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Section G: Hybrid Mismatches

Last updated 7 February 2022

Question 45 Did the hybrid mismatch rules apply to you?

This question provides us with information about whether the hybrid mismatch rules in Division 832 of the ITAA 1997 (and associated amendments) applied to you during 2020–21.

Answer Yes to this question if during 2020–21 you had an arrangement which had the potential to give rise to a hybrid mismatch under any of the following provisions regardless of its impact on your taxable income (that is, whether as a result there was a deduction denied or amount included in your assessable income):

  • Subdivision 832-C – Hybrid financial instrument mismatch
  • Subdivision 832-D – Hybrid payer mismatch
  • Subdivision 832-E – Reverse hybrid mismatch
  • Subdivision 832-F – Branch hybrid mismatch
  • Subdivision 832-G – Deducting hybrid mismatch
  • Subdivision 832-H – Imported hybrid mismatch
  • Subdivision 832-J – Integrity rule
  • Section 230-522 – Adjusting a TOFA gain or loss that gives rise to a hybrid mismatch

All dollar amounts or values you use for in this entire section are based on your tax records.

If the hybrid mismatch rules did apply to you, answer Yes at A item 45 then go to question 46. Otherwise answer No at A item 45 then go to question 49.

Example 32

A Co is an Australian resident company which is wholly owned by B Co, a resident of Country B. B Co makes a check-the-box election under country B’s law to disregard A Co.

A Co claims deductions of $500,000 in Australia for payments made to B Co. These payments give rise to a deduction/non-inclusion mismatch.

A Co also derives $500,000 of operating income. This income will be dual inclusion income as it is subject to tax in both Australia and Country B, and therefore reduces the deduction/non-inclusion mismatch to nil.

A Co answers Yes at question 45.

End of example

For more information about the hybrid mismatch rules, see:

Question 46 Payments which gave rise to a mismatch

This question helps us to assess whether a hybrid mismatch has arisen between Australia and a counterparty jurisdiction for any payments you have made or received.

A payment that gives rise to a deduction under the rules of the payer jurisdiction and is not included in the ordinary income of the payee jurisdiction is a deduction/non-inclusion (D/NI) mismatch as defined in section 832-105 of the ITAA 1997. A payment that gives rise to a deduction in more than one jurisdiction for the same economic expense is a double deduction (D/D) mismatch as defined in section 832-110 of the ITAA 1997.

If payments you made or received resulted in either of the above outcomes, answer Yes at item A and then go to question 46a.

46a Total amount of payments which gave rise to deduction/non-inclusion mismatches and deduction/deduction mismatches

At B item 46a, write the total of all amounts of D/NI and D/D mismatches calculated under subsections 832-105(3) and 832-110(3) of the ITAA 1997 for all your transactions or arrangements in scope of the hybrid mismatch rules including section 230-522.

This is the sum of D/NI mismatches and D/D mismatches calculated prior to any adjustments for dual inclusion income, for equivalent foreign hybrid mismatch rules and for income recognised in later years. See Appendix 16 for these adjustments. Regardless of materiality, this disclosure must include all payments that gave rise to D/NI mismatches and D/D mismatches that are relevant to question 46b (that is, more than the top three material arrangements).

46b List top three material arrangements which gave rise to the mismatch

At A item 46b, write the appropriate Appendix 15 codes for the top three hybrid mismatch arrangements that gave rise to the highest dollar value of hybrid mismatches under the hybrid mismatch rules. Write these codes in descending order of total dollar value. Arrangement for the purposes of this question takes its meaning from the context of the type of hybrid in question and how the hybridity comes about.

Accordingly for a hybrid financial instrument mismatch, the instrument would be considered to be included in the one arrangement so that the total dollar value of the payments made under the instrument would be included in the amount you show at this item for that arrangement.

For a deducting hybrid or a hybrid payer, the relevant arrangement includes the relationship between the entities making or receiving the payments. For example, where a deducting hybrid has made a number of payments to various recipients which give rise to a D/D mismatch, the relevant arrangement is the deducting hybrid and you write the total dollar value of the payments made by the deducting hybrid at C item 46b.

