Thin Capitalisation Rules and Australian Expat Property: How the ATO’s Debt Deduction Limits Affect Investment Loan Structures in 2026
Australia’s thin capitalisation rules, as reformed from 1 July 2023 onwards, fundamentally change how Australian expats and non-residents can structure debt deductions on their Australian investment properties [4]. Under the new framework, the old safe harbour that allowed debt up to 60% of the average value of the entity’s total Australian assets has been replaced by earnings-based tests, and new debt deduction creation rules (DDCR) specifically target arrangements where debt is used in ways that shift tax benefits rather than fund genuine investment [2]. For expats holding or acquiring an investment property loan in Australia, the rules governing what interest can be deducted are no longer a simple ratio calculation. They now depend on the type of test your entity qualifies for, how the loan is structured, and whether the arrangement involves related-party debt.
- Australia’s thin capitalisation rules were reformed effective 1 July 2023, replacing asset-based safe harbours with earnings-based tests for most entities [4].
- The debt deduction creation rules (DDCR) can disallow interest deductions on loans used to acquire certain assets, even where the loan itself is commercially structured [2].
- The third-party debt test (TPDT) offers a pathway to full deductibility for genuinely arm’s-length external borrowings, subject to ATO guidance finalised in late 2025 [1] [3].
- The Board of Taxation is conducting an independent review of the reforms in 2026, meaning further changes are possible [5].
- Loan structure decisions made now, without accounting for these rules, may produce unexpected tax outcomes. Content here is general information only, not personal tax or credit advice.
What Are Thin Capitalisation Rules in Australia, and Who Do They Apply To?
The thin capitalisation rules in Australia limit the amount of debt-related deductions an entity can claim when it is considered to be “thinly capitalised,” meaning it carries a high proportion of debt relative to equity. The rules apply to:
- Australian entities with certain overseas investments (outward-investing entities)
- Foreign entities with Australian investments, and Australian entities controlled by foreign residents (inward-investing entities)
- Trusts and partnerships that meet the inward-investing definition
The reforms that apply from 1 July 2023 replaced the previous net assets-based safe harbour with three new primary tests [4] [6]:
| Test | How It Works | Relevant For |
|---|---|---|
| Fixed Ratio Test (default) | Limits net debt deductions to 30% of tax EBITDA | Most inward and outward investing entities |
| Group Ratio Test | Allows deductions up to the worldwide group’s net interest-to-EBITDA ratio, if higher than 30% | Entities within a group with higher third-party leverage |
| Third-Party Debt Test (TPDT) | Allows full deduction of interest on genuine third-party debt meeting specific conditions | Entities whose debt is entirely from unrelated lenders [3] |
For most individual expats borrowing from an Australian bank to hold a rental property in their own name, the thin capitalisation rules are unlikely to apply directly, as the rules target entities rather than individuals in most cases. However, the situation changes meaningfully when property is held in a trust, a company, or a structure involving overseas related parties.
How Do the Debt Deduction Creation Rules Affect Investment Property Loan Structures?
Building on the tests above, a separate and often misunderstood dimension of the reform is the debt deduction creation rules (DDCR), which can deny deductions even where the borrowing clears the thin capitalisation limits [2]. The DDCR target situations where debt is created or used in a way that artificially generates a deductible expense, rather than funding a genuine economic transaction at arm’s length.
The practical effect on expat property investors holding assets inside a trust or corporate structure includes:
- Interest on loans used to fund distributions or returns of equity within a related-party arrangement may be partially or wholly non-deductible.
- Debt used to acquire assets from associates, or to fund intra-group transfers, falls under specific DDCR scrutiny [2].
- Even a commercial-looking loan from an Australian lender can be caught if the proceeds flow through a structure in a way that creates a deduction without a corresponding economic cost at the group level.
The ATO finalised its guidance on both the TPDT and the DDCR in late 2025, providing greater clarity on which structures are likely to survive challenge [1]. However, the guidance also confirmed that common trust-based financing arrangements used by expat investors require careful review against the new rules [3].
Does the Third-Party Debt Test Protect a Standard Australian Bank Loan?
The third-party debt test is the clearest pathway to full interest deductibility under the new framework, but it comes with strict conditions that not every investment property loan in Australia will automatically satisfy [3]. To rely on the TPDT, the entity must elect to apply it, and the debt must meet all of the following:
- The lender must be a genuine third party with no association with the borrower or any related entity.
- The debt must be used to fund assets that generate assessable income in Australia.
- The debt must not have features that effectively make it related-party debt in substance.
- The entity cannot hold any related-party debt during the income year if it elects this test.
A standard investment property loan from an Australian bank, held by an individual in their own name, will generally meet these conditions. The complexity arises for expats who hold property in a discretionary trust funded partly by a director’s loan or a related-party guarantee arrangement, because introducing any related-party debt element can disqualify the election entirely [3].
What Does the 2026 Board of Taxation Review Mean for Expat Investors?
