ATO releases guidance to the operation of Australian hybrid rules

ATO releases Australian hybrid rules guidance

Peter Madden and Fabian Fedele unpack the ATO's guidance on the operation of the Australian hybrid rules.


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The Australian Taxation Office (ATO) has recently released Law Companion Ruling (LCR 2018/D9) together with Practical Compliance Guidelines: OECD hybrid mismatch rules – concept of structured arrangement (PCG 2018/D9).

The draft guidance provides the ATO’s view on arrangements which will be considered a ‘structured arrangement’ and whether an entity will be a party to the structured arrangement for the purposes of the Australian hybrid rules. The ATO’s view on ‘structured arrangement’ is significant as it will determine the commencement date of the Imported Hybrid Mismatch provisions. Where an offshore hybrid mismatch exists within a multinational group, and is directly or indirectly connected to an Australian deductible payment (which is deemed a ‘structured arrangement’), the 12 month deferral of the commencement date will not apply. In these circumstances the Imported Hybrid Mismatch provisions will apply from income years starting on or after 1 January 2019.

The ‘structured arrangement’ definition is satisfied in respect of a payment giving rise to a hybrid mismatch if one of the two limbs are satisfied within section 832-210 of the ITAA 1997:

  • The hybrid mismatch is priced into the terms of a scheme under which the payment is made, or;
  • It is reasonable to conclude that the hybrid mismatch is a design feature of a scheme under which the payment is made.

Much of the interpretive debate turns on whether it is reasonable to conclude the hybrid mismatch is a ‘design feature of the scheme’. This determination requires an objective test based on the relevant facts and circumstances of the scheme. The ATO has listed a broad list of factors which would indicate a ‘structured arrangement’ exists. This broad view is demonstrated in Example 4 in the PCG as a ‘structured arrangement’ where:

  • An Australian entity makes a COGS payment to a related party;
  • The recipient of the COGS payment makes a payment to a related party manufacturer, and;
  • The manufacturer makes a royalty payment leading to a hybrid outcome within a multinational group.

On this view, where a hybrid mismatch occurs within a multinational group it will likely be deemed a ‘structured arrangement’. The result of the ATO’s view is the Imported Hybrid Mismatch provisions will likely apply to most scenarios where there is an Australian deductible payment which can be traced to an offshore hybrid mismatch.

Responding to the ATO guidance

While our view is that ‘structured arrangement’ has been defined too broadly by the ATO, should the ATO maintain its view through the consultation stage, Australian subsidiaries of foreign parent entities should consider their exposure to the Imported Hybrid Mismatch provisions from 1 January 2019.

For more analysis of ATO rulings and compliance guidelines, log on to KPMG Tax Now.

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