For the purpose of this question when determining the three highest dollar value hybrid mismatch arrangements, the dollar value of the hybrid mismatch which must be considered is the amount prior to any adjustments for dual inclusion income, for equivalent foreign hybrid mismatch rules and for income recognised in later years. See Appendix 16 for these adjustments. At B item 46b, write the code for the counterparty jurisdiction for each of the three hybrid mismatch arrangements you have identified.

  • The counterparty jurisdiction for a D/NI mismatch is the country in which the recipient (if Australia is the payer) or the payer (if Australia is the recipient) is located.
  • The counterparty jurisdiction for a D/D mismatch is the country in which the foreign income tax deduction is claimed.

At C item 46b, write the total amount of the hybrid mismatch payments in respect of each of the three hybrid mismatch arrangements you have identified. This is the amount of hybrid mismatch for the income year calculated under subsection 832-105(3) and 832-110(3) of the ITAA 1997 prior to any adjustments for dual inclusion income, for equivalent foreign hybrid mismatch rules and for income recognised in later years. See Appendix 16 for these adjustments.

At D item 46b, write the total of the deduction denied or income included as assessable income in respect of each of the three hybrid mismatch arrangements you identified. This is the neutralising amount calculated under the relevant provisions in subdivision 832-C to 832-G of the ITAA 1997 or section 230-522 of the ITAA 1997. This could be the same or less than the figure stated in item C.

At E item 46b, select the appropriate code from Appendix 16 which indicates why the amount at C item 46b differs from the neutralising amount disclosed at D item 46b for the three hybrid mismatch arrangements you have identified. The reason for the difference may be one of the following:

  • The exception in subsection 832-220(2) of the ITAA 1997 applies, that is the difference in treatment of the debt interest, equity interest or derivative financial arrangement primarily relates to a debt deferral in the recognition of income or profits under the debt interest, equity interest or derivative financial arrangement and the term of the instrument is three years or less.
  • The neutralising amount of a hybrid payer mismatch or deducting hybrid mismatch has been reduced by an amount of dual inclusion income under section 832-330 or subsection 832-560(2) of the ITAA 1997.
  • Australia is the secondary response country and the hybrid mismatch has been neutralised by foreign hybrid mismatch rules in the counterparty jurisdiction.

At F item 46b, answer Yes if, under the hybrid mismatch rules, you are the recipient of the payment.

For the purposes of this question, the meaning of payment includes the extended meaning under subdivision 832-B of the ITAA 1997.

Example 33

An Australian Limited Partnership (ALP) is an eligible tier-1 company that is part of an Australian MEC Group. Aus Co is the head company of the MEC Group. The ALP is treated as a transparent or flow-through entity under Country B’s tax law for the purpose of taxation in Country B of the ALP’s foreign partners.

The ALP makes a payment of $1,000,000 to Aus Co which is deductible in Country B for the foreign partners, and disregarded in Australia under the single entity rule under Section 701-1 of the ITAA 1997. Accordingly, a D/NI mismatch has arisen.

The ALP also derives $500,000 of operating income. This income is dual inclusion income as it is subject to tax in both Australia and Country B.

Aus Co answers Yes at item 46, and writes $1,000,000 at B item 46a.

Aus Co selects Appendix 15 code 2 at A item 46b, writes $1,000,000 at C item 46b and $500,000 at D item 46b.

Aus Co selects Appendix 16 code 2 at E item 46b, and answers No at F item 46b.

End of example

Question 47 Do your international related parties have an offshore hybrid mismatch?

This question helps us to determine whether any offshore hybrid mismatches from transactions or arrangements entered into between your international related parties have been imported into Australia.

If any of your international related parties entered into transactions or arrangements which fall into any of the five categories below, answer Yes at A item 47 and then go to B item 47. If you identify any offshore hybrid mismatches in your analysis, you must answer Yes at A item 47 even if the importing deductions that are denied under the imported mismatch rule is nil.

