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  • Hybrid mismatch rules

    The hybrid mismatch rules received royal assent on 24 August 2018. They are designed to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements.

    These arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. Hybrid mismatch arrangements have an overall negative impact on competition, efficiency, transparency and fairness.

    On 3 September 2020 amending legislation to clarify the operation of the hybrid mismatch rules (amending legislation) received royal assent – see Clarifying the operation of the hybrid mismatch rules.

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    What the rules apply to

    Australia's hybrid mismatch rules largely follow The Organisation for Economic Cooperation and Development (OECD) hybrid mismatch and branch mismatch rules from Action Item 2 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan.

    The rules apply to payments that give rise to hybrid mismatch outcomes which can be best summarised as:

    • deduction or non-inclusion mismatches (D/NI) where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction
    • deduction or deduction mismatches (D/D) where the one payment qualifies for a tax deduction in two jurisdictions
    • imported hybrid mismatches where receipts are sheltered from tax directly or indirectly by hybrid outcomes in a group of entities or a chain of transactions.

    These rules operate in Australia to neutralise hybrid mismatches by cancelling deductions or including amounts in assessable income.

    The rules also contain a targeted integrity provision that applies to certain deductible interest payments, or payments under a derivative, made to an interposed foreign entity where the rate of foreign income tax on the payment is 10% or less.

    Subject to some exceptions, the rules apply to certain payments after 1 January 2019, and to income years commencing on or after 1 January 2019. Limited transitional arrangements – impacting frankable distributions – apply for Additional Tier 1 regulatory capital issued by banks or insurance companies.

    In addition, the imported mismatch rules will only apply in respect of 'structured arrangements' for income years commencing on or after 1 January 2019. The complete imported mismatch rule will be delayed to income years commencing on or after 1 January 2020. This aligns with the EU introduction of the hybrid mismatch rules.

    Who the rules apply to

    The rules apply to payments between:

    • related parties
    • members of a control group
    • parties under a structured arrangement.

    Unlike the recently enacted diverted profits tax or multinational anti-avoidance law measures, the hybrid mismatch rules do not have a de minimis or materiality threshold.

    Legislation and supporting material

    The hybrid mismatch rules received royal assent on 24 August 2018 (as contained in Schedule 1 and 2 of Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018External Link.

    The amending legislation clarifying the operation of the hybrid mismatch rules received royal assent on 3 September 2020 (as contained in Schedule 1 of The Treasury Laws Amendment (2020 Measures No. 2External Link) Act 2020).

    Law companion rulings

    The following LCRs have been released so far:

    • On 13 January 2021 we finalised Law Companion Ruling LCR 2021/1: OECD hybrid mismatch rules – targeted integrity rule which provides the Commissioner of Taxation's interpretation of the hybrid mismatch targeted integrity rule set out in subdivision 832-J of the Income Tax Assessment Act 1997 (ITAA 1997). The finalised version incorporates feedback received on the two previous drafts and addresses changes introduced as part of the amending legislation.
    • On 24 July 2019 we finalised Law Companion Ruling LCR 2019/3 OECD hybrid mismatch rules – concept of structured arrangement which provides the Commissioner's view of the law in relation to the phrases 'structured arrangement' and 'party to the structured arrangement' set out in section 832-210 of the Income Tax Assessment Act 1997 (ITAA 1997).

    Taxation determination

    We published draft Taxation Determination TD 2019/D12 Income tax: is section 951A of the US Internal Revenue Code a provision of a law of a foreign country that corresponds to section 456 or 457 of the Income Tax Assessment Act 1936 for the purpose of subsection 832-130(5) of the Income Tax Assessment Act 1997?

    This draft Determination clarifies the ATO’s view that section 951A of the US Internal Revenue Code (which is the operative provision for the United States' global intangible low-taxed income regime) does not correspond to either section 456 or 457 in Australia’s controlled foreign company regime for the purpose of applying Australia’s hybrid mismatch rules.

    This draft ruling was published 19 November 2019 and was released for public comment until 17 January 2020.

    Practical compliance guidelines

    To date, the following PCGs have been released.

    • On 21 April 2021 we released draft Practical Compliance Guideline PCG 2021/D3 Imported hybrid mismatch rule - ATO's compliance approach. This contains practical guidance as to the ATO's assessment of the relative levels of tax compliance risk associated with hybrid mismatches addressed by Subdivision 832-H of the ITAA 1997 (the imported mismatch rule).

    This draft PCG is open for public comment until 21 May 2021.

    • On 24 July 2019 we finalised Practical Compliance Guideline PCG 2019/6 OECD hybrid mismatch rules – concept of structured arrangement. This contains practical guidance to assist taxpayers assessing the risk of the newly legislated hybrid mismatch rules applying to their circumstances – in particular in relation to the concept of 'structured arrangement' in section 832-210 of the ITAA 1997.

      This PCG should be read in conjunction with LCR 2019/3.
    • On 25 October 2018, we finalised PCG 2018/7 Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements to assist clients wishing to eliminate hybrid tax outcomes that would otherwise fall foul of the newly legislated hybrid mismatch rules.

      This PCG will assist clients to manage their compliance risk by outlining straightforward (low-risk) restructuring to which the Commissioner will not seek to apply Part IVA. The PCG also encourages early engagement with us by those taxpayers whose arrangements fall outside the low risk parameters outlined in the PCG.

      Clients potentially affected by the rules and considering restructuring should refer to this PCG to understand our compliance approach.

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      Last modified: 11 May 2021QC 61035