PCG 2025/2EC1: Compendium
Document type: Compendium
Status: Draft

All legislative references in this Compendium are to the Income Tax Assessment Act 1997, unless otherwise indicated. Reordering the examples was considered and, on balance, not preferred. The low-risk zones include general characteristics that need to be present in all low-risk restructures (such as that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) would not otherwise apply). The examples are then used to demonstrate circumstances the Commissioner would apply resources to investigate, distilled from stakeholder engagements. This approach is designed for taxpayers to self-assess using the examples provided in the Guideline. The examples are based on stakeholder submissions of realistic and expected restructures. However, the Guideline is not intended to provide interpretive guidance and this interaction may be considered for further guidance in the future. Further guidance on joint ventures is beyond the scope of the Guideline. The Guideline is not intended to provide interpretive guidance and this request may be considered for further guidance in the future. We have also included Example 9 in Schedule 1 (replacement of third party debt with related party debt) to demonstrate the inverse scenario would attract our attention. While a 'de minimis' threshold is included in the white zone (aligned to the legislative threshold in section 820-35), we have not sought to provide any additional 'de minimis' threshold in the context of this record-keeping guidance. The guidance is intended to assist taxpayers considering what records they may have to rely on and, in their circumstances, whether it is appropriate to disallow debt deductions in proportion to identifiable transactions to which the DDCR applies. In addition, where taxpayers consider their records indicate that it would be more appropriate to restructure their arrangements, the Guideline provides guidance on the Commissioner's compliance approach to that restructuring. This request may be considered for further guidance in the future. New Examples 15, 16 and 17, regarding record keeping, tracing and apportionment also include refinancing and illustrate the need to identify the original use of refinanced funds. We have not provided any mandatory methodologies in the final Guideline. Whether a particular methodology is appropriate will depend on what is fair and reasonable based on the facts and circumstances of the taxpayer. The Guideline is intended to assist taxpayers to comply with the DDCR in its context as new law. It is anticipated that taxpayers may restructure their arrangements rather than incur disallowed debt deductions. We will monitor these arrangements to consider whether we are able to publish guidance on low-risk scenarios in the future. The final Guideline retains statements from the draft Guideline that characterisation as low risk or high risk does not presuppose the application of any particular tax provision (including anti-avoidance provisions) to the restructure. It is intended as a guide as to the allocation of resources by the Commissioner, including the intensity of those resources (in the context of high-risk restructures). Taxation Ruling TR 2025/2 Income tax: aspects of the third-party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997 provides guidance on when an asset may be characterised as an Australian asset. In the final Guideline, Example 37 has been revised to reflect stakeholder feedback and now provides further clarity as to the circumstances in which we will not apply compliance resources to the arrangement, including what actions by the taxpayer we will seek to verify. At the end of the compliance period, we will consider if this approach needs to be extended. In the final Guideline, a targeted compliance approach has been included at Example 34 to accommodate circumstances where trust distributions have been funded by third party debt, however, repayments towards the debt facility are made prior to or during the compliance period that equal or exceed those trust distributions. At the end of the compliance period, we will consider if this approach needs to be extended. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).






Relying on this Compendium: This Compendium of comments provides responses to comments received on draft Practical Compliance Guideline PCG 2024/D3 Restructures and the thin capitalisation and debt deduction creation rules  ATO compliance approach. It is not a publication that has been approved to allow you to rely on it for any purpose and is not intended to provide you with advice or guidance, nor does it set out the ATO's general administrative practice. Therefore, this Compendium does not provide protection from primary tax, penalties or interest for any taxpayer that purports to rely on any views expressed in it.

