Final ATO guidance on restructures and the thin capitalisation and debt deduction creation rules – PCG 2025/2

On 20 August 2025, the Australian Taxation Office (ATO) released PCG 2025/2, providing its final compliance approach to restructures undertaken in response to restructures, the new thin capitalisation rules and debt deduction creation rules (DDCR) introduced by the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024. This guideline offers a risk assessment framework and practical examples to help taxpayers self-assess the compliance risk of their restructuring arrangements.

Background

The Act introduced:

• New thin capitalisation rules under Division 820 of the ITAA 1997.

• Debt deduction creation rules (DDCR) under Subdivision 820-EAA.

These reforms aim to limit excessive interest deductions and ensure fair tax contributions from multinationals.

Structure of PCG 2025/2

The guideline is structured into:

• Main body: Compliance principles and risk framework.

• Schedules:

  • Schedule 1: DDCR examples.

  • Schedule 2: Restructures in response to DDCR.

  • Schedule 3: Third-party debt test compliance approach (pending).

  • Schedule 4: Restructures in response to thin capitalisation changes. 

Schedule summaries

Schedule 1 – Debt Deduction Creation Rules

This schedule outlines the ATO’s compliance approach to arrangements that may trigger the DDCR provisions, which disallow interest deductions in certain related-party financing scenarios.

1. Type of arrangements covered:

• Type 1 – Acquisition Case: Disallows deductions where a CGT asset or obligation is acquired from an associate pair and funded by related party debt.

• Type 2 – Payment/Distribution Case: Disallows deductions where debt funds payments (e.g. dividends, royalties) to associate pairs.

1. Risk assessment examples:

• 5 Examples Where DDCR Does Not Need to Be Considered: These are low-risk, commercially driven arrangements that fall outside the scope of DDCR.

• 9 Examples Where DDCR May Need to Be Considered: These involve related party debt funding and may trigger DDCR depending on the structure and purpose. 

  Example: An entity borrows from a related party to acquire intellectual property from an associate. The transaction may fall under Type 1 and require DDCR analysis.

1. Tracing and Apportionment requirements:

• The DDCR requires taxpayers to trace the use of debt funds, including direct and indirect transactions, and apportion interest deductions where necessary.

Schedule 2 – Restructures in Response to DDCR

This schedule outlines the ATO’s compliance approach to restructures undertaken in response to the DDCR, categorising them into four risk zones:

1. White Zone: Further risk assessment not required. 

• White Zone restructures do not require further ATO review and fall into following categories:

  • A settlement agreement has been entered into since 8 April 2024 confirming the arrangement’s treatment.

  • A court decision has clarified the Australian tax outcome.

  • The restructure was reviewed by the ATO and rated as 'low risk' or received 'high assurance' under a Justified Trust review.

1. Yellow Zone: Compliance risk not assessed.

   • Restructures fall into the Yellow Zone if they do not meet the criteria for either the Green or Red Zones. 

2. Green Zone: Low risk.

• These are acceptable restructures that are commercially justifiable and supported by documentation. 

• To be considered low risk, a restructure must:

• Accurately calculate disallowed DDCR deduction.

• Not trigger Part IVA before or after the restructure.

• Be straightforward, commercially driven, and on arm’s length terms.

• Avoid any contrived or artificial elements.

• The ATO provides eight examples in this category. 

  Example: an entity restructures its financing to replace related party debt with genuine third-party debt, and uses the funds to acquire assets from an unrelated party. The restructure is supported by commercial documentation and aligns with business needs.

1. Red Zone: High risk.

• These are high-risk arrangements that appear artificial or contrived and are likely to attract ATO scrutiny. 

• The ATO provides three examples in this category.

  Example: an entity borrows from a related party to fund a dividend payment to its foreign parent, and the funds are then returned to the lender through a circular arrangement. The restructure appears designed to generate interest deductions without genuine commercial purpose.

Schedule 3 – Third Party Debt Test (TPDT)

This schedule is currently pending finalisation. Once released, it will provide targeted compliance guidance for entities applying the TPDT under Subdivision 820-EAB, including how to demonstrate that debt arrangements meet the criteria for genuine third-party debt.

Schedule 4 – Restructures in Response to Thin Capitalisation Changes

1. This schedule outlines the ATO’s view on compliance risks of restructures under the updated thin capitalisation rules, with examples to help taxpayers assess their risk level.

2. Key Focus Areas:

• Restructures aimed at aligning with the Fixed Ratio Test (FRT), Group Ratio Test (GRT), or Third Party Debt Test (TPDT).

• Emphasis on whether restructures are commercially driven or primarily designed to maximise debt deductions

1. Examples Provided:

• Low-Risk Arrangements (2 examples): These involve genuine commercial restructures supported by documentation and aligned with business needs.

• High-Risk Arrangements (2 examples): These involve artificial or contrived restructures that may trigger ATO scrutiny:

  • Introducing new debt primarily to maximise interest deductions under the Fixed Ratio Test, without a genuine business need.

  • Amending interest rates on conduit financing arrangements to inflate deductible amounts, lacking commercial justification.

Implications for taxpayers

• Taxpayers must self-assess the risk level of their restructures using the PCG framework.

• High-risk arrangements may trigger Part IVA or specific anti-avoidance rules under section 820-423D.

• Entities applying Third Party Debt Test must ensure debt meets third-party conditions to avoid disallowance.

Recommendations

1. Review existing and planned restructures against PCG 2025/2 risk zones.

2. Document commercial rationale and ensure arm’s length terms.

3. Avoid circular or artificial arrangements involving related parties.

4. Seek professional advice for complex restructures or TPDT applications.

5. Monitor updates, especially the finalisation of Schedule 3 and TR 2024/D3.