The ATO issued Draft Taxation Ruling TR 2024/D3 which explains its various interpretations on aspects of the “Third Party Debt Test” under the new thin capitalisation rules. This test is an alternative elective test to the default “Fixed Ratio Test”. Broadly, for debt deductions to satisfy the requirements under the Third Party Debt Test the borrowed funds need to be use for commercial activities in connection with Australia with the lender only having recourse for the payment of the debt to Australian assets of Australian entities.
PCG 2024/D3 was updated in December 2024 with two additional schedules that (1) provide transitional compliance approaches for aspects of the Third Party Debt Test and (2) outline the ATO’s likelihood of seeking to apply anti-avoidance rules to restructures undertaken in response to the new thin capitalisation rules.
We made a comprehensive submission in response to the Draft Ruling and Draft PCG where we outline our views on key concepts such as “Australian asset”, “commercial activities” and “recourse”, as well as various other issues that arise out of the ATO’s guidance.
You can read our submission below