  • Hybrid financial instrument mismatch as an offshore hybrid mismatch under section 832-195 of the ITAA 1997
  • Hybrid payer mismatch as an offshore hybrid mismatch under section 832-300 of the ITAA 1997
  • Reverse hybrid mismatch as an offshore hybrid mismatch under section 832-390 of the ITAA 1997
  • Branch hybrid mismatch as an offshore hybrid mismatch under section 832-465 of the ITAA 1997
  • Deducting hybrid mismatch as an offshore hybrid mismatch under section 832-540 of the ITAA 1997

At B item 47, write the total of all amounts of imported hybrid mismatches calculated under section 832-630 of the ITAA 1997. This is the total amount of your importing deductions that are denied under the imported mismatch rule, including section 230-522.

Example 34

ABC Co, a Country A resident, provides financing to B Co, one of its wholly owned subsidiaries resident in Country B, under a hybrid financial instrument. Interest payments of $1,000,000 on the hybrid financial instrument are deductible in an income year under Country B’s law but not included in ordinary income for Country A’s tax purposes. Neither Country A nor Country B has implemented foreign hybrid mismatch rules. Accordingly, an offshore hybrid mismatch has arisen.

B Co on-lends to a subsidiary member of ABC Co’s Australian consolidated tax group, Aus Co, under an ordinary loan arrangement. Aus Co makes interest payments of $1,000,000 on the ordinary loan, which are deductible in the income year in Australia and assessable as ordinary income in Country B. All loans are made as part of a structured arrangement. Therefore, Aus Co has made an importing payment in relation to the offshore hybrid mismatch that would be neutralised under section 832-610 of the ITAA 1997.

Aus Co answers Yes at item A item 47, and writes $1,000,000 at item B item 47.

End of example

Question 48 Amounts under subdivision 832-J

This question helps us to determine whether any of your transactions or arrangements were subject to subdivision 832-J of the ITAA 1997.

If you have directly or indirectly paid (including via a back to back arrangement) an amount of interest, an amount treated as interest under subsection 128A(1AB) of ITAA 1997, or an amount under a derivative arrangement to an international related party that was subject to foreign income tax at a rate of 10% or less, or was not subject to foreign income tax, answer Yes at A item 48 and then go to question 48a.

Answer Yes at A item 48 even if:

  • you were not denied a deduction because you relied on the principal purpose test in subsection 832-725(1)(h) of the ITAA 1997, or
  • an exception in sections 832-725(4) to (6) of the ITAA 1997 applied to you.

48a Total amount of deductions subject to subdivision 832-J

At B item 48a, write the total amount of the payments denied under subsection 832-725(3) or section 230-522 (dealing with the taxation of financial arrangements) of the ITAA 1997.

48b List top three material arrangements

This question seeks information on the top three arrangements involving any payments to foreign entities subject to foreign income tax at a rate of 10% or less, or not subject to foreign income tax, based on the highest dollar value of the payments. Write these in descending order of total dollar value.

At A item 48b, write the code for the foreign country where the interposed entity is located in relation to each of the top three arrangements you have identified.

At B item 48b, write the total amount of payments you have directly or indirectly made (including via a back to back arrangement) which are interest, payments treated as interest under subsection 128A(1AB) of ITAA 1997 or payments under a derivative financial arrangement that are subject to foreign income tax at a rate of 10% or less, or are not subject to foreign income tax, in respect of each of the top three arrangements you have identified. This is the amount of payments prior to the application of the principal purpose test or any exceptions under subdivision 832-J of the ITAA 1997 (refer to Appendix 17).

At C item 48b, write the total amount of the deductions denied in respect to each of the top three arrangements you have identified under subsection 832-725(3) or section 230-522 of the ITAA 1997. This is the amount for each of the three arrangements after applying the principal purpose test or any of the exceptions under subdivision 832-J of the ITAA 1997 (refer to Appendix 17).

At D item 48b, if C item 48b is nil, select the appropriate code from Appendix 17 which indicates the reason why item C is nil.

