The Bill to enact the Government’s announced anti-hybrid measures was introduced into Parliament today. As expected, the Bill comprises three main elements:
- restrictions on the domestic franking regime and the rules which currently exempt from Australian tax non-portfolio dividends received by Australian companies from their foreign subsidiaries;
- a rule attacking payments of interest or under derivatives made to related entities resident in low-tax jurisdictions (the so-called ‘integrity rule’); and
- a suite of measures, based on the OECD/G20 Final Report on BEPS action 2, directed to countering the consequences of transactions involving hybrid financial instruments and hybrid entities.
Two prior versions of the legislation were released for comment and there has been a lot of development to the legislation over the last 6 months, including further changes in the final Bill just introduced into Parliament. But the legislation is still highly complex and very technical, and many of the interactions among the regimes and between these regimes and the rest of the Act will require detailed consideration.
To date, our experience working with earlier versions of these provisions indicates –
- unexpected applications of the new rules will be common. It will be a mistake to think that payments under what we consider a ‘plain vanilla’ debt or equity instrument will be immune from challenge;
- in some cases these rules will apply to entirely domestic transactions. It is a mistake to think that only cross-border transactions can be challenged;
- taxpayers will need to keep abreast of tax developments occurring in many countries in order to be confident of their own tax treatment in Australia;
- Australian entities will need to be able to get good, reliable and timely information from other group members in order to be confident of their own tax position. Australian entities will need to know not only what treatment is being applied offshore, but why;
- any transaction involving a partnership, limited partnership, trust, foreign branch, disregarded company or consolidation regime is going to require careful analysis; and
- almost every financing transaction involving a related entity in a low-tax jurisdiction will require scrutiny.
Individual measures in the Bill start from different dates – the changes to imputation and foreign dividends will apply to distributions made on and after 1 January 2019; most the remaining changes will apply to income years starting on and after 1 January 2019 (so, in many cases, for payments made from 1 July 2019); the rules dealing with ‘imported mismatches’ will apply to income years starting on and after 1 January 2020 (so commonly for payments made after 1 July 2020).
We expect the Bill will pass through Parliament quickly and receive Royal Assent in the next month or two.
There will be a lot of work to do in the next 7 months to get ready for these rules. Taxpayers should consider the potential impact of the rules, including the impact of changes in the final Bill compared to the previous drafts, as soon as possible. Identifying hybrid mismatches and determining their impact can be a complex exercise. Many taxpayers may need to restructure out of hybridity. We expect that the ATO will release guidance on its views on the news rules, and potentially issues relating to restructures in response to the rules, in the near future, hopefully by the date of Royal Assent.