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Hybrid mismatch targeted integrity rule: draft ruling

Hybrid mismatch targeted integrity rule

KPMG's Peter Madden, Fabian Fedele & Bevis Field discuss a draft Law Companion Ruling dealing with particular aspects of the targeted integrity rule.


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Gavel and open book

The Australian Taxation Office (ATO) has released draft Law Companion Ruling LCR 2019/D1, which sets out its view on particular aspects of the targeted integrity rule within the hybrid mismatch rules in Division 832 of the ITAA 1997 for public comment. It is proposed that this draft Ruling will be finalised as a public ruling, effective from 1 January 2019.


The targeted integrity rule in Subdivision 832-J aims to prevent offshore multinationals from circumventing the hybrid mismatch rules by routing investment or financing into Australia via an interposed foreign entity located in a no or low tax (10 percent or less) jurisdiction. The rule applies to deny the deduction for a payment of interest or an amount under a derivative financial arrangement.

The key issues considered in the LCR are:

  1. the meaning of ‘control’ in the requirement that the ultimate parent entity is not controlled by any other entity (other than an entity that is not a member of the Division 832 control group), in paragraph 832-725(1)(c);
  2. the term ‘subject to foreign income tax is 10 percent or less’, in subparagraph 832-725(1)(g)(i);
  3. the principal purpose test, in paragraph 832-725(1)(h); and
  4. back to back arrangements, in section 832-730.

To read more on the key elements of the guidance, please log on to KPMG Tax Now.

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