New ATO PCG on thin capitalisation ‘acknowledged’ industry concerns, BDO says

On 20 August 2025, the ATO released PCG 2025/2, a guide outlining its compliance approach towards restructures, thin capitalisation and debt deduction creation rules (DDCR).

In a September 10 insight, accounting firm BDO noted that the final PCG didn’t diverge greatly from its draft version, but provided additional clarity surrounding examples that would attract certain risk levels.

“The finalised PCG introduces additional detail to the examples as well as practical guidance on how the various tracing provisions in the new rules will be applied. Significantly, it appears industry concerns expressed on the draft PCG about the ATO’s risk ratings have been acknowledged,” BDO said.

“This will provide some taxpayers with comfort, for example, in the context of the application of the DDCR to what might be described as routine commercial transactions where existing related party debt is replaced with third party debt.”

Notable differences between the draft and final version of the draft PCG largely concerned the ATO’s examples of low and high risk arrangements, BDO said. In the final PCG, the ATO provided additional clarity for some examples and added new examples to cover fresh scenarios.

One new example, example three, related to funding capital expenditure with related party debt, where the related party debt was repaid out of cash provided from business operations. In such a situation, the ATO said it was unlikely to apply compliance resources.

Another new example, example nine, was about refinancing third-party debt. It outlined that ATO compliance activity would probably occur to determine the correct application of DDCR in the context of refinancing third-party debt. It added that if an entity refinanced arm’s length debt with related party debt, the refinancing principle would apply.

“These are some helpful expanded upon examples in the finalised PCG. More generally, other examples confirm that repaying related party debt in cash, via dividends and via equity injections will also not attract the DDCRs,” BDO said.

At the time of the final PCG’s release, CA ANZ welcomed the final PCG and called it an improvement from the draft version.

“CA ANZ is pleased that many of our recommendations regarding restructuring and the debt deduction creation rules (DDCR) have been accepted and reflected in the final document, notably, the expansion of the white zone to include restructures that have been subject to ATO review or audit and received a low-risk or high-assurance rating," Susan Franks, tax, superannuation and financial services leader for CA ANZ, said.

“We also support the introduction of a de minimis threshold for restructures, where total debt deductions of the whole group are $2 million or less. These changes demonstrate a practical and proportionate compliance approach."

A controversial aspect of the PCG, rules regarding the third-party debt test, was not included in the guideline. It awaits a final taxation ruling, TR 2024/D3 ‘Income tax: aspects of the third-party debt test’, due in September.

Franks noted: “We remain concerned around the treatment of taxpayers who restructure to access the third-party debt test under the thin capitalisation rules. Greater clarity is needed to ensure that legitimate choices under the law are not inadvertently flagged as high-risk."