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  • Thin capitalisation arm’s length debt test

    Following public consultation, we have finalised our interpretative and practical guidance on key technical aspects of the arm’s length debt test for thin capitalisation purposes.

    This arm's length debt test is one of the tests available to establish an entity’s maximum allowable debt amount for thin capitalisation purposes. It focuses on identifying a notional amount of debt the Australian business would reasonably be expected to have, and what independent commercial lenders would reasonably be expected to lend (at arm’s length).

    Our final advice follows and is to be read together:

    • TR 2020/4 Income tax: thin capitalisation - the arm's length debt test provides interpretative guidance on key technical issues.
    • PCG 2020/7 ATO compliance approach to the arm's length debt test sets out what we consider is a reasonable approach to undertaking a comprehensive and robust arm’s length debt test, including a risk-assessment framework to self-assess your level of risk.

    What you should do

    If you have used or are considering using the arm’s length debt test, we recommend you:

    • seek independent professional advice
    • review your arrangement
    • discuss your situation with us by emailing PGIAdvice@ato.gov.au.

    See more:

    Last modified: 12 Aug 2020QC 63418