Types of arrangements
The debt deduction creation rules (DDCR) apply to the following 2 types of arrangements.
Type 1 DDCR: Acquisition case
In the Acquisition case, the DDCR will operate to disallow an entity's debt deductions referable to an amount paid, directly or indirectly, to an 'associate pair' to the extent they are in relation to the acquisition or holding of a CGT asset, or a legal or equitable obligation, directly or indirectly, from an 'associate pair'.
This is covered in subsection 820-423A(2) of the Income Tax Assessment Act 1997 (ITAA 1997).
For more information about a CGT asset, see What is a CGT asset?
Type 2 DDCR: Payment or distribution case
In the Payment or distribution case, the DDCR will operate to disallow an entity's debt deductions referable to an amount paid, directly or indirectly, to an 'associate pair' in relation to a financial arrangement to the extent the arrangement is used to fund or facilitate funding of prescribed types of payments or distributions to an 'associate pair'.
This is covered in subsection 820-423A(5) of the ITAA 1997.
Timing
The rules apply to debt deductions arising in income years starting on or after 1 July 2024. This includes debt deductions in relation to arrangements entered into before or after 1 July 2024.
The rules do not apply to an entity for an income year that has made a choice (including a deemed choice) to apply the third-party debt test for the income year.
Domestic and cross-border transactions
The rules disallow debt deductions for certain arrangements involving associates, including arrangements between Australian entities.
Tracing and apportionment
You and your 'associate pairs' must obtain sufficient information to trace the use of related party debt or financing arrangements covered by subsections 820-423A(2) and (5) of the ITAA 1997. These include indirect related party arrangements.
Apportionment does not replace tracing. However, apportionment may be appropriate where it is not possible to trace. For instance, where funding from various sources that were used for different purposes are refinanced into a single debt interest.
For example, apportionment will be necessary to determine the debt deductions disallowed by the DDCR for a debt facility where a payment or distribution covered by subsection 820-423A(5A) is funded by related party debt that is refinanced into a single debt facility with other debt used for different purposes.
For more information on tracing and apportionment, see PCG 2024/D3 Restructures and the new thin capitalisation and debt deduction creation rules – ATO compliance approach.