ATO Draft Guidance on Thin Capitalisation: Key Changes for Businesses

The Australian Taxation Office (ATO) has released draft guidance on key aspects of the Thin Capitalisation Third Party Debt Test (TPDT) and the implications of restructures undertaken in response to the new rules.

Key Takeaways from the Draft Guidance

1. Third Party Debt Test (TPDT) – TR 2024/D3

The Draft Taxation Ruling TR 2024/D3 provides interpretative guidance on the TPDT conditions, which businesses must meet to qualify for thin capitalisation relief.

The Ruling clarifies:

Test Timing: When and how the TPDT applies.
Debt Issuance: How the test applies to partial-year debts.
Key Definitions: Interpretation of critical terms.
Examples: Illustrations of how the ATO assesses compliance.

The draft ruling does not cover conduit financing rules.

2. Compliance & Restructuring Guidance – PCG 2024/D3

Alongside TR 2024/D3, the ATO has updated its Practical Compliance Guideline PCG 2024/D3, now including:

Schedule 3 – Compliance Approach to TPDT

Provides insights into how the ATO will enforce TPDT compliance.
Focuses on targeted risk areas.

Schedule 4 – Compliance Approach to Restructures

Details acceptable restructuring approaches in response to the new thin capitalisation rules.
Sets time limits for restructuring to qualify for ATO concessions.

While TR 2024/D3 adopts a strict interpretation, Schedule 3 of PCG 2024/D3 provides some flexibility for businesses needing time to adjust to the new rules.