On 24 November 2017, Treasury released an exposure draft of legislation to address hybrid mismatch arrangements.

The exposure draft legislation seeks to implement the recommendations of the 2015 Organisation for Economic Co-operation and Development (OECD) report – Neutralising the Effects of Hybrid Mismatch Arrangements.

  • Hybrid mismatches exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. This may occur, for example, where an instrument is treated as debt in Australia (with tax deductible interest) but treated as equity in a foreign jurisdiction (with no tax payable as the holder is entitled to an exemption). A mismatch can also occur where a deduction is available for the same payment in two or more jurisdictions.

The proposed hybrid mismatch rules are designed to prevent any double non-taxation benefits by either denying deductions or including amounts in assessable income. They will apply to payments between related entities and parties to a structured arrangement.

Following the introduction of the hybrid mismatch rules, multinational groups investing into Australia may seek to achieve double non-taxation outcomes by using investment structures and arrangements that may not fall within the scope of the OECD’s hybrid mismatch rules.

  • For example, foreign headquartered groups investing into Australia may use financing arrangements through interposed entities in zero tax countries which reduce Australian profits without those profits being subject to foreign tax.

The Government is developing a targeted integrity rule to ensure such arrangements cannot be used to circumvent the hybrid mismatch rules.

A further report released by the OECD – Neutralising the Effects of Branch Mismatch Arrangements – (released in July 2017) recommends that countries address double non-taxation outcomes which arise because of differences in the taxation treatment of dealings within the same legal entity (for example, dealings between a head office and a foreign branch) to bring the treatment of these arrangements in line with hybrid mismatch arrangements.

To ensure that these ‘branch mismatches’ are addressed the Government will also implement the recommendations of this later report.

The Government will consult with stakeholders as it develops the targeted integrity rule and branch mismatch rules including through the release of separate exposure draft legislation.

These additional rules will commence at the same time as the general hybrid mismatch rules (that is, six months after Royal Assent of the bill introducing the hybrid mismatch rules).

The Treasurer noted the Government’s significant action to shut down loopholes and tackle tax avoidance head on. This includes:

  • introducing a strong Diverted Profits Tax [s177H of the ITAA36, and following].
  • introducing the Multinational Anti Avoidance Law legislation (MAAL) [s177DA of the ITAA36].
  • establishing a Tax Avoidance Taskforce in the Australian Taxation Office (ATO).

[Treasurer’s website: media release; Treasury website: consultation page; draft Bill, draft EM; LTN 226, 24/11/17; Tax Month Nov 2017]

Extract from Draft Bill

Division 832 – Hybrid mismatch rules

[which will follow ITAA97: Div 830 – Foreign Hybrids]


Table of Subdivisions

      Guide to Division 832

832-A    Preliminary

832-B    Neutralising hybrid mismatches (deducting entities)

832-C    Neutralising hybrid mismatches (non – including entities)

832-D    Adjustments (deducting entities)

832-I     Hybrid financial instrument mismatch

832-J    Hybrid payer mismatch

832-K    Reverse hybrid mismatch

832-L    Deducting hybrid mismatch

832-M   Imported hybrid mismatch

832-P    Concepts relating to mismatches

832-Q   Other concepts

Guide to Division 832

832 – 1 What this Division is about 

A “hybrid mismatch” arises if double non – taxation results from the exploitation of differences in the tax treatment of an entity or financial instrument under the laws of 2 or more countries .

There is double non-taxation if a deductible payment is not included in a tax base (this is called a deduction/non-inclusion mismatch), or if a payment gives rise to 2 deductions (this is called a deduction/deduction mismatch) . Disallowing a deduction, or including an amount in assessable income, “neutralises” this tax 2 advantage.

This Division is based on Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 — 2015 Final Report , of the 5 Organisation for Economic Cooperation and Development, 6 published on 5 October 2015 .


Extract from Draft Explanatory Memorandum

1.19 The rules implement the recommendations in the OECD Action 2 Report, taking into account the recommendations made by the Board of Taxation.

1.20 Broadly, a hybrid mismatch will arise if :

• an entity enters into a scheme that gives rise to a payment; and

• the payment gives rise to:

– a deduction/non – inclusion mismatch; or

– a deduction/deduction mismatch.

1.21 A mismatch will be covered by the hybrid mismatch rules if it is:

• a hybrid financial instrument mismatch;

• a hybrid payer mismatch;

• a reverse hybrid mismatch;

• a deducting hybrid mismatch; or

• an imported hybrid mismatch.

1.22 If a mismatch arises, it is neutralised by:

• disallowing a deduction; or

• including an amount in assessable income.



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