Tax Planning

Tax Planning in Australia: How to Reap Benefits from Thin Capitalisation & DDCR Rules

Multinational and private groups need to know how the new thin capitalisation and Debt Deduction Creation Rules (DDCR) affect deductions and borrowing — and how to plan accordingly.

By NomadicTax Research Team • 5-8 min read • November 17, 2025

## Introduction Australia’s **thin capitalisation rules** and the **Debt Deduction Creation Rules (DDCR)** form part of international tax integrity reforms now law for many private and multinational groups. Knowing how these rules work — and taking proactive steps — can meaningfully reduce your risk exposure and inform your structuring decisions. ([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)) ## What are the changes? - **Thin capitalisation** rules set limits on how much interest expense (i.e. debt deductions) an entity can claim, generally capped at **30% of its earnings before interest, tax, depreciation, amortisation** (EBITDA). ([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 further deny debt deductions for related-party loans used to acquire assets or for certain prescribed payments, including distributions and returns of capital. These apply to income years from **1 July 2024** onward. ([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 affected? Primarily, businesses and groups with: - Foreign-controlled operations or cross-border entities. - Large debt deductions (aggregate above AUD $2 million) from associates or related parties. ([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)) - Multinationals with global operations, particularly when accessing foreign income or structuring intra-group loans. ([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)) ## Strategic planning steps 1. **Assess existing debt levels**: Compare deductions under thin capitalisation default (30% of EBITDA) with other available methods like the group-ratio test — this could allow more deductions in certain cases. ([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)) 2. **Review intercompany financing**: Ensure that loans from related entities are structured to avoid falling under DDCR exclusions — for example, avoid funding acquisitions or prescribed payments using related party debt where possible. 3. **Carry-forward denied deductions**: If your entity defaults under the fixed ratio test, excess deductions can be carried forward for up to **15 years**, subject to the yearly limit. ([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)) 4. **Maintain good documentation**: Track reasons for restructures, debt origination, related party intercompany payments; prepare to explain use-and-need, fair value etc. 5. **Use alternative tests**: For eligible entities, group-ratio or other test options might be less restrictive. Consider their suitability before defaulting to the standard fixed ratio. ## Example scenario A private three-entity group operates in Australia with parent overseas. Total associate debt deductions are AUD 3 million. EBITDA is AUD 10 million. Under fixed-ratio (30%) rule, maximum deduction is AUD 3 million. If debt deductions exceed that, excess is denied but can be carried forward for 15 years. If you planned a related-party loan to acquire new assets, DDCR may deny deductions on that portion, so upfront planning can avoid being impacted. ## Actionable insights and next-steps - **Model your tax liability** under scenarios: fixed ratio vs group ratio vs a mix. - Revisit intercompany loan agreements and purposes. - Consult your tax advisor about ongoing financial planning to time investments, payments, and restructuring to align with rules. - Engage in ATO’s guidance updates in case of changes or transitional compliance relief for first affected years.