The Australian Taxation Office (ATO) has finalised Practical Compliance Guideline PCG 2025/2, which sets out how restructures will be assessed under Australia’s new thin capitalisation regime and the debt deduction creation rules (DDCR).
For businesses with related-party financing or refinancing arrangements, this guidance is crucial. It introduces a four-zone “traffic light” risk framework, practical examples, and clear signals about which restructures are likely to attract ATO scrutiny.
At Boa & Co. Chartered Accountants, we’ve summarised the key developments you need to know:
1. The Four Risk Zones Explained
The ATO will categorise restructures into four zones:
- White zone – No further review needed if the restructure has already been reviewed, settled, or falls under the $2m de minimis.
- Green zone (low risk) – Examples include repaying related-party debt with retained earnings, refinancing with genuine third-party debt, or replacing Division 7A loans with external borrowings.
- Yellow zone – Middle ground, where risk is not pre-assessed. Expect potential ATO engagement.
- Red zone (high risk) – Includes circular or artificial refinancing, “debt dumping” into Australia, or restructures aimed at inflating debt deductions.
👉 Action point: Businesses should self-assess their restructures against this framework and be prepared to substantiate their position with records and tracing evidence.
2. Debt Deduction Creation Rules (DDCR) – Refinancing Risks
The ATO has reinforced that related-party debt deductions may be disallowed if linked to earlier transactions (like dividends or asset acquisitions from associates) that fall within the DDCR scope.
Key changes include:
- Green zone: Genuine refinancing with third-party debt, no artificial leverage, and no circular cash flows.
- Red zone: Refinancing that effectively reallocates offshore third-party debt to Australia or disguises in-scope costs.
👉 Reminder: Simply using related-party funds to repay third-party debt will not automatically protect deductions. Taxpayers must trace the original use of borrowed funds.
3. Thin Capitalisation Restructures – New Guidance
The ATO also provided new examples of restructures responding to the fixed ratio test (FRT), group ratio test (GRT), and third-party debt test (TPDT):
- Low risk (green zone): Consolidating tax groups to offset EBITDA surpluses/deficits, aligning loan terms to external borrowings.
- High risk (red zone): Artificial intra-group leverage or repricing loans to maximise deductions without commercial justification.
👉 Takeaway: The ATO is watching closely for restructures that look like debt shifting or artificial leverage strategies.
4. Record-Keeping and Evidence
The ATO has stressed the need for robust contemporaneous documentation, including:
- Tracing the use of funds.
- Evidence for apportionment of debt deductions.
- Commercial justifications for restructures.
How Boa & Co. Can Support You
At Boa & Co., we help Sydney businesses navigate complex ATO compliance frameworks with clarity and confidence. Our services include:
- Reviewing financing arrangements and identifying exposure under the DDCR.
- Assisting with refinancing strategies to ensure they fall within “green zone” examples.
- Supporting with record-keeping, tracing, and apportionment to withstand ATO scrutiny.
- Advising on restructures under the new thin capitalisation tests (FRT, GRT, TPDT).
With deep expertise in Australian corporate tax and international financing rules, our team ensures your business can restructure effectively without triggering unnecessary ATO risk.
The Bottom Line
The ATO’s final guidance confirms that restructures will be under closer scrutiny than ever. Low-risk refinancing and genuine commercial restructures are acceptable, but anything that resembles “debt dumping” or artificial leverage will draw attention.
Now is the time for businesses to review their financing structures, ensure compliance, and keep strong evidence on file.
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