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The DDCR rules, effective for income years starting on or after 1 July 2024, are designed to curb excessive debt deductions (eg interest and borrowing costs) arising from related party arrangements and restructures for taxpayers with associate inclusive Australian debt deductions in excess of $2m for an income year.
With no transitional relief and broad application, the DDCR demands immediate attention from taxpayers, particularly those with historical intra-group funding arrangements. The DDCR may apply to deny debt deductions incurred on or after DDCR commencement date in relation to a debt that met the DDRC conditions which was created pre commencement date.
As we approach the first year of application – 30 June 2025 for most taxpayers – it is critical that businesses take proactive steps to ensure compliance and mitigate risk by reviewing the history of current debt arrangements.
The DDCR targets two primary types of arrangements:
The new rules operate to deny debt deductions where they are connected to certain acquisitions or distributions involving associates. Importantly, unlike deductions disallowed under the Thin Capitalisation Fixed Ratio Test – which may be carried forward – any deductions denied under the DDCR are lost permanently and cannot be recouped in future years.
Notably, the rules apply with no requirement to demonstrate a tax avoidance purpose. If the factual conditions of the rules are met, the denial of deductions applies even if the transaction was commercially driven and not motivated by tax outcomes.
Taxpayers should take proactive steps to review and document the history of their current debts as the Australian Taxation Office (ATO) expects that taxpayers should not be claiming interest deductions unless taxpayers can demonstrate that the DDCR do not apply to their debts.
The DDCR include targeted anti-avoidance provisions that empower the Commissioner to disregard arrangements designed primarily to sidestep the operation of the rules. If the Commissioner determines that a scheme was implemented with the main objective of avoiding the DDCR’s application to a particular debt deduction, the rules can still be enforced as if the scheme had not occurred. Additionally, arrangements that attempt to manipulate the related party debt condition – such as shifting third-party debt into Australia through artificial structures – may also attract scrutiny under the general anti-avoidance provisions in Part IVA of the ITAA 1936.
To guide taxpayers, the ATO has released Draft Practical Compliance Guideline PCG 2024/D3, which outlines its compliance strategy for restructures undertaken in response to the DDCR. The guideline provides a risk assessment framework that helps taxpayers understand when the ATO is more likely to allocate resources to investigate potential application of either the specific or general anti-avoidance rules.
The draft guidance also includes illustrative examples that reflect the ATO’s likely interpretation of the rules. A key expectation is that taxpayers must be able to trace the flow of funds to determine how the DDCR applies, and maintain contemporaneous documentation to support their position. Notably, the ATO does not intend to limit its expectations to transactions occurring after the DDCR was first announced in June 2023 – meaning historical arrangements may still require detailed substantiation.
Identify any related party financing arrangements that may fall within the scope of the DDCR. Pay particular attention to historical acquisitions or distributions funded by debt even if those debts arose before 1 July 2024.
If restructures were undertaken in anticipation of the DDCR, evaluate whether they align with the ATO’s compliance expectations under PCG 2024/D3. Ensure the restructure has commercial rationale beyond tax benefits.
Maintain detailed records of the purpose, economic substance, and expected benefits of any restructure or financing arrangement. While the DDCR rules apply irrespective of a tax avoidance purpose, the specific and general anti-avoidance rules do require a tax avoidance purpose to operate. So such records are critical to demonstrate that any restructure in respect of a debt that caused the DDCR rules not to apply was commercially driven and thus do not contravene the anti-avoidance measures.
The International Dealings Schedule (IDS) 2025 includes new questions specifically targeting DDCR-related restructures. Entities must disclose:
For large taxpayers, the Reportable Tax Position (RTP) Schedule 2025 requires disclosure of risk assessments related to restructures under the DDCR. Ensure consistency with PCG 2024/D3.
The DDCR represents a significant tightening of Australia’s anti-avoidance framework for debt deductions. With the ATO signalling a strong compliance focus, taxpayers must act now to review, assess, and disclose relevant arrangements.
At Grant Thornton, we are working closely with clients to navigate these changes, assess risk, and ensure compliance. If you have any concerns about how the DDCR may impact your business and tax compliance, now is the time to act.
