2023 Thin capitalisation

Proposed Australian thin capitalisation changes – revamp or regression?

Published Date: 17 Aug 2023


This article analyses the significant overhaul of Australia’s thin capitalisation rules as we move to an earnings-based approach. The new rules include the fixed ratio test, group ratio test and third party debt test to better align Australia’s thin capitalisation rules with the OECD’s recommended approach.

The article discusses the application of the new tests, the interaction of the new rules with other legislative provisions and the new debt deduction creation rule. While certain sectors may benefit from increased debt capacity, the new rules include some measures that go beyond OECD best practice, which may impose compliance burdens for some entities or inadvertently disadvantage certain entities. Some sectors, particularly capital-intensive industries or start-ups, may face challenges from the changes, such as applying transfer pricing rules to allowable debt, limiting intra-group debt creation and excluding deductions for prior year tax losses from the tax EBITDA calculation.

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2023 Thin capitalisation

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