Income Tax Assessment Act 1936

PART IIIB - AUSTRALIAN BRANCHES OF FOREIGN BANKS  

Division 5 - Modifications relating to hybrid mismatch rules  

SECTION 160ZZZL   CERTAIN " HYBRID MISMATCH " DEDUCTIONS DENIED  

160ZZZL(1)    
Subsection (2) applies if:

(a) either:

(i) an amount of interest (a notional payment ) is taken under section 160ZZZA to be incurred by an Australian branch of a foreign bank in respect of a notional borrowing; or

(ii) an amount (also a notional payment ) is taken under section 160ZZZE to be an amount paid by an Australian branch of a foreign bank in respect of a notional derivative transaction; and

(b) the amount would, apart from this section, give rise to a deduction for the Australian branch in a year of income; and

(c) the amount of the deduction exceeds the amount worked out under subsection (3).

Neutralising hybrid mismatch outcomes

160ZZZL(2)    
So much of the deduction as equals the excess worked out under paragraph (1)(c) is not allowable as a deduction for the year of income.

Extent to which notional payment gives rise to a deduction/non-inclusion outcome

160ZZZL(3)    
For the purposes of paragraph (1)(c), sum the following amounts:

(a) the amount of the notional payment that is subject to foreign income tax;

(b) so much (if any) of the amount of the notional payment as it is reasonable to conclude is effectively funding expenses covered by subsection (4) or (5) (about non-deductible third party expenses);

(c) the amount (if any) of income or profits of the Australian branch that is both:

(i) subject to Australian income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the year of income mentioned in paragraph (1)(b); and

(ii) subject to foreign income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the foreign country in which the foreign bank is a resident.

Non-deductible third party expenses

160ZZZL(4)    
For the purposes of paragraph (3)(b), if:

(a) the notional payment is in respect of a notional borrowing; and

(b) it is reasonable to conclude that the notional borrowing is effectively funded by actual borrowings by the foreign bank;

then the expenses in respect of the actual borrowings are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.

160ZZZL(5)    
For the purposes of paragraph (3)(b), if:

(a) the notional payment is in respect of a notional derivative transaction; and

(b) it is reasonable to conclude that the foreign bank has hedged or managed all or part of its risk in relation to the notional derivative transaction by entering into actual transactions;

then the expenses in respect of the actual transactions are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.

Safe harbour

160ZZZL(6)    
The deduction is taken for the purposes of paragraph (1)(c) not to exceed the amount worked out under subsection (3) if the foreign bank adopts a recognised transfer pricing methodology in allocating expenditure and income between itself and all its branches.