Entity Setup
Operating a Global Entity under Australia’s NEW Thin Capitalisation & DDCR Rules
Australia’s new thin capitalisation and Debt Deduction Creation Rules (DDCR) reshape how private groups, multinationals and foreign-controlled entities structure their debt and funding strategies.
By NomadicTax Research Team • 5-8 min read • February 22, 2026
## What Are the Thin Capitalisation and DDCR Rules?
Australia’s **new thin capitalisation rules** align with OECD BEPS Action 4 and apply to many multinational businesses, private groups, and wealthy entities with **foreign control** or significant 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))
Alongside them, the **Debt Deduction Creation Rules (DDCR)** prohibit related-party or associate entities from structuring financial arrangements to create excessive deductible debt (e.g. via asset acquisition, distributions, or returns of capital) without tax consequences. ([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))
## Timing & Who’s Covered
- New thin capitalisation rules apply to income years **starting on or after 1 July 2023**. ([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 on or after 1 July 2024**, to both existing and new domestic and international arrangements. ([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))
- Entities with less than **AUD $2 million in associate inclusive debt deductions** may still benefit from a de minimis exemption. ([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))
## Fundamental Tests Under the New Rules
There are three main methods (“tests”) entities can use to calculate net debt deductions when subject to thin capitalisation rules:
| Test Type | Applicability | Key Features |
|---|---|---|
| **Fixed Ratio Test** | Default unless another is elected | Deductions limited to 30% of EBITDA; denied excess carried forward 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** | Entities in large groups | Based on worldwide group’s debt vs EBITDA; no carry forward usually. ([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** | Entities with external debt only | Related-party debt deductions largely denied; external debt allowed fully. ([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 Implications & Entity Setup
- **Funding strategies**: Using member-funded or related-party financing may result in lost deductions. External debt becomes more advantageous.
- **Debt leverage**: Excess debt may be carried forward under fixed ratio test, but only if thresholds met; group ratio or third-party tests avoid carry forwards.
- **Restructuring**: Asset transfers, dividends, or capital returns should be reviewed to avoid triggering DDCR consequences. Example: a parent entity distributing capital to reduce equity before incurring debt could be constrained.
## Compliance and Reporting
- Large entities under *Justified Trust* programs are already under review for compliance with these rules; expect scrutiny of restructuring in response to thin capitalisation/DDCR. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/thin-capitalisation-in-focus-for-justified-trust-reviews?utm_source=openai))
- Required to disclose relevant restructuring or selections via the **Reportable Tax Position** (RTP) schedule when filing. ([ato.gov.au](https://www.ato.gov.au/about-ato/consultation/in-detail/stewardship-groups-key-messages/large-business-stewardship-group/large-business-stewardship-group-key-messages-5-march-2025?utm_source=openai))
- Guidance and rulings are being published (e.g. PCG 2025/2; TR 2024/D3) to clarify the practical approach and help assess risk. ([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/final-thin-capitalisation-and-ddcr-guideline-published?utm_source=openai))
## Actionable Steps for Entities & Advisors
- Assess your existing debt structure and related interest rates. Are you using related-party debt? If so, what test (third-party vs fixed vs group ratio) provides the best outcome?
- For groups with international operations, compare the performance under each ratio test, considering carry forward or denial of deductions.
- Review any recent or planned restructuring, distributions, or returns of capital for potential DDCR exposure.
- Uplift internal documentation and ensure you have working papers to justify your chosen test—especially in audits under Top 100 or Top 1,000 schemes.