Question 49 Restructuring or replacing hybrid arrangements

This question seeks further information about unwinding, restructuring or replacing arrangements in 2020–21 or 2019–20 which would otherwise have potentially fallen within the scope of the hybrid mismatch rules (including section 768-7 of the ITAA 1997, subsection 23AH(4A) and subsection 160ZZZL(2) of the ITAA 1936), had the arrangement remained in place. This question ensures disclosure of the steps of arrangements replacing earlier arrangements.

For the purpose of answering this question, you determine whether an arrangement would have been subject to the hybrid mismatch rules prior to considering dual inclusion income, changes to the treatment of the arrangement in the counterparty jurisdiction or any other specific modifications or exceptions in the rules.

This question is intended to ensure disclosure of the steps of arrangements replacing earlier arrangements, where those earlier arrangements were terminated in connection with the anticipated impact of the hybrids legislation.

If your 2021 income year ended on 31 December 2020, for the purpose of answering this question, you determine whether the prior arrangements would have been subject to the hybrid mismatch rules based on the assumption the arrangements continued until after 31 December 2020 or such later date when the relevant hybrid mismatch rules apply.

If your 2021 income year ended on 30 June 2021, for the purpose of answering this question, you determine whether the prior arrangements would have been subject to the hybrid mismatch rules based on the assumption the arrangements continued until after 1 July 2021 or such later date when the relevant hybrid mismatch rules apply.

A corresponding approach is taken for income years that end on other dates. The individual steps of the replacement arrangement do not need to be disclosed at Question 49 if all steps of the replacement arrangement were disclosed at Question 49 of your 2020 IDS and there have been no changes to the steps of that replacement arrangement and no additional steps in connection with that replacement arrangement. If you did fully disclose all steps of a replacement arrangement at Question 49 of your 2020 IDS, you need to answer Yes at Question 49 and:

  • state you disclosed all the steps of the replacement arrangement at Question 49 of your 2020 IDS, and
  • describe any further steps or changes in connection with the previously reported replacement arrangement that occurred before the end of 2020–21.

If in 2020–21 or 2019–20 you had one or more arrangements to which the hybrid mismatch rules would apply (had the arrangements continued after the hybrid mismatch rules came into effect and applied to you) and you restructured or replaced these arrangements or entered into alternative arrangements (restructured/replacement/alternative arrangements), answer Yes at A item and then go to question 49a.

49a Top three restructured or replacement arrangements

For the purpose of this question, describe the most material restructured/replacement/alternative arrangements. Materiality is determined by reference to the amount of the hybrid mismatch payments during 2020–21 if the arrangement had remained in place and had been affected by the hybrid mismatch rules, before considering:

  • dual inclusion income
  • equivalent foreign hybrid mismatch rules
  • income recognised in later years, and
  • any other specific exceptions under the hybrid mismatch rules.

At A item 49a, write a description of the most material restructured/replacement/alternative arrangements providing the following details:

  • a description of each prior hybrid mismatch arrangement including the nature of the hybrid mismatch and how the tax laws of relevant counterparty jurisdictions operated to produce the mismatch, and
  • a high-level description of each of the steps in each of the restructured/replacement/alternative arrangements, including the steps involving other members of your global group occurring in connection with the transactions involving you, including any steps that are in addition to the removal of a hybrid mismatch outcome.

Where the restructured/replacement/alternative arrangements have resulted in your taxable income being greater than what your taxable income would have been under the replaced hybrid arrangement before the application of the hybrid mismatch rules, answer No at the respective B item 49a. Otherwise answer Yes at the respective B item 49a.

Example 35

A Co, an Australian tax resident has issued mandatory redeemable preference shares (MRPS) to Parent B Co, a resident in Country B.

The MRPS are treated as debt for Australian tax purposes and A Co is entitled to a deduction for interest payments made to B Co under the MRPS. B Co treats the return it receives from A Co on the MRPS as exempt dividends under Country B’s tax law. Accordingly, a D/NI mismatch has arisen which would be neutralised under the Australian hybrid mismatch rules by disallowing A Co the deduction.

