Debt deduction creation rules

About the rules

The debt deduction creation rules (DDCR) disallow debt deductions relating to certain related party financing arrangements. They apply to assessments for income years starting on or after 1 July 2024.

A debt deduction is a cost or expense that an entity incurs which is otherwise deductible if Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) is disregarded. It includes:

• interest
• an amount in the nature of interest
• any other amount that is economically equivalent to interest
• any other amount covered by paragraph 820-40(1)(a) or subsection 820-40(2) of the ITAA 1997.

The DDCR is contained in Subdivision 820-EAA of the ITAA 1997.

Who is affected by the DDCR

For any given income year, the DDCR applies to all or part of a debt deduction for any of the following entities:

• an entity that is a general class investor
  • this includes non-ADI and non-financial entities which are
    • foreign entities that operate in Australia
    • foreign controlled Australian entities, or
    • Australian controlled Australian entities that control a foreign entity or carry on business at or through an overseas permanent establishment, including private businesses and privately owned groups
• an outward investing financial entity (non-ADI)
• an inward investing financial entity (non-ADI).

Entities that are exempt from the thin capitalisation rules under section 820-37 and private and domestic assets and non-debt liabilities under section 820-32 of the ITAA 1997 are not excluded from the DDCR.

Assets threshold test

Section 820-37 of the ITAA 1997 (the assets threshold test) excludes certain outward investing entities from the thin capitalisation rules for an income year. These entities are subject to the DDCR.

Private or domestic assets test

Section 820-32 of the ITAA 1997 excludes the following from the thin capitalisation rules:

• assets used (or held for use) wholly or principally for private or domestic purposes
• non-debt liabilities that are wholly or principally of a private or domestic nature.

These assets and liabilities are not excluded from the DDCR.

Who is not affected by the DDCR

For any given income year, the following entities will not be subject to the DDCR:

ADI

An entity that is an (inward or outward) authorised deposit-taking institution (ADI).

Debt deductions under $2 million

An entity whose debt deductions, together with the debt deductions of its associate entities, are $2 million or less for the income year under section 820-35 of the ITAA 1997.

Australian plantation forestry entity

An Australian plantation forestry entity which solely or predominantly carries on a business of establishing and tending trees for felling in Australia. Refer to section 146 of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Act 2024.

Securitisation vehicle

An entity that is a securitisation vehicle under subsection 820-942(2) of the ITAA 1997 where all the following apply:

• It is established for the purposes of acquiring, funding and holding securitised assets.
• It has acquired the securitised assets from another entity (the originator).
• The acquisition of the securitised assets is wholly funded by the issuing of debt interests by the entity.
• In issuing the debt interest, the entity does not receive any guarantee, security or other form of credit support from any of its associate entities, the originator or any associate entity of the originator.
• It has not issued debt interests for any purpose other than for the purpose of funding the acquisition of the securitised assets.
• There is no debt interest issued to the entity by any of the entity's associate entities, the originator or any associate entity of the originator, and
• Any arrangements the entity has with any of its associate entities, the originator or any associate entity of the originator are those that would reasonably be expected to have been entered into by parties dealing at arm's length with each other.

Special purpose entity

Certain special purpose entities under section 820-39 of the ITAA 1997 where all the following apply:

• The entity is established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments.
• The total value of debt interests in the entity is at least 50% of the total value of the entity's assets, and
• The entity is an insolvency remote special purpose entity according to the criteria of an internationally recognised rating agency that are applicable to the entity's circumstances. That entity does not have to have been rated by a rating agency.

How the DDCR interacts with other rules

The DDCR and Division 7A of the ITAA 1936

Complying loans under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) are not excluded from the DDCR.

Where DDCR conditions are satisfied, the DDCR will apply to disallow debt deductions for interest paid or payable under a complying Division 7A loan. This is where the loan has been used to acquire or fund a relevant related party arrangement.

For more information, see Debt deduction creation rules and Division 7A.

The DDCR and thin capitalisation rules

Under section 820-31 of the ITAA 1997, the DDCR will apply to the following 3 kinds of entities before the thin capitalisation rules apply to the entity:

• general class investors
• outward investing financial entities (non-ADI)
• inward investing financial entities (non-ADI).

Where a debt deduction is disallowed under the DDCR, you disregard that debt deduction when applying the following provisions to the entity for the income year:

• Subdivision 820-AA of the ITAA 1997 (thin capitalisation rules for general class investors)
• Subdivision 820-B of the ITAA 1997 (thin capitalisation rules for outward investing financial entities (non-ADI))
• Subdivision 820-C of the ITAA 1997 (thin capitalisation rules for inward investing financial entities (non-ADI)).