Australia: KPMG recommendations on thin capitalisation reforms
KPMG proposes clarifications and amendments to Australia's thin capitalisation rules to improve certainty and consistency for affected taxpayers.
may 28, 2026
The Board of Taxation (BoT) initiated a statutory review of Australia's thin capitalisation reforms. This review aims to assess whether the rules are operating effectively and producing outcomes in line with their intended policy objectives.
The thin capitalisation rules affect a broad segment of taxpayers, and the review seeks to determine if these rules provide appropriate certainty and treat economically equivalent arrangements consistently.
In response, KPMG has submitted recommendations, which include:
- Clarifying the scope of the definition of debt deduction, including guidance on amounts "economically equivalent to interest," the characterization of foreign exchange (FX) gains and losses, and the finance cost components of lease arrangements
- Reinstating the prior financial entity definition and clarifying situations involving a financial entity within a tax consolidated group
- Amending the fixed ratio test (FRT) to function as a true default test, applicable when a taxpayer opts for the group ratio test or third-party debt test (TPDT) and the resulting debt deductions are less than the FRT; relax the strict administrative rules for elections to align with other choice rules in income tax law
- Modifying the FRT to ensure appropriate outcomes for investors with interests between 10% and 50%, addressing the inability of these taxpayers to access excess FRT capacity from subsidiaries while disregarding income from distributions in their own FRT calculations,
- Clarifying key FRT mechanics, including the treatment of carried forward tax losses in the tax-EBITDA calculation and the deduction of carried forward FRT disallowed amounts when the thin capitalisation rules no longer apply
- Refining the TPDT to enhance certainty and restore its intended operation for infrastructure and property projects
- Clarifying the "same terms" condition in the conduit financing exception to permit on-lending and on-charging of swap costs with flexibility in legal form and mechanics
- Excluding foreign hybrids and related offshore permanent establishments from the thin capitalisation rules
- Revising the drafting of the debt deduction creation rule (DDCR) to align with policy intent