To aid in clarity, the examples in the Schedules to the Guideline should be reordered in the final Guideline to have low-risk and high-risk examples sorted by topic. | The final Guideline should include a list of features, indicia or criteria for whether a restructure is low risk or high risk rather than relying on examples in Schedule 2. | The final Guideline should provide further risk zones to differentiate further gradients of risk. | The risk assessment framework includes high-risk and low-risk restructures, with the remainder not assessed (yellow risk zone). Given the recent enactment of the DDCR and the third party debt test (TPDT) rules, the Guideline focuses on maximising certainty, in particular permissive certainty of low-risk zones, for taxpayers to consider in responding to the new laws. Further gradients of risk at this stage would not meaningfully assist in this task. | Schedule 1 of the final Guideline should provide guidance on the overlap between Type 1 (subsection 820-423A(2)) and Type 2 (subsection 820-423A(5)) DDCR arrangements. | The final Guideline should provide guidance on the operation of the 'associate pair' definition to unincorporated joint ventures (for example, in Example 1). | Example 1 of Schedule 1 of the final Guideline should clarify the timing of when the associate pairs test in paragraph 820-423A(2)(b) is applied. | In the final Guideline, Example 1 has been updated to clarify that the associate pair condition in paragraph 820-423A(2)(b) is tested at the time of the acquisition referred to in paragraph 820-423A(2)(a). | Further information is needed in Example 2 of the draft Guideline which explains the ATO's compliance approach after the project has completed development and begins to generate profits. | Example 3 has been added to the final Guideline which demonstrates the ATO's compliance approach once the development is complete and the debt is being repaid. | The final Guideline should provide interpretive guidance on the term 'facilitate the funding' in paragraph 820-423A(5)(b). | Schedule 2 of the final Guideline should clarify whether there are any circumstances in which the Commissioner would consider it low risk to restructure related party debt that attracts the operation of the DDCR with third party debt. | Schedules 1 and 2 of the final Guideline should provide further examples for middle market taxpayers (for example, on the interaction of the DDCR and Division 7A of the ITAA 1936). | In the final Guideline, Example 21 has been added to Schedule 2, to outline a situation where a privately owned Australian group replaces a Division 7A loan with third party debt in circumstances, where the Australian group does not have the financial capacity to otherwise terminate the related party (Division 7A) loan. | The final Guideline should provide further interpretive guidance on when costs incurred under an interest rate swap are in relation to the acquisition of a CGT asset or legal or equitable obligation under section 820-423B. | Schedule 1 of the Guideline includes examples where costs incurred under interest rate swaps are in relation to the acquisition of CGT assets. The Guideline is not intended to provide interpretive guidance. | The final Guideline should provide a 'de minimis' threshold under which the DDCR will not apply (in lieu of tracing and apportionment and record-keeping compliance). | The final Guideline should provide guidance for taxpayers that are unable to provide evidence to determine whether the DDCR operates to disallow debt deductions. | The final Guidelines should provide further examples illustrating when the Commissioner will apply compliance resources to determine the application of the DDCR where a debt interest has been refinanced. | Further examples are needed in the final Guideline on tracing and apportionment and which methodologies the ATO will deem to be fair and reasonable. Further, the final Guideline should provide circumstances in which a 'first in  first out' or 'last in  first out' methodology may be used. | The ATO should reconsider whether historical transactions should be grandfathered from the operation of the DDCR. | Schedule 2 of the final Guideline should provide a low-risk restructuring example that includes the replacement of related party debt with interest-free debt. | Schedule 2 of the Guideline includes examples where related party debt is replaced with equity interests. Replacing related party debt with interest-free debt will not be considered to fall in the green zone. | Schedule 2 of the final Guideline should provide a low-risk restructuring category where an Australian group uses a conduit financing entity to pass through third party debt costs to operating and asset entities in circumstances where the TPDT choice is not made. | Schedule 2 of the final Guideline should clarify, for high risk restructures in Schedule 2, whether Pt IVA of the ITAA 1936 or section 820-324D is the risk in question. | Schedule 2 identifies low-risk and high-risk restructures. Where high-risk restructures are identified, the Guideline does not pre-empt the application of section 820-324D or Part IVA of the ITAA 1936 to the circumstances. The intention of the Guideline is to provide taxpayers certainty about circumstances that will attract the Commissioner's compliance resources. | The final Guideline should provide further explanation of the high risk rating on Example 19 of the draft Guideline. | The final Guideline should clarify whether cash held in a non-Australian bank account must be repatriated in order to use the TPDT, having regard to Example 22 of the draft Guideline. | The final Guideline should expand Example 23 of the draft Guideline to include a restructure. | In the final Guideline, an additional paragraph has been added to this example (now Example 32) to demonstrate how the taxpayer may restructure to comply with the TPDT. | The final Guideline should provide additional information regarding the consequences of Example 26 of the draft Guideline where the swap and a loan are modified such that the amended loan satisfies the conduit financing conditions. The final Guideline should provide further interpretive guidance on the operation of the taxation of financial arrangements. | The final Guideline should extend the compliance approach regarding minor or insignificant assets beyond its current limitations (both the $1 million monetary threshold and the time limitation of income years starting on or after 1 July 2023 and ending on or before 1 January 2027). | The final Guideline should provide a compliance approach relating to credit support rights and subsection 820-427A(5), so that taxpayers may restructure to limit credit support rights to satisfy subsection 820-427A(5) without increasing the amount of debt  for example, limiting credit support to the phase of a project corresponding to the development of a CGT asset, with no such rights arising for the operational phase (that is, overall project financing restructured into staged financing). | In the final Guideline, a new example (Example 31) has been added where the terms of a credit support agreement are amended to satisfy subsection 820-427A(5). | The final Guideline should provide a compliance approach relating to the meaning of 'commercial activities' in Schedule 3.

Related rulings and determinations: TR 2025/2