Entity Setup
Navigating Australia’s New Thin Capitalisation & Global Minimum Tax Rules: A Practical Guide
New rules for thin capitalisation and Australia’s adoption of the OECD’s Pillar Two minimum tax are now law—understand how these changes affect corporate debt, private groups, multinational operations and your tax obligations.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What are Thin Capitalisation and Pillar Two?
- **Thin Capitalisation rules** limit the amount of debt deductions an entity can claim, especially where there are cross-border related party loans, to prevent base erosion. ([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** (Global Anti-Base Erosion or GloBE & Domestic Minimum Tax) ensures large multinational enterprises (MNEs) with global revenue exceeding EUR 750 million pay a minimum effective tax rate of 15% in each jurisdiction. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/international/implementation-of-a-global-minimum-tax-and-a-domestic-minimum-tax?utm_source=openai))
## Key changes now in force
| Rule | Effective Date | Applicability | What Changed |
|---|---|---|---|
| New thin capitalisation rules | Income years starting on or after 1 July 2023 | Most multinationals, foreign-controlled private groups, wealthy outbound groups | Fixed ratio test (30% EBITDA cap), group ratio test, third-party debt test; arm’s length debt test removed. Denied deductions can be carried forward (fixed ratio) or outright denied (others). ([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) | Income years starting on or after 1 July 2024 | Same as above | Denies deductions from related party loans funding asset acquisitions, distributions, or 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)) |
| Global & Domestic Minimum Tax (Pillar Two) | Fiscal years from 1 Jan 2024 (IIR & DMT), Undertaxed Profits Rule from 1 Jan 2025 | MNEs with global revenue ≥ EUR 750M | Requires lodgment of GloBE return, pay top-up tax where rates fall below 15%, domestically and internationally. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/international/implementation-of-a-global-minimum-tax-and-a-domestic-minimum-tax?utm_source=openai)) |
## Why These Matter
- The combined rules target **over-leveraging** and interest deductions abuses, particularly in multinational groups. The removal of the arm’s length debt test forces strict compliance. ([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 enforcement means MNEs may face **higher tax liabilities** or administrative burdens due to new reporting: GloBE Information Return (GIR) and others. Australia has legislated these laws. ([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/international/implementation-of-a-global-minimum-tax-and-a-domestic-minimum-tax?utm_source=openai))
## Practical Examples
- *Example 1:* An Australian subsidiary of a large foreign-controlled private group debt-finances capital expenditure via loans from related parties. Under the new thin capitalisation rules, more than 30% of its EBITDA debt interest deductions are likely denied or carried forward. It should evaluate whether another method (group ratio, third-party test) offers better relief.
- *Example 2:* A global technology MNE headquartered overseas with operations in Australia pays low through foreign-subsidiary jurisdictions. Under Pillar Two, Australia can impose top-up tax to bring its effective rate to 15%. The entity must prepare to lodge GIR and fulfill reporting obligations by relevant deadlines.
## Actionable Insights
1. **Assess if your entity is in scope**: check whether your global revenue exceeds the EUR 750 million threshold, whether you are foreign controlled or part of a private group.
2. **Review existing debt structures**: identify intercompany loans, related party debt, and whether you’ll need to shift to fixed ratio or group ratio tests.
3. **Upgrade your reporting systems**: ensure you can lodge the GIR, IIR/UTPR/DMT forms via the ATO’s API or other channels. Use updated XML schemas if applicable. ([softwaredevelopers.ato.gov.au](https://softwaredevelopers.ato.gov.au/Pillar2_20250305?utm_source=openai))
4. **Document everything**: aim for strong transfer pricing practices, clear arm’s length dealings, and robust governance to reduce risk.
5. **Plan for compliance and penalties**: non-compliance with Pillar Two or thin capitalisation has high stakes. Familiarize with recent rulings, guidance (e.g., PCGs) and ATO’s approach.
## Takeaway
These changes represent some of the most significant shifts in Australia’s international tax landscape in years. If you are a multinational, foreign controlled private group, or engage heavily with debt or intangibles across borders, this is a must-do. Act now to adjust structures, systems, and reporting to ensure compliance, avoid penalties, and optimize tax outcomes in the new regime.