The ATO issued this PCG to:

• Clarify what good evidence looks like
• Identify behaviours that attract audit attention
• Encourages taxpayers toward more commercial borrowing levels
• Provide predictability so taxpayers can self‑assess their risk position

In short: PCG 2020/7 helps taxpayers understand when the ATO is likely or unlikely to challenge their ALDT position.

The ATO expects:

• Detailed functional and risk analysis focused on borrowing capacity
• Evidence of realistic commercial funding options
• Comparable debt terms and market conditions
• Analysis showing the independent lender’s decision‑making process
• Scenarios that test refinancing, credit quality, and business performance

The PCG outlines high‑risk indicators, including: 

• Debt levels that exceed market norms
• Interest rates above market pricing
• Guarantees or parental support are essential to obtaining funding
• Intragroup loans with terms that independent lenders would not accept
• Weak financial capacity or thin equity

If these indicators are present, taxpayers may fall in the “High Risk” zone, which is more likely to attract audit activity.

ATO effectively discourages the use of ALDT unless:

• The taxpayer has substantial, defensible commercial analysis
• The financing structure reflects genuine third‑party market practice

For many taxpayers, this makes the standard thin capitalization safe harbours a more practical option.

Here’s what affected taxpayers should do:

1. Determine if ALDT is still the right option. If safe harbour is sufficient, it may be simpler and lower‑risk.

2. Conduct a gap analysis of your current ALDT documentation

•       Do you have strong commercial evidence of borrowing capacity?
•       Do your loan terms match market practice?
•       Can you show that an independent lender would have lent that amount?

3. Strengthen your commercial evidence base (i.e. financial modelling, credit rating analysis)

4. Apply the PCG risk framework (i.e. risk zones)

5. Prepare formal ALDT documentation annually reflecting financial performance, market conditions, industry leverage changes, and revised debt capacity.