Although aimed at aggressive structuring by multinational corporations, the rules have an extremely broad application and apply to ordinary commercial transactions of minor amounts involving all kinds of entities.
The hybrid mismatch rules were introduced into Australia’s income tax legislation in 2018 with effect from income years commencing on or after 1 January 2019 with no grandfathering or transitional rules in respect of pre-existing arrangements.
What are the rules about?
The hybrid mismatch rules aim to neutralise the double non-taxation outcomes that result from differences between the domestic tax law of two different jurisdictions. They attempt to prevent deduction/non-inclusion outcomes (where a payment is deductible in one country and the receipt of which is not taxable in the other country) and deduction/deduction outcomes (where one payment results in a deduction in two countries).
One scenario in which a mismatch can occur is where an Australian entity issues a debt instrument to an entity in a foreign country which treats the instrument as equity. To the extent that the foreign country provides an exemption for dividend income (e.g. a participation exemption), the transaction may give rise to a deduction (in Australia) and non-inclusion amount (in the foreign country).
What transactions will be caught?
The hybrid mismatch rules are extremely broad in their application. There are seven key subdivisions in the legislation that focus on particular types of mismatches that can arise due to the difference in the tax treatment of financial instruments, entities and branches. Australia has also introduced a targeted integrity rule where interest is paid to foreign related entities that are taxed at 10% or less.
Does it apply to a simple structure?
The rules can apply to complex multinational structures but also to relatively minor transactions. For example, an individual incurring expenses for a foreign rental property would be caught within these provisions. The rules can apply to related party transactions as well as arm’s length third party transactions.
What are the consequences?
The rules operate to deny deductions or assess entities in Australia. Further, the “imported hybrid” rules can apply to deny deductions where the mismatch outcome occurs between two other countries but is “imported” into Australia with a payment. An understanding of transactions occurring within a global structure as well as the tax treatment of those transactions in foreign countries is necessary to apply the rules.
Where can I get support?
It is important to obtain an understanding of whether the hybrid rules may apply to your structure and transactions and then the potential implications of the provisions.
Pitcher Partners can conduct a high-level review of your structure and transactions to identify the possible application of the hybrid mismatch rules to a group that has some foreign assets, income or entities in their structure. This will determine whether there is a risk of the rules applying resulting in deduction being denied, income being included and other courses of action that may need to be taken.
Get in touch with your Pitcher Partners expert for support.