From 1 July 2023, Australia replaced its former thin capitalisation safe-harbour rules with an interest limitation regime broadly aligned with OECD concepts.
For foreign-owned groups, the rules can limit deductions for interest and other financing costs. Where aggregated debt deductions exceed AUD 2 million, deductions are generally limited under one of the following tests:
- A fixed ratio based on an EBITDA-like measure.
- A group ratio based on worldwide third-party interest expense and earnings.
- A third-party debt test for certain externally funded Australian operations.
From 1 July 2024, the debt deduction creation rules also restrict deductions for certain financing costs and related arrangements.
There have been no major legislative changes to the core rules, but ATO guidance remains important.
ATO guidance and review
On 1 October 2025, the ATO published final guidance on the third-party debt test, including its application to common financing structures, restructures and the debt deduction creation rules.
PCG 2025/2 outlines the ATO’s compliance approach to restructures and inbound related-party financing, including foreign-parent recapitalisations, reorganisations and refinancing.
An independent statutory review of the interest limitation rules has commenced, but no report has yet been released.
Practical implications
Foreign-owned groups should review their Australian financing before entering into loans, refinancing facilities or implementing restructures. This may include modelling the applicable tests, assessing the debt deduction creation rules and reviewing related-party financing documentation.
How we can assist
We can model the available interest limitation tests, review financing and restructuring arrangements, and assist with the supporting tax and financial reporting documentation.
