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  • Section G: Hybrid mismatches

    This section provides us with information about whether the hybrid mismatch rules in Division 832 of the ITAA 1997 (and associated amendments) applied to you during 2021–22. This section also helps us to assess tax risks associated with hybrid structures.

    In this section

    Question 45 Did the hybrid mismatch rules apply to you?

    Answer Yes to this question if during 2021–22 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.

    Examples of where you must answer Yes to this question include:

    • after requesting your Division 832 control group to provide information about the group’s offshore hybrids in order to complete your income tax return, you have knowledge of an offshore hybrid mismatch (regardless of whether you think it has been imported into Australia under Subdivision 832-H of ITAA 1997)
    • a hybrid mismatch arrangement was in place but there was no operative effect of the hybrid provisions for a given year because there is dual inclusion income (reducing the neutralisation amount to nil)
    • a hybrid entity or hybrid financial instrument was in place but there were no 'payments' giving rise to a hybrid mismatch in a given year
    • you have directly or indirectly paid amounts of interest or under a derivative to an international related party and the amount is subject to foreign income tax at a rate of 10% or less.

    These disclosure requirements for question 45 are unchanged from the 2020 and 2021 income years.

    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

     

    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 foreign partners of the ALP are tax residents of Country B. 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.

    ALP is currently dormant and has not entered into any transactions or made any payments during the income year.

    While ALP is dormant it still has the potential to give rise to a hybrid mismatch. For instance, if ALP had made a payment to a third party it would give rise to a deduction/deduction mismatch.

    Aus Co answers Yes at question 45. This is regardless of whether any deducting hybrid mismatch under Subdivision-G would result in a deduction being disallowed.

    End of example

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

    If you answer Yes at A item 45 then go to question 46. If you answer No at A item 45 then go to question 49.

    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.

    In this section

    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 34

    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 assess tax risks associated with offshore hybrid structures, including whether any offshore hybrid mismatches from transactions or arrangements between your international related parties have been imported into Australia.

    An offshore hybrid mismatch is considered to have been imported into Australia if you have made an importing payment in relation to the offshore hybrid mismatch. A payment you have made is an importing payment in relation to an offshore hybrid mismatch if that payment, or part of the payment:

    • gave rise to an Australian income tax deduction (disregarding section 832-610 of the ITAA 1997)
    • was made directly, or indirectly through one or more interposed entities, to another entity, and
    • that other entity made a payment that gave rise to an offshore hybrid mismatch, or that entity is a deducting hybrid which gave rise to an offshore hybrid mismatch.

    If you have made a payment which gave rise to an importing payment under a structured arrangement, answer Yes at Item A and then go to B item 47.

    At B item 47, write the total amount of importing payments, as defined in section 832-625 of the ITAA 1997, that were made under structured arrangements and then go to C item 47.

    At C item 47, write the total amount of offshore hybrid mismatches that arose under the structured arrangements. You need to include amounts of carry forward residual offshore hybrids mismatches as calculated under section 832-635 of the ITAA 1997.

    At D item 47, write the total amount of deduction disallowed under section 832-610 of the ITAA 1997 in respect of importing payments made under a structured arrangement, including section 230-522 of the ITAA 1997.

    Example 35

    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 A item 47
    • writes $1,000,000 at B item 47
    • writes $1,000,000 at C item 47
    • writes $1,000,000 at D item 47.
    End of example

    Question 47a Do you have any other offshore hybrid mismatches within your Division 832 control groups?

    If any of your international related parties entered into transactions or arrangements that fall into any of the below five categories of hybrid mismatches and are not covered by item 47, answer Yes at A item 47a and then go to B item 47a and item 47b. If you identify any offshore hybrid mismatches in your analysis, you must answer Yes at A item 47a 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.

    In the above disclosures, you need to include amounts of carry forward residual offshore hybrid mismatches as calculated under section 832-635 of the ITAA 1997.

    A taxpayer is expected to make reasonable relevant enquiries within their global group to obtain any information required to prepare their tax return, which includes the IDS. You are required to disclose information you have or have obtained from your control group (or groups) through those enquiries or for any other reason. This includes information you have about the existence of any offshore hybrid mismatches, whether or not you obtained the information in the course of determining your compliance with Subdivision 832-H.

    Reasonable enquiries includes enquiring of the global head of tax or other relevant overseas tax personnel if there are any offshore hybrid mismatches in the taxpayer’s global group. If the taxpayer becomes aware of an offshore hybrid mismatch as a result of these enquiries or otherwise, the taxpayer must provide the information in the IDS regardless of any impact on their taxable income under Division 832.

    At B item 47a, write the total of all amounts of offshore hybrid mismatches identified above under non-structured arrangements and then go to C item 47a.

    At C item 47a, 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 under non-structured arrangements that are denied under the imported mismatch rule under section 832-610 of the ITAA 1997, including section 230-522 of the ITAA 1997.

    Question 47b List the top three most material offshore hybrid mismatches

    You must answer item 47b if you answered Yes at A item 47 and/or 47a for any of your offshore hybrid mismatches.

    At A item 47b, write the appropriate Appendix 18 codes for the top three offshore hybrid mismatch arrangements that gave rise to the highest dollar value of the amount of the offshore hybrid mismatches or neutralising amount (as applicable). Write these codes in descending order of total dollar value. The type of offshore hybrid mismatch will be one of the following:

    • 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.

    In the above disclosures, you need to include amounts of carry forward residual offshore hybrid mismatches as calculated under section 832-635 of the ITAA 1997.

    At B item 47b, write the total amount of the offshore hybrid mismatches or the neutralising amount (as applicable) in respect of each of the three offshore hybrid mismatch arrangements you have identified.

