In brief
With Tax Time 2025 fast approaching, the ATO has now released all the forms, schedules and instructions for 2025 income tax returns. Within these forms, there are multiple areas – including the international dealings schedule (IDS), the reportable tax position (RTP) schedule and the short form local file (Short Form) – where taxpayers must disclose information and/or arrangements impacted by the new thin capitalisation regime and debt deduction creation rules (DDCR). For the 2025 income year, there is a particular focus on new disclosures relating to the DDCR which are effective for income years starting on or after 1 July 2024.
For an overview of the new thin capitalisation regime, refer to this earlier Tax Alert.
In detail
There are three key parts of the 2025 income tax return and associated schedules where thin capitalisation disclosures may be required – the Short Form, the RTP schedule and the IDS.
The new thin capitalisation rules for general class investors broadly apply to income years commencing on or after 1 July 2023, with the DDCR commencing one year later. Accordingly, for early balancers (e.g. 31 December year ends) the 2025 income year is the first year of operation of the new thin capitalisation rules. For June balancers, this is the second year of operation of the new thin capitalisation rules, but the first year of operation of the DDCR. This makes for a complex set of disclosures and instructions for the 2025 income year.
Short Form
The new Short Form, which is to be completed by taxpayers that are subject to country-by-country reporting obligations and applies to reporting periods starting on or after 1 January 2024, requires taxpayers to disclose the details of certain reportable arrangements, which the ATO refers to as ‘significant restructures’, occurring during the current or previous income year. A restructure in response to the amended thin capitalisation rules or the DDCR is deemed to be a significant restructure and therefore must be disclosed in the Short Form. The detail required in the Short Form for these restructures is significant, and includes:
- a description of the arrangement
- the total capital value of the restructure
- the anticipated Australian tax, global tax and commercial impacts of the restructure, and
- details of the steps and parties involved in the restructure (including a step plan).
For further details on the new Short Form, refer to this earlier Tax Alert.
RTP schedule
Corporate taxpayers that are required to complete the RTP schedule will need to address new question 47 in Category C of the 2025 RTP schedule which requires taxpayers to disclose their self-assessed risk rating under the risk assessment framework in PCG 2024/D3 Restructures and the thin capitalisation and debt deduction creation rules - ATO compliance approach where it has restructured an arrangement in response to the DDCR. Additional comments must also be provided, including any examples in PCG 2024/D3 that were relied on for the taxpayer’s risk rating, and a description of the arrangement. In providing a description of the arrangement, taxpayers can refer to and incorporate the description of the restructure that is provided in the IDS or Short Form.
Given the overlap with disclosures in the Short Form, the ATO has indicated that for 2025 year only, if a taxpayer is not lodging its 2025 Short Form at the same time as its 2025 tax return, it can simply disclose in its RTP schedule that the information required in the RTP schedule for this question will be included in its 2025 Short Form. To rely on this administrative concession, the Short Form must be lodged by its due date.
International dealings schedule
For the 2025 year, there are two sections of the IDS that include disclosures on the new thin capitalisation regime. Section D – which was significantly updated last year to reflect the new rules – relates to the general thin capitalisation tests, whilst Section H (new for 2025) relates to the DDCR.
The changes to Section D this year as compared to the 2024 year are relatively minor and reflect the fact that all general class investors are now within scope of the new regime. As such, disclosures relating to the old regime (those that were retained last year for early balancers) have been removed.
The most significant change is the introduction of Section H, which adds an additional six pages to an already lengthy schedule. This section requires detailed disclosures on the DDCR, in some cases even where the rules are not yet applicable to an early balancer. At a high level, disclosures include:
- whether the DDCR applies to the taxpayer, and if not, why not
- restructures in response to the DDCR (again, there is significant overlap with both the Short Form and RTP schedule here)
- prior and current year arrangements involving the acquisition of a capital gains tax (CGT) asset or legal or equitable obligation from an associate pair, and
- prior and current year arrangements involving certain payments to associate pairs.
In some cases, the disclosure requirements are complex and lengthy. For example, where a restructure in response to the DDCR has taken place, a description is required which should include the following:
- How the DDCR applied (or would have applied) to debt deductions arising in connection with the prior arrangements if they had remained in place. This should include information on the nature and terms of the relevant debt or financial arrangement, parties involved, details of CGT assets or legal or equitable obligations acquired or the relevant payment or distribution that was funded by the financial arrangement, details of the acquirer and disposer/payee, and an estimate of the debt deductions that would have been disallowed had the DDCR applied for the first income year starting after 30 June 2024.
- The steps involved in the restructure or replacement of the prior arrangements including the tax effect of the restructure or replacement.
- Whether the taxpayer received any tax advice in relation to the application of the DDCR to the relevant arrangements (both old and new).
There are also special instructions for completing Section H in the following circumstances:
- where restructures have or will be disclosed in the Short Form
- early balancers not yet subject to the DDCR in 2025 (which, in many cases, may need to complete the first two questions of Section H), and
- entities that have chosen to use the third party debt test for the income year (which in effect, switches off the DDCR).
The takeaway
For the 2025 income year, taxpayers affected by the new thin capitalisation regime – especially those subject to the new DDCR – face significantly expanded and more complex disclosure requirements in their tax returns. These new requirements can also apply across multiple forms and schedules. Whilst the ATO has attempted to implement an ‘ask once’ approach, there remains some duplication across the various forms – as such, taxpayers that are required to lodge more than the IDS will need to take care when completing the relevant disclosures to ensure consistency, especially in the first year.
Taxpayers should be prepared to provide detailed information about restructures undertaken in response to the new rules, including comprehensive descriptions, financial impacts, and step-by-step details of the arrangements. The introduction of new sections (notably Section H in the IDS) and new questions (such as Question 47 of Category C in the RTP schedule) means that complying with reporting obligations this year will require careful attention to the timing and content of disclosures.
Contact us
James Nickless
Clement Lui
Patricia Muscat
Georgie Hockings
Sarah Saville
Subscribe to PwC's monthly Tax update
Related content