Private groups must reassess annually whether the revised thin capitalisation and new DDCR rules apply to them and their associates.
The Australian Taxation Office has released guidance on 14 November 2025, offering practical tips for private groups seeking to claim debt deductions.
When preparing a tax return, private groups must make sure they check if the thin capitalisation and debt deduction creation rules (DDCR) apply.
These rules now affect more private groups and their associates, following significant changes to the thin capitalisation rules from July 2023 and the introduction of DDCR from July 2024.
The thin capitalisation rules may limit their debt deductions, based on their adjusted tax earnings or the amount of eligible third-party debt they have. The DDCR may disallow debt deductions relating to certain related-party arrangements, such as wholly domestic funding connected with acquisitions, transactions and distributions.
Are they relying on an exemption? They should check their eligibility again. Some private groups are misapplying exemptions and incorrectly believe the rules don’t apply to them. A common pitfall is not taking associates into account. They should not make this mistake.
Non-compliance attracts the attention of the ATO and can lead to the denial of debt deductions, amended tax returns with tax shortfalls, and penalties and interest. Private groups can avoid costly mistakes by:
- carefully checking if the thin capitalisation rules and DDCR affect them and their associates each year
- reviewing previously-lodged tax returns and schedules to ensure they’ve complied – this should be done now as waiting for the ATO to identify an error may result in a bigger tax bill.
5 tips to get it right
Follow these tips when preparing a tax return:
- Review all funding arrangements and ask an adviser how the thin capitalisation rules affect the entity as well as what extra information they need to provide.
- If the thin capitalisation rules and DDCR apply to the entity, the international dealings schedule must be completed with the tax return.
- When determining if the entity is under the AUD 2 million threshold exemption, include the debt deductions of all associate entities.
- If the entity has used a related-party arrangement, such as a Division 7A loan, to fund an asset acquisition from, or a payment or distribution to, an associate pair, they should read Debt deduction creation rules and Division 7A. Remember, the DDCR can deny debt deductions arising from historical arrangements and transactions too.
- Keep accurate and complete records that explain and support the entity’s tax positions.
