Does Thin capitalisation rules (Div 820 ITAA 1997) apply to sole traders?

No. Across every industry and every size band, the engine's answer for a sole trader is: no.

Does Thin capitalisation rules (Div 820 ITAA 1997) apply to businesses with 1–5 employees?

No (1–5 employees, turnover $100K–$1M).

When is "Thin capitalisation rules (Div 820 ITAA 1997)" due?

Annual; documentation contemporaneous.

Who must comply with Thin capitalisation rules (Div 820 ITAA 1997)?

The applicability test for Thin capitalisation rules (Div 820 ITAA 1997) (ATO), computed across 35 industries, 9 business structures and 6 size bands.

Short answer: Only if

Applies only if your group has more than $2M of debt deductions. Whether it applies turns on a fact that no industry, structure or size settles on its own.

What the obligation is

Limits debt deductions for thinly-capitalised entities, reformed from 1 July 2023.

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.

The applicability test

Applies only if your group has more than $2M of debt deductions. Whether it applies turns on a fact that no industry, structure or size settles on its own.

How the regulator frames it: Australian + foreign-owned multinational entities (with $5M+ debt deductions typically).

What triggers it: Debt deductions above de minimis.

Jurisdiction: Commonwealth law, so the test is the same in every state and territory.

Which industries are in or out

Outcome across the 35 industries Rules Mate maps (35 of 35: no).

The answer is the same in every industry: no. Industry does not change who must comply.

Business structure and size

Structure does not change the answer across all industries: for every structure the answer is "no".

Size does not change the answer across all industries: at every size band the answer is "no".

Worked examples

Each line is one run of the Rules Mate applicability engine for a single business profile, with the reason the engine gives:

Pty Ltd company in real estate agents with 6–19 employees, turnover $1M–$3M: does not apply. Requires a trigger outside this questionnaire.

Answers that bring it into scope

Starting from a small or large professional services company that does not otherwise meet the test, each of these single facts changes the engine's answer:

The business is foreign-owned: it becomes worth checking, because it applies only if your group has more than $2M of debt deductions.

When you need to check further

The engine shows this obligation as "check whether this applies" when a business has foreign ownership. It then applies only if your group has more than $2M of debt deductions. That fact is not something Rules Mate can infer from industry, structure or size.

What you must do, and when

When due: Annual; documentation contemporaneous.
Frequency: Annual
Evidence to keep: Documentation supporting the chosen test; debt ratios; group structure.
Status: Current
Priority: High

Penalty for not complying

Maximum penalty: Tax shortfall + interest + penalty (typically 25-75%)

Audit or assurance level

Rules Mate has not yet classified the audit or assurance level for this obligation. Any audit, review or certification requirement is set by the regulator source listed below.

Where it sits in the corpus

Rules Mate tracks 37 published obligations tagged "tax", 6 of them rated critical. For a professional services Pty Ltd company with 6–19 employees operating in every state, 7 of those apply outright. This obligation is rated high priority, and is a annual obligation.

Regulator, legislation and tools

Regulated by Australian Taxation Office.

ATO: Federal tax administrator covering income tax, GST, PAYG, FBT, superannuation guarantee, STP, and self-managed super funds. Also administers the Director ID regime via ABRS.

Australian Taxation Office

ITAA 1997: Modern federal income tax statute (replaces ITAA 1936 progressively).

Income Tax Assessment Act 1997

Free tools that help with this obligation:

Run the compliance journeyAnswer a short questionnaire about your business and get the obligations that apply to you, with the reason each one applies.

Questions

Who must comply with Thin capitalisation rules (Div 820 ITAA 1997)?: Applies only if your group has more than $2M of debt deductions. Whether it applies turns on a fact that no industry, structure or size settles on its own.
Does Thin capitalisation rules (Div 820 ITAA 1997) apply to sole traders?: No. Across every industry and every size band, the engine's answer for a sole trader is: no.
Does Thin capitalisation rules (Div 820 ITAA 1997) apply to businesses with 1–5 employees?: No (1–5 employees, turnover $100K–$1M).
When is "Thin capitalisation rules (Div 820 ITAA 1997)" due?: Annual; documentation contemporaneous.

Sources

Computed by the Rules Mate applicability engine from the published obligation corpus; facts last checked 3 October 2026. Rules Mate is not a law firm and this is general information, not legal advice. Confirm your position with the regulator source or a qualified adviser before acting.