Show download pdf controls
  • Implementation of the OECD hybrid mismatch rules

    In the 2016–17 Budget, the government announced it would implement 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 hybrid mismatch rules aim 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.

    What will the rules apply to?

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

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

    These rules will 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 have application 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 (to align with the EU introduction of the hybrid mismatch rules).

    Who do these rules apply to?

    The rules can apply to payments between related parties, members of a control group or between 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.

    Law companion ruling (LCR)

    The following LCRs have been released so far:

    • We have published draft Law Companion Ruling LCR 2019/D1: OECD hybrid mismatch rules – targeted integrity rule which provides the Commissioner's interpretation of the hybrid mismatch targeted integrity rule set out in subdivision 832-J of the Income Tax Assessment Act 1997 (ITAA 1997).
    • 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).

    Practical compliance guideline (PCG)

    To date, the following PCGs have been released.

    • 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.


    If you have any questions or would like to contact us, email us at

    See also:

      Last modified: 25 Jul 2019QC 48876