Introduced in 2018, the Australian hybrid mismatch rules operate to prevent multinational companies from avoiding income tax or obtaining dual tax benefits by exploiting differences between the tax treatment of entities or instruments across different countries. These rules aim to ensure companies pay their fair share of taxes and prevent them from abusing these mismatches to gain an unfair competitive advantage.
The hybrid mismatch rules cover payments that result in hybrid mismatch situations, which can be summarised as:
- Deduction or non-inclusion mismatches (D/NI): When a payment is tax deductible in one jurisdiction but not included in assessable income in the other jurisdiction.
- Deduction or deduction mismatches (D/D): When a single payment qualifies for a tax deduction in two jurisdictions.
- Imported hybrid mismatch: When a payment gives rise to a tax deduction but the income from such payment is set off, directly or indirectly, against a deduction that arises under a hybrid mismatch arrangement in an offshore jurisdiction.
These rules operate to neutralise hybrid mismatches by either denying the tax deductions or including them in assessable income.
The hybrid mismatch rules also contain a target integrity provision which applies when a deductible interest or derivative payment is made to a foreign interposed entity where the rate of foreign income tax on the payment is 10% or less.
It is worth noting that the hybrid mismatch rules do not have a de minimis or materiality threshold.
As stated in PCG 2021/5, a taxpayer should not claim a tax deduction for an offshore payment made to a member of its ‘Division 832 control group’ unless they have obtained sufficient information to conclude that the payment does not, directly or indirectly, import an offshore hybrid mismatch. Taxpayers should document their assessment as per the requirements in PCG 2021/5 and have the documentation in place prior to lodgment of their income tax returns.
Taxpayers are also subject to additional disclosures regarding hybrid mismatch rules when completing the International Dealing Schedule and Reportable Tax Position Schedule attached to their tax returns. The ATO have advised that clients who may be potentially affected by the rules should refer to the PCG to understand the ATO compliance approach, particularly PCG 2018/7 | Legal database (ato.gov.au), PCG 2019/6 | Legal database (ato.gov.au) and PCG 2021/5 | Legal database (ato.gov.au).