ATO Issues New Guidance on Inbound Cross-Border Related Party Debt – Are You at Risk?
As of 29 May 2025, the Australian Taxation Office (ATO) has released important draft guidelines that could affect many multinational companies and investors with cross-border related party loans.
The new PCG 2025/D2 explains how the ATO will now evaluate the amount (not just the price) of related party debt under transfer pricing rules – a change that forms part of Australia’s updated thin capitalisation regime introduced in 2024.
At Boa & Co. Chartered Accountants, we’re helping clients navigate these complex changes and reduce the risk of costly ATO reviews. If your business relies on overseas financing from related parties, this article is a must-read.
What’s Changed?
Before these new rules, most businesses only had to worry about whether their interest rate was “arm’s length.” But now, the ATO also wants to know if the amount of the loan would make sense between two independent companies in similar circumstances.
If you operate with overseas related party debt, you must now prove that:
- The interest rate is fair, and
- The amount borrowed is commercially justifiable.
This change applies to most companies from 1 July 2023, except for:
- Financial institutions using special safe harbour rules
- Banks (ADIs)
ATO’s Risk Zones – Where Do You Stand?
The ATO has introduced a risk assessment system with four categories:
White, Green, Blue, Red – each reflecting a different level of scrutiny.
| Zone | ATO View | What It Means |
| White | Already reviewed or agreed with ATO | ✅ No action needed if no major changes |
| Green | Low-risk | 🟢 ATO may review but won’t dig deep |
| Blue | Medium risk | 🔵 ATO may monitor and possibly review |
| Red | High-risk | 🔴 Likely ATO audit and deeper scrutiny |
Boa & Co. can help assess which zone your current loan structure falls into and prepare documentation to support your position.
Examples of Low and High Risk
Low Risk (Green Zone):
- Your debt level and ability to repay are better than your global group and industry benchmarks
- You apply the third-party debt test and disallow related party debt deductions
High Risk (Red Zone):
- You borrow from related parties while holding large cash reserves
- You rely on a parental guarantee to borrow more than you could independently
- You borrow just to use up thin cap capacity and make a loss on on-lending
If any of these sound familiar, your company may face ATO scrutiny. At Boa & Co., we’ve helped clients restructure or re-document their loans to move out of high-risk territory.
What Does the ATO Expect You to Document?
If you’re borrowing from a related party overseas, the ATO expects to see:
- A transfer pricing analysis proving the loan is arm’s length
- Documentation showing you considered other funding options
- Internal loan proposals, term sheets, facility agreements
- Evidence showing how the funds were used
- Any emails or negotiations about the loan terms
- Details of repayments and interest payments
This is more than just filing tax returns – and it’s exactly where Boa & Co. can add value.
We assist clients in preparing the right documentation, benchmarking against comparables, and ensuring that both the interest rate and loan amount stand up to ATO review.
Why This Matters
The ATO’s new draft guidance shows that it no longer accepts “one-size-fits-all” ratios for related party loans. Instead, it wants to see a full commercial analysis of:
- The purpose of the loan
- Industry practice
- The borrower’s standalone debt capacity
- Financial strategy and funding alternatives
This approach aligns with real-world lending – and smart companies will now need to take a more thoughtful, well-documented approach.
How Boa & Co. Can Help
At Boa & Co., we work with local subsidiaries, private equity funds, family groups, and foreign-owned entities to:
- Assess risk under the ATO’s new zones
- Prepare or review transfer pricing documentation
- Benchmark against comparable companies
- Navigate complex issues like parental guarantees
- Support clients during ATO reviews or audits
Deadline to Act
The draft guidance is open for feedback until 30 June 2025, but it applies to financial years starting 1 July 2023.
If you haven’t already assessed the quantum of your related party loans, now is the time. A well-prepared case today may avoid ATO challenges tomorrow.
Let’s Talk
Whether you’re a multinational, a private equity-backed company, or an Australian business with overseas connections, our team at Boa & Co. can guide you through these changes with clarity and confidence.
1300 952 286
[email protected]
www.boanco.com.au
Boa & Co. Chartere Accountants – Empowering your business through clarity, compliance, and confidence.