This draft Guideline applies to entities that:

• Are classified as general class investors or financial entities and elect to apply the third party debt test under Division 820 of the ITAA 1997.
  
• Have inbound, cross-border related party financing arrangements.
  

The guidance does not cover aspects such as pricing, debt/equity characterisation, interest deductibility, thin capitalisation, withholding tax, or anti-avoidance provisions (Part IVA).

Under the amended section 815-140 of the ITAA 1997:

• The ATO no longer accepts the actual amount of a cross-border financing arrangement as fixed when applying Subdivision 815-B.
  
• Taxpayers must demonstrate both the arm’s length amount and the arm’s length pricing of related party debt.

Acknowledging the diversity in capital structures among independent enterprises, this Guideline sets out how the ATO will assess compliance risks. It offers a practical framework to help taxpayers understand and manage their risk exposure and reduce compliance costs.

Taxpayers are encouraged to self-assess their arrangements against the ATO’s four risk zones:

• White Zone: Arrangements likely to be outside the scope of ATO review.
  
• Green Zone: Low-risk arrangements that reflect arm’s length conditions.
  
• Blue Zone: Moderate-risk arrangements needing further consideration.
  
• Red Zone: High-risk arrangements that are more likely to attract ATO scrutiny.

The ATO outlines key considerations when assessing the amount of related party debt:

• Options Realistically Available: Would an independent party have chosen this funding structure?
  
• Use of Internal Funds: Could the entity have funded activities from retained earnings?
  
• Use of Debt vs Equity: What is the commercially viable mix of funding?
  
• Funding Requirements: Is there a genuine business need for the debt?
  
• Group Policies: Are group-wide financial policies consistent and reasonable?
  
• Return to Shareholders: How does this funding choice affect shareholder returns?
  
• Cost of Funds: Is the cost competitive with market rates?
  
• Covenants and Guarantees: Are terms comparable to third-party arrangements?
  
• Security and Serviceability: Can the entity support and repay the debt?
  
• Leverage: Is the entity’s debt ratio in line with industry norms?

Lower Risk Scenarios:

• A mix of third-party and related party debt consistent with third party debt test.
  
• Financial indicators and leverage aligned with peer benchmarks.
  

Higher Risk Scenarios:

• Related party financing used despite substantial cash reserves.
  
• Explicit guarantees provided by related parties.
  
• Funding exceeds commercial needs under the fixed ratio test.

The ATO expects taxpayers to prepare and maintain documentation and evidence supporting the determination of the amount of their inbound, cross-border related party financing arrangements. This includes:

• Comparative analysis of funding options.
  
• Evidence of the entity’s funding requirements.
  
• Internal policies and financial plans.
  
• Loan terms, security details, and financial covenants.
  
• Forecasts demonstrating serviceability.

Once finalised, the Guideline will apply to income years commencing on or after 1 July 2023. This includes both existing and new arrangements..

The draft Guideline is open for public comment until 30 June 2025. Taxpayers and stakeholders are encouraged to review the Guideline and provide feedback to the ATO.