PCG 2018/D4 – Anti-Hybrid Bill – ATO would not apply Part IVA to a scheme to unwind certain arrangements before the 1 January 2019 start date of the new Bill (avoiding a future ‘tax benefit’)

On Thursday, 21 June 2018, the ATO issued Draft Practical Compliance Guideline PCG 2018/D4 , which provides guidance on the ATO’s compliance approach to restructures in response to the introduction of the hybrid mismatch rules.

These measures (in the Treasury Laws Amendment (Tax Integrity and Other Measures No 2) Bill 2018) address certain hybrid arrangements that exploit differences in the tax treatment of an entity or financial instrument under the laws of 2 or more countries. If enacted, the measures will generally apply from 1 January 2019.

The draft guideline notes that the enactment of these rules with a prospective start date is intended to allow taxpayers time to review their existing hybrid arrangements and to unwind or restructure out of such arrangements if they so choose. However, the ATO then flags the possibility that Pt IVA could apply to restructures that preserve Australian tax benefits that would otherwise be disallowed with the enactment of the rules.

Draft PCG 2018/D4 outlines 4 restructuring scenarios to which the Commissioner will not seek to apply Pt IVA of the ITAA36. These involve:

1. inbound mandatorily redeemable preference shares,
2. an outbound profit participating loan,
3. an inbound Australian limited partnership and
4. an outbound general partnership.

In each scenario, there is a straightforward restructuring, which removes the hybrid element, of the existing arrangement, but keeps the surrounding facts and circumstances the same. In particular:

• there is no change to the jurisdictions of the entities involved;
• the replacement arrangement makes commercial sense for the parties involved (and the original arrangement also made commercial sense and would not have attracted Pt IVA);
• the arrangement is effected in a straightforward way having regard to the circumstances;
• the arrangement is implemented on arm’s length terms; and
• the replacement arrangement preserves a tax benefit.

The ATO says that the presence of features which are inconsistent with the above may indicate a higher compliance risk. The draft sets out 2 higher-risk scenarios.

1. The first involves a cross-border round robin financing arrangement, similar to the one described in Taxpayer Alert TA 2016/10.
2. The second scenario deals with conduit financing via a low-tax jurisdiction.

Entities that are considering restructuring in a way that is not covered by the low-risk scenarios in draft PCG 2018/D4 are encouraged to engage with the ATO about their proposed restructure.

PROPOSED DATE OF EFFECT: from the date of enactment of the hybrid mismatch rules, applicable to restructures entered into before and after that date.

COMMENTS on the draft are due by 20 July 2018.

FJM  21.6.18

[ATO website: Consultation on Draft; LTN 117, 21/6/18; Tax Month – June 2018]

Study questions (answers available)

1. Is this PCG about unwinding ‘hybrid’ structures that might be targeted by Bill, should it be passed into law and commence to operate on 1 January 2019?
2. Is it aimed at giving comfort, to taxpayers, that Part IVA will not be applied to a scheme designed to obtain a tax benefit that could only occur in the future (should the law change)?
3. Does the ruling apply to all hybrid arrangements, targeted by this Bill?