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Australia: Hybrid mismatch rules

The Australian Treasurer Scott Morrison released exposure draft legislation on November 24 to prevent entities that are liable to Australian income tax from avoiding income taxation or obtaining a double non-taxation benefit by utilising differences between the tax treatment of entities and instruments across different countries.

The most prevalent types of hybrid mismatch arrangements are those that give rise to:

  • A deduction/non-inclusion mismatch (e.g. redeemable preference shares that are treated as debt in Australia and equity in a foreign jurisdiction); and

  • A double deduction mismatch (where a deduction is available in two or more countries for the same payment).

In these circumstances, under the new rules the hybrid mismatch arrangement may be neutralised by, firstly, disallowing a deduction, or, secondly, including an amount in assessable income.

The hybrid mismatch rules are based on the recommendations of the 2015 OECD report, 'Neutralising the Effects of Hybrid Mismatch Arrangements', and also the recommendations of the Australian Board of Taxation, including its consultation paper of November 2015, entitled 'Implementation of the OECD Anti-hybrid Rules'.

The Australian government had previously indicated that it would implement the recommendations of the 2015 OECD report and this exposure draft legislation will now be open for consultation until December 22 2017.

The release of the Australian hybrid mismatch rules is part of a growing global trend that has been preceded by the UK enacting similar laws with effect from January 1 2017 and the European Union's commitment to similar rules by January 1 2020. It is also expected that other countries, including New Zealand, will adopt similar rules in the foreseeable future.

The hybrid mismatch rules are principally contained in proposed new Division 832 (sections 832-1 to 832-1020) of the Income Tax Assessment Act 1997 (the 1997 Act) and will generally apply to payments made on or after the day that is six months following the legislation receiving royal assent.

Broadly, a hybrid mismatch will arise if:

  • An entity enters into a scheme that gives rise to a payment; and

  • The payment gives rise to either a deduction/non-inclusion mismatch or a deduction/deduction mismatch.

The new rules will principally apply to five types of arrangements, as follows:

  • A hybrid financial instrument mismatch;

  • A hybrid payer mismatch;

  • A reverse hybrid mismatch;

  • A deducting hybrid mismatch; or

  • An imported hybrid mismatch.

In neutralising a particular mismatch, a deduction will be disallowed or an amount included in assessable income.

Further specific Australian initiatives are proposed denying imputation benefits and/or effectively tax exempt foreign sourced distributions.

Tax whistleblower protections

Separately, the Australian government on October 23 2017 released exposure draft legislation outlining a new whistleblower protection regime in Australian tax law with a view to more readily exposing tax misconduct.

In addition to the new tax regime, the government will introduce a single whistleblower protection regime in the Australian Corporations Law to cover the corporate, financial and credit sectors.

Other developments

We are keenly awaiting the release of the exposure draft legislation for the tax component of the proposed new corporate collective investment vehicle regime that is expected to be released prior to Christmas 2017.

Further, the Australian government is expected to provide some direction on the tax policy approach to stapled structures, which has been a major focus for taxpayers, the Australian Taxation Office (ATO) and the Australian Treasury during 2017.

Finally, the ATO is moving to settle certain of its Multinational Anti-Avoidance Law (MAAL) disputes with taxpayers and continues to elevate its transfer pricing, diverted profits tax and related international tax focuses.


Jock McCormack (

DLA Piper Australia

Tel: +61 2 9286 8253

Fax: +61 2 9286 8007


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