The Australian Taxation Office (ATO)  has summarised thin capitalisation and how debt deduction creation rules (DDCR) affect private groups on 3 September 2024. New information has been released to help taxpayers understand how the DDCR interacts with your private group clients.

The DDCR came into effect on 1 July 2024.

The DDCR applies to disallow debt deductions arising from related party debt created in connection with certain acquisitions, payments or distributions from associate entities.

Private group clients should be aware that:

  • The DDCR applies to entities that, together with their associate entities, have more than AUD 2 million of debt deductions for an income year;
  • The DDCR can impact private groups that have a controlling interest in an offshore entity (no matter the size or turnover of that offshore entity);
  • The 90% Australian assets threshold exemption test (also known as the assets threshold test) doesn’t apply to exempt an entity from the DDCR;
  • The DDCR can apply to wholly domestic arrangements;
  • Complying Division 7A loans aren’t excluded from the operation of the DDCR.

The DDCR affects all lodgments from 1 July 2024 and relevant arrangements that carry over from prior income years.