Australia: ATO clarification of hybrid mismatch rules

Australia: ATO clarification of hybrid mismatch rules

The Australian Taxation Office (ATO) updated guidance concerning the hybrid mismatch rules after Treasury Laws Amendment (2020 Measures No.2) Act 2020 received Royal Assent on 3 September 2020.

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According to the ATO update, the new law makes minor technical amendments to Australia’s hybrid mismatch rules to clarify and improve their operation, in relation to:

  • Trusts and partnerships
  • The circumstances in which an entity is a deducting hybrid
  • The operation of the dual inclusion income rule by:
    • Deeming certain types of foreign-sourced income to be subject to Australian income tax in determining if that income is dual inclusion income
    • Removing the need for non-corporate entities to reduce their dual inclusion income when they have a foreign income tax offset
    • Clarifying the operation of the dual inclusion income on-payment rule
    • Expanding the definition of “dual inclusion income group” such that if in a country, two or more entities share the same multiple liable entities (and those alone), then those entities are members of a dual inclusion income group in that country
  • The definition of “foreign hybrid mismatch rules” so that it refers to a foreign law corresponding to any of Subdivisions 832-C to 832-H of the ITAA 1997 and clarifying the operation of provisions that have regard to the operation of corresponding foreign hybrid mismatch rules
  • Foreign income tax not including foreign municipal or state taxes (except in considering the application of the integrity rule)
  • Rules that apply to multiple entry consolidated (MEC) groups in the same way as they apply to consolidated groups
  • The integrity rule applying appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules
  • Allowing franking benefits on franked distributions made on certain Additional Tier 1 (AT1) capital instruments that would otherwise be denied

The amendments will apply to income years beginning on or after 1 January 2019, except for amendments:

  • To the integrity rule (other than the state and municipal taxes changes), which will apply to income years beginning on or after 2 April 2019
  • To the definition of “foreign hybrid mismatch rules” which will apply to income years beginning on or after 1 January 2020

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