Australia: Draft guidance on arm’s length amount of related-party debt
Comments are due June 30, 2025.
The Australian Taxation Office (ATO) on May 29, 2025, released a draft practical compliance guideline (PCG 2025/D2) regarding factors to consider when determining an arm’s length amount of inbound, cross-border related-party debt. This draft guidance outlines the ATO's “compliance approach” to assessing tax risk, helping taxpayers self-assess and mitigate transfer pricing risks.
Background
The draft PCG follows amendments made in April 2024 to transfer pricing rules, requiring general class investors to demonstrate that the amount of related-party debt is arm's length and commercially realistic. Previously, the amount of debt was protected if it fell within thin capitalisation limits.
Summary
The draft PCG categorizes taxpayers into risk zones—green (low risk), red (high risk), and blue (compliance risk not assessed). Most taxpayers are expected to fall into the blue zone, which does not reflect risk but indicates that compliance risk cannot be assessed under the PCG. The guidance provides examples of low and high-risk scenarios and discusses factors influencing borrowing decisions, such as funding requirements, group policies, and shareholder returns. The ATO considers explicit guarantees from related parties as high risk, aligning with OECD guidelines on debt characterization.
Comments on the draft PCG are due by June 30, 2025.
For more information, contact a KPMG tax professional in Australia:
Sean Madden | smadden3@kpmg.com.au
Sam van Berkel | svanberkel@kpmg.com.au