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Appendix 3: Thin capitalisation

Last updated 18 July 2023

Use Appendix 3 to help you work out if the thin capitalisation rules apply and what to do if they affect you.

What is this capitalisation?

The thin capitalisation provisions reduce certain expenditure (called debt deductions) incurred in obtaining and servicing debt where the debt used to finance the Australian operations of a trust exceeds the limits set out in Division 820 of the ITAA 1997.

These rules ensure that taxpayers fund their Australian operations with an appropriate amount of equity.

What if the thin capitalisation rules affect you?

If the thin capitalisation rules affect you, the trust must complete the International dealings schedule 2023, unless the trust was a subsidiary member of a consolidated group or MEC group for the entire income year.

Where the trust is a member of a consolidated group or MEC group for the whole income year and the thin capitalisation rules apply, the responsibility for preparing the schedule will rest on the head company of the group.

Where a return is required because the trust had a period in the income year when it was not a member of a consolidated group or MEC group (a non-membership period) the trust should complete an International dealings schedule 2023 where the thin capitalisation rules apply to the trust during the non-membership period.

For more information on reporting multiple non-membership periods during the year, see the Consolidation reference manual, sheet C9-5-110.

The International dealings schedule is available through the PLS or complete and lodge the paper schedule.

For more information, see

  • TR 2020/4 Income tax: thin capitalisation – the arm's length debt test
  • PCG 2020/7 Arm's length debt test – ATO compliance approach.

What if the thin capitalisation rules are breached?

If the thin capitalisation rules are breached, some of the trust’s debt deductions may be denied. The amount denied for business income is shown in item 5 – label B Expense reconciliation adjustments. If the trust incurred debt deductions for other types of income (for example, rental income, dividend income or foreign income) the amount of deductions shown at the relevant entries must exclude the debt deductions denied.

Return to: Appendixes, Schedules or Instructions to complete the trust tax return

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