As infrastructure demand grows, so does the need for smart financing. New Zealand’s current thin capitalisation rules aim to limit excessive interest deductions claimed by non-resident investors or foreign-controlled entities, but they weren’t built with large-scale, capital-intensive projects in mind. That mismatch is creating real tension for investors.

Thin capitalisation rules typically cap deductible interest based on a 60% debt-to-asset ratio or a 110% worldwide gearing ratio. For ordinary commercial enterprises, that’s a reasonable safeguard. But for infrastructure projects, which rely heavily on upfront capital and long-term debt, these limits can become a barrier rather than a protection.

The core challenge

Infrastructure projects are long-lived, capital-intensive, and often have low initial returns that rely on long-term financing structures. In many cases, the project’s value is not in the land or physical assets, but in the future cash flows it generates. Because these projects are often structured through special-purpose vehicles (SPVs) with non-recourse or limited-recourse debt, they can easily exceed the 60% gearing threshold without raising any real risk of base erosion.

The thin capitalisation settings, as currently drafted, don’t account for these commercial realities. This has raised concerns across the infrastructure and finance sectors, prompting Inland Revenue to issue an Issues Paper in May 2025 seeking views on whether the rules should be adjusted for infrastructure-related investment.

Two policy options

The Issues Paper proposed two potential policy options. First, an infrastructure-specific thin cap rule that would allow higher interest deductions for qualifying infrastructure assets, potentially building on existing rules for public-private partnerships (PPPs). Second, a more general rule that would permit deductions for third-party, limited-recourse debt in certain commercial situations, not limited to infrastructure.

The first is targeted and may be simpler to apply, but risks excluding commercially viable projects. The second is broader and, in CA ANZ’s view, offers greater flexibility and practicality with built-in safeguards through third-party lender discipline.

CA ANZ’s perspective

CA ANZ’s June 2025 submission supports a practical, investment-friendly approach that balances tax integrity with reducing barriers to capital flow.

CA ANZ expressed a clear preference for Option 2, which proposes a more general thin capitalisation rule for third-party, limited-recourse debt. This option was favoured for its flexibility, commercial realism, and its sector-neutral application. CA ANZ noted that third-party lenders impose natural constraints on borrowing, making this option largely self-limiting and less prone to abuse. It also avoids the need to “pick winners” by favouring specific sectors such as public-private partnerships or central government-backed infrastructure.

If Option 1 were adopted, CA ANZ recommended that it be expanded beyond traditional PPPs to apply to a wider range of privately financed infrastructure projects. In such cases, interest deductibility for both third-party and related-party debt could be permitted, subject to safeguards such as debt caps and arm’s-length pricing to maintain integrity.

The submission also highlighted concerns with applying thin capitalisation rules at the consolidated group level. CA ANZ suggested that flexibility should be provided for different subsidiaries, particularly project-based SPVs to apply thin cap rules independently, where their debt is ring-fenced and commercially justified.

Budget 2025 and What lies ahead

The Government signalled in the 2025 Budget that change is coming. The Budget confirmed that one of the two approaches will be adopted, with a preference for the infrastructure-specific rule. It also estimated a modest revenue cost of around $65 million through to 2029, reflecting the Government’s willingness to trade tax revenue for better infrastructure outcomes.

If implemented, new rules could take effect from 1 April 2026, applying to assets constructed or acquired after that date. Draft legislation is expected later this year.