The tax rules that could affect your private group clients

When preparing tax returns for your private group clients, make sure you understand the thin capitalisation and debt deduction creation rules (DDCR).

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

Review the rules around exemptions carefully, as we've observed mistakes in applying these. A common pitfall is not taking associates into account.

Now's the best time to double-check and amend any incorrect tax returns previously lodged.

Important tips

Follow these tips when preparing tax returns:

1. When determining if a client is under the $2 million threshold exemption, include the debt deductions of all associate entities.
2. If the thin capitalisation rules and DDCR apply to a client, complete the international dealings schedule with the tax return.
3. If a client has 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.
4. Ensure clients keep accurate and complete records that explain and support their tax positions.