Tax Planning
Tax Planning Under the New Thin Capitalisation & Interest Deduction Rules in Australia
Recent changes to thin capitalisation and debt deduction rules offer both challenges and planning opportunities for businesses with international exposure. Here's how to adjust your structure and financing to stay compliant and cost-efficient.
By NomadicTax Research Team • 5-8 min read • March 2, 2026
## What Has Changed
Australia has fully enacted the thin capitalisation reforms and associated **Debt Deduction Creation Rules (DDCR)**, effective for income years starting **1 July 2023** for thin capitalisation rules, and **1 July 2024** for the 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))
Key features:
- Net debt deductions are now limited under a **fixed-ratio test** (30% of EBITDA), a **group ratio test**, or a **third-party debt test**. The arm’s length debt test has been removed. ([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))
- If you borrow from related parties to, for example, acquire assets or make distributions, the DDCR may deny those debt 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))
## Who Is Affected
- Multinational businesses with Australian operations or Australian entities owned by foreign groups
- Privately-owned wealthy groups engaged in cross-border financing
- Entities using internal loans or related-party debt to shift profits offshore
- Those holding significant external debt mixed with internal debt or capital structures reliant on leverage
## Strategic Tax Planning Tips
**1. Choosing the best test method**
- Evaluate whether the fixed-ratio, group ratio or third-party debt test results in the highest deductible debt. Sometimes shifting more debt to external providers helps.
- Example: If your worldwide group has low leverage, group ratio test may give a better outcome; if you borrow mostly from third parties, the third-party debt test may avoid denials.
**2. Minimize related-party internal debt for asset acquisitions or shareholder distributions**
- Use equity financing where feasible.
- Separate out funding for non-commercial transactions to avoid traps under DDCR.
**3. Prepare documentation in advance**
- Maintain robust financial statements, debt schedules, interest rates, and purpose of loans.
- Transfer pricing compliance is even more central now.
**4. Model effective tax burden**
- Using illustrative numbers: Suppose you have AUD 10 million EBITDA and AUD 4 million of related-party debt that exceeds third-party debt. Under fixed-ratio test, only AUD 3 million (30% of EBITDA) debt deduction is allowed. The remaining AUD 1 million may be denied or carried forward (depending on test).
## Actionable Compliance Checklist
- Identify all debts: classify external vs related-party debts.
- For each debt, assess the applicable test and document your eligibility.
- Manage your group’s worldwide leverage if using the group ratio test.
- Track deadlines: new rules apply to years from July 2023 (thin cap) and July 2024 (DDCR).
- Keep watch for ATO guidance and Public Advice & Guidance (PAG) documents on these topics.
## Conclusion
These changes aim to curb base erosion and profit shifting, so while they increase complexity, they also introduce predictability. Businesses that act early—assess debt profiles, restructure where needed, and maintain solid documentation—can optimize deductions while avoiding unexpected disallowances.