PCG 2018/7 – restructuring out of arrangements likely to offend the new ‘anti-hybrid rules’ – 6 examples where the ATO will NOT apply Part IVA and a list of ‘low risk’ features (for deploying audit resources)

Practical Compliance Guideline PCG 2018/7, issued on Thursday 25.10.2018. It sets out the ATO’s compliance approach to restructures out of existing hybrid arrangements to avoid the potential application of the hybrid mismatch rules.

The anti-hybrid rules, will generally take effect from 1 January 2019, and they address certain hybrid arrangements that exploit differences in the tax treatment of an entity or financial instrument under the laws of two or more countries. They are aimed at double deductions or double non-taxation.

Consequently, where taxpayers have existing hybrid arrangements, and it is likely that they will attract the operation of the hybrid mismatch rules, a likely response would be for affected taxpayers to restructure out of their hybrid arrangements to avoid any potential adverse impact of the rules.

The enactment of the hybrid mismatch rules, with a deferred commencement date, is intended to allow taxpayers time to review their existing hybrid arrangements and to unwind or restructure out of such arrangements in advance of the rules if they so choose.

Despite this being the intention, taxpayers and their advisers have been concerned that the Commissioner might apply the ‘General Anti-Avoidance Provisions’ in Part IVA of the ITAA36, saying that the sole or dominant purpose of the restructure was to avoid the new (anti-hybrid) rules, which, of course, they are.

• One might think that opting out of an offending ‘hybrid’ ought bring more tax to Australia, destroying (or reducing) the ‘tax benefit’ necessary for Part IVA to operate.
• But, the restructure might be to eliminate the offending ‘double counting’ overseas, so that there is arguably a ‘tax benefit’ still in Australia.

Despite this problem, the PCG  seeks to “assist taxpayers to manage their compliance risk in these circumstances where their intention is to eliminate double non-taxation outcomes, consistent with the underlying objective of the hybrid mismatch rules”. And, it does this, in the usual fashion, of identifying the factors the Commissioner would use, to allocate audit resources – identifying low risk and high risk factors.

Low risk factors, that the PCG identifies (n para 18) are as follows.

18.  We would expect the following factors to be present for a restructure to qualify as low risk.

(a)   There is no change to the entities or jurisdictions of entities involved under the replacement arrangement, unless the change in entities is the result of the removal from the original arrangement of an entity whose tax characteristics gave rise to the hybrid outcome. Such a change would represent a rationalisation of the flow of funds or a simplification of the structure under the new arrangement. Essentially this factor is concerned with the interposition of entities or jurisdictions unconnected with the original arrangement, where the interposition might be indicative of tax driven restructuring.

(b)   The original arrangement prior to the restructure would not have attracted the application of Part IVA.

(c)   The replacement arrangement on a stand-alone basis would not attract the application of Part IVA. By stand-alone basis, we mean the arrangement viewed without regard to the original arrangement or the restructuring steps.

(d)   The restructure and replacement arrangements are effected in a straightforward manner, explicable only by an objective of eliminating hybrid outcomes.

(e)   Both the restructure steps and replacement arrangement are implemented in a commercial manner reflecting arm’s length conditions. In this regard, it is to be noted that this Guideline does not deal specifically with pricing of related party transactions as other ATO guidance materials are available to assist taxpayers assessing their risk in respect of arm’s length conditions.

PCG 2018/7 sets out 6 restructuring scenarios to which the Commissioner would not seek to apply Pt IVA.

• In each scenario, there is a straightforward restructuring which removes the hybrid element of the existing arrangement but maintains the surrounding facts and circumstances.
• The guideline also lists various factors which the ATO expects to be present for a restructure to qualify as low risk.

DATE OF EFFECT: 24 August 2018, but applicable to restructuring arrangements entered into before that date.

[LTN 206, 25/10/18; Tax Month – October 2018]

CPD questions (answers available)

1. When do the anti-hybrid rules commence?
2. Is this deferred date intended to give taxpayers time to review their ‘anti-hybrid’ exposure and structure out of it?
3. Does this preclude Part IVA applying to a restructure of that type?
4. Does the Commissioner give 6 examples of restructures he would apply Part IVA to?
5. Does the Commissioner identify ‘low risk’ factors?
6. Is interposing new entities or jurisdictions a risk factor?
7. Does it help that the original arrangement did not attract Part IVA (ignoring the new anti-hybrid rules)?
8. Does it help that Part IVA did not apply to the new arrangement (viewed in isolation from the previous arrangement)?
9. Does it help that the restructure is done in a simple way that shows its objective was to avoid ‘double counting’ aspects of the hybrid?
10. Does it help if the restructure is done in a commercial manner and on an arm’s length basis?