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By Modiesha Stephens, Special Counsel, and James Tadros, Solicitor
HHG Legal Group
West Perth, Australia 

In November 2017 the Australia Federal Government circulated the Treasury Laws Amendment (OECD Hybrid Mismatch Rules) Bill 2017 (Bill).  If passed in its current form, Schedule 1 of the Bill will implement the OECD hybrid mismatch rules through the insertion of Division 832 into the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

New Division 832 aims to prevent entities liable to income tax in Australia from avoiding income taxation, or obtaining a double non‑taxation benefit, through the exploitation of differences between the tax treatment of entities and instruments under the laws of two or more tax jurisdictions.

The proposed rules are largely in line with the OECD recommendations but with some variations specific to Australia.

What is a Hybrid Mismatch? 

Broadly, under the proposed rules in Division 832 a hybrid mismatch will arise if:

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

b)     The payment gives rise to either:

i. A Double Deduction Mismatch: occurs when the payer receives a deduction for the same expenditure in two jurisdictions; or
ii. A Deduction/Non-inclusion Mismatch: occurs when a deduction is allowed for a payment in one country (i.e. the payer’s jurisdiction), but it is not included as assessable income in the recipient country (i.e. the recipient’s jurisdiction).

However, the proposed rules will only apply if a hybrid mismatch is attributable to one of the following five hybrid mismatch arrangements:

a)     Hybrid financial instruments mismatch (for example, an Australian company issues redeemable preference shares to a foreign company. These shares are treated as debt in Australia and give rise to deductions but the foreign country has a participation exemption in relation to the dividends)

b)     Hybrid payer mismatch (for example, an Australian company makes a deductible payment to its foreign parent in circumstances where the Australian company is treated as tax transparent in the foreign parent’s jurisdiction and the payment is disregarded in the foreign jurisdiction)

c)     Reverse hybrid mismatch (for example, an Australian company A makes a deductible payment to a foreign group member B (a partnership) owned by C and resident in a country in which C is regarded as liable for the payment.  However, in C’s tax jurisdiction B is regarded as a separate legal entity and does not subject the payment to tax)

d)     Deducting hybrid mismatch (for example, where an payment by a foreign company is deductible in Australia and the foreign country )

e)     Imported hybrid mismatch (where payment is made directly or indirectly by an Australian taxpayer to a non resident and that payment funds the return on a hybrid arrangement)

Subject Entities

An entity will be subject to the hybrid mismatch rules in the following circumstances:

a)     The entities are in the same Division 832 control group – a group that is consolidated for accounting purposes or where the entities have at least 50% common ownership or one of the entities holds at least 50% in the other entity;

b)     The arrangement is a structured arrangement, being one where the payment gives rise to a hybrid mismatch and either:

i. The hybrid mismatch is priced into the terms of the scheme; or
ii. It is reasonable to conclude that the scheme has been designed to produce a hybrid mismatch.

For the purposes of determining whether a hybrid financial instruments mismatch exists, the 50% ownership threshold is lowered to 25%.

(a)     Neutralising Hybrid Mismatches

In general, if a hybrid mismatch arises, the tax advantage obtained from the mismatch is ‘neutralised’ by, including an amount in the entity’s Australian assessable income or disallowing a deduction in Australia.


A carve-out applies to financial instruments and arrangements with a term of three years or less.   However, as currently drafted, there are no additional de minimis rules or materiality thresholds to otherwise restrict the application of the proposed rules.

What Next?

The Government has indicated that additional rules covering branch mismatches and targeted integrity rules will also be included in due course.

The rules proposed in the Bill will commence six months after the Bill receives Royal Assent and, importantly, there will be no ‘grandfathering’ relief for existing arrangements.  This commencement date may also apply to the (as yet undrafted) branch mismatch and targeted integrity rules.

Whilst Taxpayers participating in cross-border transactions after the Bill’s commencement date will need to consider whether proposed Division 832 applies to their arrangements, the lack of ‘grandfathering’ relief means that existing arrangements should also be evaluated and, if appropriate, restructured.   Any evaluation of these arrangements will also need to consider the (currently undrafted) targeting integrity rules.

At HHG Legal Group our team of tax law specialists can provide you with the necessary advice to determine if and how proposed new Division 832 applies to your existing and future arrangements.

This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on 9841 2322.