Thin capitalisation rules (Div 820 ITAA 1997)
Limits debt deductions for thinly-capitalised entities, reformed from 1 July 2023.
Who must comply
Australian + foreign-owned multinational entities (with $5M+ debt deductions typically).
What triggers it
Debt deductions above de minimis.
When due
Annual; documentation contemporaneous.
Evidence required
Documentation supporting the chosen test; debt ratios; group structure.
Max penalty
Tax shortfall + interest + penalty (typically 25-75%)
Summary
Division 820 limits debt deductions. From 1 July 2023 the safe-harbour debt test (debt up to 60% of value) was replaced for general class investors by a fixed-ratio test capping net debt deductions at 30% of tax EBITDA (BEPS Action 4 style), with group-ratio and third-party-debt alternatives. The 60% safe harbour now survives only for certain financial entities.
Enforced by
Source legislation
Topics
Related obligations
- CWLTHAustralian Business Number (ABN) applicationEntities carrying on an enterprise in Australia need an ABN — without one, payers must withhold 47% PAYG from your payments. How to apply and who's eligible.
- CWLTHLodge Business Activity Statements at assigned frequencyGST-registered entities must lodge a BAS monthly, quarterly or annually as the ATO assigns.
- CWLTHMake trustee resolutions for trust distributions by 30 JuneDiscretionary trust trustees must validly resolve to distribute trust income before the end of the FY.
- CWLTHWithhold PAYG from employee and contractor paymentsEmployers must withhold tax from wages, certain contractor payments + report via STP / BAS.
- CWLTHPay company PAYG/GST/SG or face Director Penalty Notice (DPN)Directors personally liable for unpaid company PAYG, GST + SG via DPN regime.
- CWLTHTASA Code Determinations from 1 August 2024Tax practitioner code reformed via Code Determinations — false + misleading statements + supervision + breach reporting.
Frequently asked questions
- Who must comply with Thin capitalisation rules (Div 820 ITAA 1997)?
- Australian + foreign-owned multinational entities (with $5M+ debt deductions typically).
- What triggers Thin capitalisation rules (Div 820 ITAA 1997)?
- Debt deductions above de minimis.
- When is Thin capitalisation rules (Div 820 ITAA 1997) due?
- Annual; documentation contemporaneous.
- What is the maximum penalty for Thin capitalisation rules (Div 820 ITAA 1997)?
- Tax shortfall + interest + penalty (typically 25-75%)
- What evidence is required for Thin capitalisation rules (Div 820 ITAA 1997)?
- Documentation supporting the chosen test; debt ratios; group structure.
Source: https://ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/thin-capitalisation. Rules Mate is not a law firm. Always verify against the live regulator source before acting.