Private groups the tax rules you could be missing

When preparing your tax return, make sure you check if the thin capitalisation and debt deduction creation rules (DDCR) apply.

These rules now affect more private groups and their associates, following significant changes to the thin capitalisation rules from July 2023 and the introduction of DDCR from July 2024.

The thin capitalisation rules may limit your debt deductions, based on your adjusted tax earnings or the amount of eligible third-party debt you have. The DDCR may disallow debt deductions relating to certain related-party arrangements, such as wholly domestic funding connected with acquisitions, transactions and distributions.

Are you relying on an exemption? Check your eligibility again. Some private groups are misapplying exemptions and incorrectly believe the rules don't apply to them. A common pitfall is not taking associates into account. Don't make this mistake.

Non-compliance attracts our attention and can lead to denial of debt deductions, amended tax returns with tax shortfalls, and penalties and interest. Avoid costly mistakes by:

• carefully checking if the thin capitalisation rules and DDCR affect you and your associates each year
• reviewing previously-lodged tax returns and schedules to ensure you've complied – do this now as waiting for us to identify an error may result in a bigger tax bill.

Five tips to get it right

Follow these tips when preparing your tax return:

1. Review all your funding arrangements and ask your adviser how the thin capitalisation rules affect you as well as what extra information you need to provide.
2. If the thin capitalisation rules and DDCR apply to you, complete the international dealings schedule with your tax return.
3. When determining if you're under the $2 million threshold exemption, include the debt deductions of all associate entities.
4. If you've used a related-party arrangement, such as a Division 7A loan, to fund an asset acquisition from, or a payment or distribution to, an associate pair, read Debt deduction creation rules and Division 7A. Remember, the DDCR can deny debt deductions arising from historical arrangements and transactions too.
5. Keep accurate and complete records that explain and support your tax positions.

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