Show download pdf controls
  • Clarifying the operation of the hybrid mismatch rules

    In the 2019–20 Budget, the government announced the measure Tax Integrity – clarifying the operation of the hybrid mismatch rules. This measure will make a number of minor technical amendments to Australia’s hybrid mismatch rules to clarify their operation.

    On 13 December 2019 the government released exposure draft legislation (PDF 273KB)External Link and supporting draft explanatory material (PDF 709KB)External Link which will give effect to this measure. The exposure draft legislation contains amendments to the hybrid mismatch rules which:

    • clarify that the rules apply to MEC groups (in the same way as consolidated groups)
    • clarify that, for the purposes of applying the hybrid mismatch rules, foreign income tax does not include foreign municipal or state taxes
    • clarify the operation of the hybrid mismatch rules for trusts and partnerships
    • clarify the operation of the dual inclusion income on-payment rule, and
    • ensure that the integrity rule can apply appropriately to inbound financing arrangements that have been designed to circumvent the operation of the rules and specify that, in certain circumstances, the integrity rule can apply where other hybrid mismatch provisions have applied.

    Proposed amendments impacting franked distributions on Additional Tier 1 capital instruments

    In addition, the exposure draft legislation contains proposed amendments that would allow franking benefits on franked distributions made on Additional Tier 1 (AT1) capital instruments, which (under the current law) would otherwise be denied because all or part of the distributions give rise to an entitlement to a foreign income tax deduction, where the Commissioner is notified that the foreign income tax deduction will not be claimed.

    It is proposed that the amendments will apply to income years commencing on or after 1 January 2019, with the exception of amendments to the integrity rule, which will apply to income years commencing on or after 2 April 2019.

    Information for investors in AT1 capital instruments - administration of current law

    There are complex issues we are working through with issuers of AT1 capital instruments to determine whether the current law has any impact on investor’s ability to claim franking benefits attached to franked distributions paid on such instruments. These issues include whether franked distributions on AT1 capital instruments give rise to an entitlement to a deduction under foreign tax laws and may take some time to resolve.

    If the proposed amendments for AT1 capital instruments referred to above proceed, and relevant issuers make a valid notification to the Commissioner that they will not claim any entitlements to foreign income tax deductions, then these complex issues will not impact the ability of an investor to claim franking benefits.

    We recognise and appreciate that investors may not currently be in a position to determine whether the current law does impact their ability to claim franking benefits. In light of the above, we are not planning to take any action in respect of investors' compliance with the current law at this time.

    We will provide further advice, including when the proposed amendments for AT1 capital instrument are enacted, or if those amendments do not proceed.

    Legislation and supporting material

    The Treasury Laws Amendment (Measures for Consultation) Bill 2019: hybrid mismatch rulesExternal Link was released for consultation on 13 December 2019.

    Contact

    If you have any questions or would like to contact us, email us at hybridmismatches@ato.gov.au

    See also:

      Last modified: 14 Feb 2020QC 60983