The Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 (Bill) introduces a new division, Division 832, and amends other sections of the Income Tax Assessment Act 1997 (1997 Act) to implement part of the recommendations made in the OECD Action 2 Report on hybrid mismatches, taking into account the recommendations made by the Board of Taxation and having regard to input received during public consultation.
The new rules aim to neutralise the effect of hybrid mismatch arrangements that exploit differences between the tax treatment of entities and instruments across different countries.
Broadly, a hybrid mismatch will arise where the arrangement results in a business receiving a deduction in two countries for the same payment (deduction/deduction), or when a business receives a deduction in one country but the corresponding income is not included as assessable income in the receipient country (deduction/non-inclusion).
To neutralise the effect of the hybrid mismatch, Australia has adopted a two-tier response system. The primary response will disallow an Australian tax deduction; the secondary response will include an amount in an entity’s Australian assessable income.
There are 6 types of mismatches captured by the legislation:
- hybrid financial instrument mismatches
- hybrid payer mismatches
- reverse hybrid mismatches
- branch hybrid mismatches
- deducting hybrid mismatches and
- imported hybrid mismatches.
If a hybrid mismatch is not captured by the above categories, the targeted integrity rule may operate to neutralise the effect of the mismatch.
The hybrid mismatch rules will apply to income years starting on or after 1 January 2019. The imported mismatch rule will apply to income years starting on or after 1 January 2020, unless the importing payment is made under a structured arrangement. Broadly, a structured arrangement will exist where either the hybrid mismatch is priced into the terms of the scheme, or it is reasonable to conclude that the hybrid mismatch is a design feature of the scheme.
This Bill also amends the Income Tax Assessment Act 1936 to implement part of the OECD hybrid mismatch rules by limiting the scope of the exemption for foreign branch income and preventing a deduction from arising for payments made by an Australian branch of a foreign bank to its head office in some circumstances.