Stepping back from the technical detail, a separate concern is the policy trajectory itself. In January 2026, the Australian Government tasked the Board of Taxation with conducting an independent review of the Albanese Government’s thin capitalisation reforms [5]. This review is significant because it signals that even the Government acknowledges the reforms may have produced unintended consequences for certain commercial and property investment structures.
For expat investors, the practical implication is that structures locked in now may need to be revisited once the review reports. Key questions the review is likely to address include whether the earnings-based tests adequately distinguish between genuine investment leverage and tax-motivated debt, and whether the DDCR have been drafted too broadly.
Investors should not wait for the review to complete before structuring their loans, but they should ensure their advisers are tracking the review’s progress and that any structure selected is defensible under the current rules, not just the hoped-for future ones.
Frequently Asked Questions
Do thin capitalisation rules apply to Australian expats buying property in their own name?
Generally, the thin capitalisation rules target entities rather than individuals borrowing in their personal capacity. If you are an Australian expat buying an investment property directly in your own name using a loan from an Australian lender, you are unlikely to be subject to the thin capitalisation regime. The risk area is primarily trusts, companies, and structures with related-party debt.
When did the new thin capitalisation rules start applying?
The reforms apply to income years commencing on or after 1 July 2023, and the legislation was formally passed in late March 2024 [6]. This means the 2023-24 income year was the first year subject to the new earnings-based tests.
Can a standard Australian bank mortgage ever be caught by the DDCR?
A standard arm’s-length mortgage from an unrelated Australian lender is unlikely to be the primary target of the DDCR. The rules are directed at arrangements where debt is used to generate a deduction without a real economic cost at the group level. However, how the loan proceeds are deployed within a structure matters as much as the loan itself [2].
Does the third-party debt test apply automatically?
No. An entity must actively elect to apply the third-party debt test. If elected, the entity cannot hold any related-party debt during the income year. ATO guidance finalised in 2025 sets out the specific conditions that must be met for the election to be valid [1] [3].
What is the fixed ratio test limit?
Under the fixed ratio test, net debt deductions are limited to 30% of the entity’s tax EBITDA for the income year. Deductions that exceed this threshold are disallowed [4]. The group ratio test may allow a higher percentage where a worldwide group carries higher third-party leverage.
Is ODIN Mortgage able to advise on thin capitalisation?
ODIN Mortgage is a specialist mortgage brokerage and, as part of ODIN, works alongside ODIN Tax, which handles tax structuring for Australian expats. Thin capitalisation rules are a tax matter and assessment of how they apply to your specific structure should be obtained from a registered tax agent. ODIN Mortgage is regulated under ASIC and the National Consumer Credit Protection Act (NCCP).
Will the 2026 Board of Taxation review change the thin capitalisation rules?
The review has been commissioned but has not yet reported [5]. Any changes to the rules would require legislation and would not apply retrospectively unless specifically stated. Structures should be assessed against the rules currently in force.
About ODIN Mortgage
ODIN Mortgage is Australia’s specialist mortgage brokerage for Australian citizens, permanent residents, and foreign investors living overseas. Part of ODIN alongside ODIN Tax, ODIN Mortgage provides investment property loan structuring, borrowing power assessments, and refinancing services coordinated with tax planning from day one. With access to a panel of 40+ Australian lenders and proprietary foreign income data built over 10+ years of specialist deal flow, ODIN Mortgage has served 2,300+ Australian expats across 40+ countries. ODIN Mortgage is regulated under ASIC and the National Consumer Credit Protection Act (NCCP), and is the Winner of Best Boutique Non-Franchise Office at the Better Business Awards 2024.
Speak to an Australian Expat Mortgage Specialist
If you are an Australian expat structuring an investment property loan and want to understand how your borrowing structure works alongside your tax position, ODIN Mortgage and ODIN can help. This article is general information only and does not constitute personal credit or tax advice. Borrowing power, LVR, and approval outcomes depend on individual circumstances and lender policy, which is subject to change.
Disclaimer: This article is general information only and does not constitute personal credit advice, tax advice, or investment advice. Thin capitalisation rules are complex and their application depends on individual entity structures and circumstances. Borrowing power, LVR outcomes, and loan approval depend on individual borrower profiles and lender policy, which is subject to change. ODIN Mortgage is regulated under ASIC and the National Consumer Credit Protection Act (NCCP). For advice specific to your situation, consult a qualified mortgage broker and registered tax agent.
References
- ATO finalises guidance on new thin capitalisation and debt… (www.internationaltaxreview.com)
- Access Denied (www.taxathand.com)
- Thin Capitalisation – ATO publishes final third party debt test guidance (www.ashurst.com)
- Understanding the major changes to the originating Bill for Australian thin capitalisation | Wolters Kluwer (www.wolterskluwer.com)
- Review of thin capitalisation reforms | Treasury Ministers (ministers.treasury.gov.au)
- Australia’s new thin capitalisation legislation | Grant Thornton Australia (www.grantthornton.com.au)
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