A Co and B Co decide to refinance the MRPS by A Co entering into an ordinary loan agreement to obtain funds to redeem the MRPS. The interest rate on the ordinary debt is on arm’s length terms which broadly equates to the coupon rate on the former MRPS. A Co will be entitled to a deduction in Australia for the interest on the loan from B Co.

A Co answers Yes at B item 49a and writes the following description:

Prior to the restructure, A Co had issued MRPS to B Co (a resident of Country B). This arrangement gave rise to a D/NI mismatch which would have been neutralised under the hybrid mismatch rules.

On 1 June 2020, the MRPS were redeemed. This was financed by A Co entering into an ordinary loan agreement with B Co. A Co will be entitled to a deduction in Australia for the interest on the loan from B Co. The interest received by B Co will be assessable in Country B.

End of example

 

Example 36

A Co is a head company of an Australian MEC group for Australian tax purposes. At the beginning of A Co’s income year ended 31 December 2019:

  • A Co’s MEC group included an eligible tier 1 company, Hybrid Co.
  • A Co’s ultimate parent is X Co.
  • Hybrid Co was a wholly owned subsidiary of X Finance Co, a wholly owned subsidiary of X Co. X Finance Co was a resident of X country for tax purposes.
  • Hybrid Co was a company incorporated in Country X that was    
    • resident for Australian tax purposes, and
    • treated as a disregarded entity for the tax purposes of Country X.
     
  • A Co’s MEC group claimed a deduction for interest payable by Hybrid Co under a borrowing from X Finance Co.
  • The loan agreement between X Finance Co and Hybrid Co for the borrowing provided the loan was repayable by Hybrid Co on 31 March 2023.
  • The result of Hybrid Co having been treated as a disregarded entity in Country X was that the interest payable to X Finance Co was not taxable in Country X.
  • There would have been a resulting D/NI mismatch under subdivision 832-D of the ITAA 1997 if these circumstances had continued.
  • As a result of tax planning advice provided to X Co by their tax adviser to the effect that the same or greater global tax savings resulting under the above hybrid mismatch arrangement can be achieved by an alternative arrangement developed by their tax adviser: Hybrid Co agreed with X Finance Co to repay the borrowing from X Finance Co early.
  • The borrowing from X Finance Co was repaid by Hybrid Co on 31 October 2019.
  • On 24 September 2019:    
    • a subsidiary member of A Co’s MEC group, A Sub Co, entered into a related party ‘debt factoring’ agreement with Irish Co, a wholly owned subsidiary of X Co, resident in Ireland for tax purposes
    • Irish Co issues shares to Lux Co, a wholly owned subsidiary of X Co, resident in Luxembourg for tax purposes
    • Lux Co enters into a securities lending agreement with X Finance Co.
     
  • Under A Sub Co’s debt factoring arrangement with Irish Co, A Co’s MEC group deducts in Australia the difference between the face value of A Sub Co’s customer receivables and the amount payable to A Sub Co by Irish Co for the ‘factored’ receivables.
  • The amount deducted by A Co during the year ended 31 December 2020 in connection with A Sub Co’s debt factoring arrangement equals or exceeds the amount that would have been deducted by A Co in connection with interest payable by Hybrid Co under the borrowing from X Finance Co, if that borrowing had remained in place until after 31 December 2020.

A Co answers Yes at B item 49a and writes a description that includes at least all of the information provided in this example.

End of example

Question 50 Foreign equity distribution giving rise to foreign deduction

If during 2020–21 you received a foreign equity distribution that gave rise to a foreign income tax deduction, answer Yes at A item 50 and then go to question 50a.

50a Amount that is not non-assessable non-exempt under section 768-7

At B item 50a, write the total amount of the foreign equity distribution subject to section 768-7 of the ITAA 1997.

Question 51 Branch hybrid mismatch income

If during 2020–21 you derived foreign income that was branch hybrid mismatch income under subsection 23AH(14C) of the ITAA 1936, answer Yes at A item 51 and then go to question 51a.

51a Amounts that are not non-assessable non-exempt under subsection 23AH(4A)

At B item 51a, write the total amount of your branch hybrid mismatch income subject to subsection 23AH (4A) of the ITAA 1936.

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