Thin Capitalisation Reforms Under Review: Key Dates and What Businesses Should Do
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Primary tax-year context: Current Australian tax settings
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On 30 January 2026, the Government announced an independent review of key parts of Australia’s thin capitalisation reforms by the Board of Taxation. The review focuses on how the post-1 July 2024 rules are operating in practice and whether technical settings are creating unintended outcomes.
What thin capitalisation rules are and why they exist
Thin capitalisation rules limit the amount of debt-related deductions that certain entities can claim in Australia when they are funded by excessive related-party debt. The concern is straightforward: a multinational group can load its Australian subsidiary with intercompany loans from a low-tax jurisdiction, charge high interest on those loans, and effectively shift taxable profit out of Australia via deductible interest payments.
Without limits, this structure allows a profitable Australian operation to report minimal taxable income — the profit is consumed by interest expense on debt that would never exist between independent parties.
Australia’s thin capitalisation rules apply to:
- Inbound investors: foreign entities and their Australian subsidiaries
- Outbound investors: Australian entities with overseas investments
- Financial entities: banks and other financial intermediaries (under separate rules)
They do not apply to most small and medium Australian businesses that only operate domestically.
The pre-2024 framework and why it changed
Before the July 2024 reforms, Australian thin capitalisation used a safe harbour debt amount equal to 60% of Australian assets (a debt-to-asset ratio). Entities within the 60% limit could deduct all interest. Those exceeding it faced deduction limits, but could use an arm’s length debt test or worldwide gearing test as alternatives.
This framework had been in place for many years and was criticised as overly generous compared to international standards. The OECD’s Base Erosion and Profit Shifting (BEPS) project — particularly Action 4 — recommended an earnings-based approach: limiting net interest deductions to a fixed percentage of earnings (EBITDA), rather than tying limits to asset values.
Australia’s 2024 reforms replaced the old safe harbour with a new set of tests aligned to OECD recommendations, including:
- Fixed ratio test: net debt deductions capped at 30% of tax-EBITDA
- Group ratio test: an alternative test allowing higher deductions if the worldwide group has a higher leverage ratio
- Third party debt test: a separate test for genuine arm’s length third-party debt
- Debt deduction creation rules: new anti-avoidance provisions targeting transactions that artificially inflate deductible debt
What the 2026 review covers
The Board of Taxation review does not reopen the fundamental architecture of the 2024 reforms. It focuses on two high-priority technical areas identified by Treasury and industry:
1. Debt deduction creation rules
The debt deduction creation rules were designed to prevent groups from manufacturing deductible interest. However, early experience suggests the rules may be capturing transactions that were not the intended target — including some ordinary commercial financing arrangements and asset restructures that have a legitimate business rationale.
The review examines whether the rules are appropriately scoped or whether technical amendments are needed to reduce overreach without undermining the integrity objective.
2. Interaction between thin capitalisation and transfer pricing related-party debt rules
Australia’s transfer pricing rules (in Division 815 of the ITAA 1997) separately govern the pricing of related-party transactions, including intercompany debt. Since the 2024 reforms, entities have found that both the new thin capitalisation limits and the transfer pricing rules can apply to the same intercompany debt — creating a potential double constraint.
The review examines whether this overlap produces outcomes that are disproportionate to the policy intent, and whether legislative clarification or administrative guidance is needed.
Who is affected
The thin capitalisation rules — and therefore this review — primarily concern:
- Large multinational groups with Australian subsidiaries funded by intercompany debt
- Australian groups with significant overseas investments funded through related-party financing
- Private equity and infrastructure investors with highly leveraged structures
- Tax advisers and in-house tax teams managing compliance for these entities
Individual taxpayers and most SMEs are not affected.
Context: Pillar Two and broader international tax reform
The thin capitalisation review sits alongside Australia’s implementation of the OECD’s Pillar Two global minimum tax (15% minimum effective tax rate for large multinationals). Both initiatives are part of a broader effort to reduce profit shifting and protect the Australian corporate tax base.
For groups already managing Pillar Two compliance, the thin capitalisation review is a related but separate workstream. The interaction between Pillar Two top-up taxes and thin capitalisation deduction limits is an area of ongoing technical analysis in several jurisdictions.
Consultation timeline
The Board’s consultation paper opened in early February 2026, with written submissions requested by 2 March 2026. The submission window has closed, but the review process continues. Affected businesses that did not make a formal submission may still have opportunities to engage through:
- Industry association submissions
- Roundtable consultation if the Board convenes further industry sessions
- Treasury consultation on any resulting exposure draft legislation
What to watch next
The review process typically moves from Board consultation to recommendations to a Government response, then exposure draft legislation. For affected groups, the key milestones to monitor are:
- Publication of the Board’s final report and recommendations (timing not confirmed; typically several months after consultation closes)
- Treasury and Government response — may accept, modify, or reject individual recommendations
- Amending legislation or ATO administrative guidance — which will determine the practical impact on compliance positions
For 2025-26 returns, the current rules as enacted apply. Groups should not assume amendments will be retrospective — although targeted retrospective fixes for clearly unintended outcomes are possible.
Practical steps for impacted taxpayers
If your group has material related-party funding and is subject to the 2024 thin capitalisation rules:
- Document transactions where debt deduction creation outcomes appear disproportionate. Concrete examples with numbers are more useful than general policy submissions.
- Identify cases where transfer pricing and thin capitalisation overlap to create a double constraint, and quantify the impact.
- Review your compliance position for the first full-year cycle under the new rules (typically the year ended 30 June 2025) to identify issues before the ATO’s audit focus sharpens.
- Monitor the Board’s recommendations and engage your adviser when exposure draft legislation emerges.
- Assess whether existing intercompany financing structures require amendment in light of the new rules — independent of the review outcome.
Key takeaways
- Thin capitalisation rules limit interest deductions for entities with excessive related-party debt, preventing multinational profit shifting via intercompany loans.
- The 2024 reforms replaced the old 60% debt-to-assets safe harbour with an earnings-based (EBITDA) cap aligned to OECD BEPS standards.
- The Board of Taxation is reviewing two specific technical issues: the debt deduction creation rules and the overlap between thin capitalisation and transfer pricing.
- The review does not affect most Australian businesses — it is primarily relevant to large multinationals and outbound investors.
- Affected groups should monitor the Board’s final report and any amending legislation, and review their 2024-25 compliance positions now.