Actionable Insights
- **Reassess debt structure**: Especially related-party versus third-party debt to optimise under third-party debt test.
- **Forecast EBITDA carefully**: Tests depend heavily on accurate EBITDA estimates.
- **Carry-forward awareness**: Only the fixed ratio test allows it; group/third-party do not.
- **Ensure compliance documentation**: Use contracts, service-level agreements, valuation reports to support arm’s-length terms. When DDCR kicks in, related-party loans are strictly assessed. ([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))
## Interactions with Global Minimum Tax and Other Reforms
These thin capitalisation changes occur alongside Pillar Two global and domestic minimum tax rules. Large MNE groups with revenues above EUR 750 million must comply with new top-up tax measures under Australian law for fiscal years starting from 1 January 2024 for the Income Inclusion Rule, and 1 January 2025 for the UTPR. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/multinationals/global-and-domestic-minimum-tax?utm_source=openai))
## Bottom Line
If your entity operates across borders with significant debt or financing arrangements, you must analyse which thin capitalisation test applies, restructure your financing where possible, and maintain strong documentation. The legislative reforms alter both risk and planning strategies in international finance and offer an opportunity to optimise tax positions under the new regime.