Australia: Imported hybrid mismatch rule, final ATO guideline

While broad concepts expressed in the draft remain, there are a number of key changes in the final guidance

Imported hybrid mismatch rule, final ATO guideline

The Australian Taxation Office (ATO) on 16 December 2021 issued Practical Compliance Guideline 2021/5: Imported hybrid mismatch rule – ATO’s compliance approach (PCG 2021/5) concerning a practical administrative approach to the imported hybrid mismatch provisions in subdivision 832-H of the Income Tax Assessment Act 1997.

PCG 2021/5 updates and finalizes a draft guideline that was released by the ATO for consultation in April 2021. Read TaxNewsFlash

Overview

PCG 2021/5 will apply retroactively for income years beginning on or after 1 January 2019 for importing payments made under a structured arrangement and 1 January 2020 for all other imported hybrid mismatch arrangements.

The key concepts that continue from the draft guideline include:

  • The Commissioner’s compliance expectations (including approach to penalties) as to what a taxpayer is required to do, to demonstrate that it has taken sufficient steps to obtain information to establish that the imported hybrid mismatch rule does not apply to the taxpayer’s circumstances, or that the taxpayer has correctly identified all imported hybrid mismatches and when there is a denial of Australian deductions as a result
  • The Commissioner’s expectation that a taxpayer is not to claim a deduction for any cross-border payments made to a member of its Division 832 control group unless the taxpayer is able to obtain sufficient information to support a conclusion that the deduction is not disallowed under the imported hybrid mismatch rule
  • The recommended methodologies (referred to as “top-down” and “bottom-up” approaches) which a taxpayer may use to demonstrate that reasonable enquiries have been made in assessing application of the imported hybrid mismatch rule
  • A risk framework for taxpayers to self-assess their compliance risk and to assess the likelihood the ATO may undertake further engagement and assurance activity

While these broad concepts expressed in the draft guideline remain, there are a number of key changes, including:

  • A clarification that taxpayers may apply a combination of the top-down and bottom-up approach in demonstrating compliance, and flexibility in the way the ATO’s recommended approaches may be applied
  • A clarification that a broad approach is needed in identifying importing payments, and that it is not necessary to demonstrate that each payment in a series of payments funds the next payment, or is made after the previous payment
  • A change to the definition of risk zones in the self-assessment risk framework, in particular:
    • An overall reduction in the number of risk zones (resulting from a shift of circumstances between risk zones)
    • An expansion of the green zone, including the welcome provision of a de minimis entry into the green zone where otherwise deductible payments made to members of the taxpayer’s Division 832 control group are less than $2 million which is expected will reduce compliance burdens on taxpayers undertaking a risk self-assessment with small international related-party transactions
    • A new yellow zone that may benefit multinational groups that have, and have applied, a global policy for managing risks associated with imported hybrid mismatches which is consistent with the OECD Action Item 2 report (it is unclear what the ATO may consider to be an appropriate global tax policy, and application of the policy, that falls within scope of the new yellow zone)
    • For the blue and green zones, enabling a taxpayer to rely on risk self-assessments completed in the two preceding income years when the circumstances of the Division 832 control group have not materially changed
  • Additional comments on the ATO’s approach to shortfall penalties, particularly in the context of voluntary disclosures made within 18 months from the date of publication of the guideline

In addition, the ATO has also added examples to help illustrate some of the key concepts expressed in the guideline, as well as included a table which sets out the expected compliance approach for each self-assessed risk zone.

KPMG observation

Tax professionals have observed that the ATO appears to be seeking to simplify the risk zones and has provided more practical guidance through examples. However, taxpayers required to undertake a risk self-assessment under the guideline may continue to encounter complexities and significant practical compliance challenges in managing their tax profiles. Furthermore, taxpayers remain responsible for determining compliance with the hybrid mismatch rules in accordance with the income tax law, regardless of the ATO’s approach to undertaking a risk self-assessment under the guideline.

With the release of the final guideline, taxpayers need to consider whether:

  • Existing tax compliance processes are appropriate in demonstrating compliance with the hybrid mismatch rules in accordance with the income tax law
  • There are any immediate or upcoming reporting obligations that require specific disclosures to be made in relation to the hybrid mismatch rules
  • Self-assessments previously completed under the draft guideline need to be revisited


For more information, contact a KPMG tax professional in Australia:

Paul Sorrell | +61 2 9335 8613 | psorrell@kpmg.com.au

Denis Larkin | +61 2 9335 7171 | dlarkin@kpmg.com.au

Jennifer Ta | +61 2 9335 7138 | jta2@kpmg.com.au

Tammy Eccles | +61 2 9335 7506 | teccles@kpmg.com.au

 

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