    At C item 47b, write the appropriate Appendix 19 code which identifies the type of the importing payments you have made in respect of each of the identified offshore hybrid mismatch. The type of the importing payments will be one of the following:

    • importing payment made under a structured arrangement
    • importing payment made directly or indirectly to the offshore deducting entity (non-structured arrangement)
    • no importing payments were made to the offshore deducting entity.

    If you have made more than one importing payment in respect of the offshore hybrid mismatch, write the code for the type of importing payment with the highest priority under section 832-615(2) of the ITAA 1997.

    At D item 47b, write the total amount of the otherwise deductible importing payments you made in respect of each of the three offshore hybrid mismatch arrangements you have identified, disregarding the following:

    • payments made by an interposed entity not resulting in a foreign income tax deduction in a country that has foreign hybrid mismatch rules within the meaning section 832-625(3)(b)(i) of the ITAA 1997, and
    • payments made by an interposed entity not giving rise to a deduction/non-inclusion mismatch within the meaning section 832-625(3)(b)(ii) of the ITAA 1997.

    In calculating the amount of importing payment in accordance with section 832-625(3)(a), it is sufficient that:

    • you have made a payment, and
    • payments exist between each interposed entity and the offshore deducting entity.

    It is not necessary for a payment to be funding another payment, or to be made after a previous payment.

    If you have not made any importing payments in respect of the offshore hybrid mismatch (after disregarding the requirement in section 832-625(3)(b)), write nil at D as the amount of the importing payment.

    If you determine that any of your top three offshore hybrid mismatches are not imported into Australia, it is acknowledged that in some circumstances it may be onerous to calculate the amount of the importing payments for the purpose of disclosing the amount at D. In those circumstances, you must use best endeavours in the relevant circumstances to calculate a reasonable estimate of the amount of the importing payments to be shown at D.

    At E, item 47b, write the total amount of the deductions disallowed under section 832-610 of the ITAA 1997 in respect of each of the three offshore hybrid mismatch arrangements you have identified, including deductions disallowed under section 230-522 of the ITAA 1997. This is the amount calculated under section 832-630 of the ITAA 1997. This could be the same or less than, the figure you show at D item 47b.

    At F item 47b, select the appropriate code from Appendix 20 which indicates the primary reason why:

    • the amount of the otherwise deductible importing payments at D item 47b differs from the amount of deductions disallowed written at E item 47b for the three offshore hybrid mismatch arrangements you have identified, or
    • the otherwise deductible importing payments and the deductions disallowed are the same.

    The reason will be one of the following:

    • Code 1 – the offshore hybrid mismatch is less than the amount of the otherwise deductible importing payments, and the offshore hybrid mismatch has been wholly neutralised by deductions disallowed under section 832-610 of the ITAA 1997.
    • Code 2 – the offshore hybrid mismatch was neutralised, in whole or in part, by a foreign importing payment with higher priority under subsection 832-615(2) of the ITAA 1997.
    • Code 3 – the offshore hybrid mismatch was neutralised, in whole or in part, by a foreign importing payment with equal priority under subsection 832-615(2) of the ITAA 1997.
    • Code 4 – the payments are excluded from the definition of an importing payment under subparagraph 832-625(3)(b)(i) of the ITAA 1997 as it was made through an interposed entity which is subject to foreign hybrid mismatch rules.
    • Code 5 – the payments are excluded from the definition of an importing payment under subparagraph 832-625(3)(b)(ii) of the ITAA 1997 as an interposed payment gave rise to a deduction/non-inclusion mismatch.
    • Code 6 – the amount of foreign income tax deductions for any interposed payments, were less than the amount of importing payments.
    • Code 7 – the deductions disallowed equals the amount of the otherwise deductible importing payments, including where both are nil.
    • Code 8 – other

    Example 36

    Aus Co, an Australian resident taxpayer, makes deductible interest payments of $5,000,000 to B Co, a resident in Country B. Aus Co and B Co are members of the same Division 832 control group.

    Aus Co does not make deductible payments to other international related parties.

    To ensure it complied with the requirements of Subdivision 832-H of the ITAA 1997, Aus Co made reasonable enquiries adopting the bottom-up approach outlined in PCG 2021/5 Imported hybrid mismatch rule – ATO's compliance approach.

    For the purpose of subsection 832-625(3) of the ITAA 1997, Country B has foreign hybrid mismatch rules. As a result, Aus Co is of the view that it has not made any payments which gave rise to an imported hybrid mismatch under Subdivision 832-H of the ITAA 1997.

    In addition to the above, Aus Co has information that:

    • C Co and D Co are also members of the same Division 832 control group
    • C Co is resident in Country C
    • D Co is resident in Country D
    • B Co made a deductible payment of $5,000,000 to C Co
    • C Co has included $5,000,000 in its assessable income in respect of that payment
    • C Co provides financing to D Co under a hybrid financial instrument. Interest payments of $10,000,000 on the hybrid financial instrument are deductible in an income year under Country C’s tax law but not included in the ordinary income of D Co under Country D’s tax law. Accordingly, an offshore hybrid mismatch has arisen.

    At item 47a, Aus Co:

    • answers Yes at A
    • writes $10,000,000 at B
    • writes $0 at C.

    At item 47b, Aus Co:

    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 2021–22 or 2020–21 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.

    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 2021 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 2021 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 2021 IDS, and
    • describe any further steps or changes in connection with the previously reported replacement arrangement that occurred before the end of 2021–22.

    If in 2021–22 or 2020–21 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 2021–22 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 37

    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 2021, 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 38

    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 2020:

    • 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 2024.
    • 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 2020.
    • On 24 September 2020  
      • 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 2021 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 2021.

    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 2021–22 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 2021–22 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.

    Last modified: 05 Sep 2022QC 68003