Australia’s Anti-Hybrid Mismatch Rules
By Tony Nunes, Kelly+Partners Chartered Accountants
On 1 October 2018 Australia’s new hybrid mismatch laws officially came into force. The new rules are intended to implement BEPS Action 2, “Neutralising the effects of hybrid mismatch arrangements”.
There are a number of separate limbs to Australia’s new hybrid mismatch laws, similar to the structure of the recommendations from the final 2015 and 2017 OECD Reports on BEPS Action 2. Each limb is targeted at a separate scenario, but all of these scenarios involve:
- a cross-border transaction or transactions involving related entities or branches; and
- an inconsistency in the treatment of the transaction or transactions between Australia and foreign countries, such that particular amounts end up not being subject to tax in any country or can be deducted in two different countries.
Hybrid financial instruments (HFI)
The HFI limb of the new rules targets a scenario of a “HFI mismatch”. This limb covers a broad variety of debt, equity and derivative instruments, where related entities are parties to the instrument. The concept of a mismatch is defined based on whether a deduction is available in Australia for a payment under the instrument, which exceeds the sum of the amounts of the payment that are subject to income tax overseas. The Australian taxpayer could then be denied a deduction for any amount of the payment, which exceeds the amounts that are assessable overseas. For example, an Australian taxpayer pays a dividend on a mandatory redeemable preference share to an overseas parent. The Australian taxpayer could be entitled to a deduction for such a dividend, while it is non-assessable to the recipient overseas (because of an overseas exemption for dividend income). Under the new rules this is likely a “HFI mismatch”, and the Australian taxpayer could be prevented from claiming a deduction for the dividends. This denial could occur despite such deductions otherwise being available under Australian tax law.
The new law also includes a corresponding rule that can make an Australian taxpayer assessable on an otherwise exempt payment that has arisen from an instrument, where a deduction for the payment can be claimed overseas. For example a dividend from an overseas subsidiary, normally covered by Australia’s tax exemption regime for non-portfolio dividends, could become assessable in Australia to the extent it was deductible overseas. However, this corresponding rule does not apply where the deduction is in a foreign country that has enacted rules reflecting BEPS Action 2, which have substantially the same effect as the new Australian laws.
Branch hybrids (BH)
The BH limb of the new rules applies to a “BH mismatch”, and can deny a deduction for a payment made by an Australian taxpayer to a related overseas branch. In broad terms, a “BH mismatch” will arise in relation to a payment where:
- The payment is derived by a foreign branch but is exempt from tax in Australia, because of Australia’s exemption for certain income derived through overseas branches; and
- The payment is also exempt from tax in the branch country, either because the branch country will not treat the payment as having been derived by the permanent establishment located within its territory, or because the branch country will otherwise treat the payment as not having a sufficient connection to the permanent establishment located within its territory.
Where there is a BH mismatch (as outlined above) there is also potential under the new rules for the actual branch profits to become assessable in Australia.
The new hybrid mismatch laws can have a significant impact on Australian taxpayers.
In this article we have only discussed two of the limbs of Australia’s new rules, however there are four additional limbs covering the concepts of hybrid payer mismatches, reverse hybrid mismatches, branch hybrid mismatches, deducting hybrid mismatches, and imported hybrid mismatches. All of these are intended to reflect the recommendations from BEPS Action 2.
The new hybrid mismatch laws are a historically significant development in Australia’s tax policy, requiring the introduction of many new concepts into the legislation. Until now the tax treatment of particular amounts overseas has generally not had any impact on the treatment of those amounts under Australian tax law. There are also no de minimus exemptions to the new law, so even small businesses that have overseas related parties or branches are potentially impacted. The Australian Taxation Office has already released a Practical Compliance Guideline, a further Draft Practical Compliance Guideline and Draft Law Companion Ruling in an effort to provide practical guidance for taxpayers on the new laws. It is likely to be very interesting times for many Australian taxpayers, trying to get to grips with these changes during this first income year that they are in force.
Tony NunesKelly + Partners Chartered Accountants, Sydney, Australia
T: +61 2 9233 8866
Kelly + Partners manages the individual needs of private business owners, high net worth individuals, and significant families. Kelly+Partners is an integrated financial services firm offering clients expertise in Chartered Accounting and Business Services, Tax Legal, Private Wealth and Family Office.
Tony Nunes is an experienced tax practitioner with over 23 years’ experience in providing tax advice across a range of industries. He brings deep technical expertise to any engagement with an understanding of its broader commercial impact.
Published: April 2019 l Photo: pominoz1966 - stock.adobe.com