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 for entities with debt > 60% of value (safe harbour) or arm's-length. Significant reform from 1 July 2023 introduced earnings-based test (similar to BEPS Action 4) for most entities + Group ratio tests.
Enforced by
Source legislation
Topics
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.