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

    In the 2016-17 Budget, the Government announced it would implement the OECD hybrid mismatch rules in Action Item 2 of the OECD BEPS Action Plan, taking into account recommendations by the Board of Taxation.

    Hybrid financing arrangements, structures and entities are a key driver of multinational tax avoidance strategies and have been a key focus of the OECD BEPS project. In the coming years, as the OECD hybrid mismatch rules are legislated by member countries, it is reasonable to expect the use of hybrids as a base erosion and profit shifting tool, should largely be curtailed.

    In particular, the 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.

    In November 2017, the Government announced that it would extend the hybrid mismatch rules to also implement:

    • a targeted integrity rule to ensure that arrangements used by multinational groups to invest in Australia which effectively achieve double non-taxation outcomes but which may not fall within the scope of the OECD's hybrid mismatch rules cannot be used to circumvent the hybrid mismatch rules. For example, financing arrangements through interposed entities in zero tax countries which reduce Australian profits without those profits being subject to foreign tax; and
    • the recommendations of the OECD report released in July 2017 - Neutralising the Effects of Branch Mismatch Arrangements - to address branch mismatches that occur because of inconsistencies in the taxation treatment of dealings within the same legal entity amongst different countries.

    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:

    1. deduction/non-inclusion mismatches ("D/NI") where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction;
    2. deduction/deduction mismatches ("D/D") where the one payment qualifies for a tax deduction in two jurisdictions; and
    3. 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.
    4. deductible interest payments or payments under a derivative made to an interposed foreign entity where the rate of foreign income tax on the payment in the country of residence of the interposed foreign entity is 10% or less (targeted integrity rule).

    These rules will operate in Australia to neutralise hybrid mismatches by:

    • switching off specific exemption provisions (Subdivision 768A for dividends, and section 23AH for branches) where the payer jurisdiction allows a deduction or offset against the payer's income tax base (for D/NI mismatches);
    • disallowing a deduction - where a payment would otherwise qualify for a deduction in Australia and would not be included in the income tax base of the recipient in another jurisdiction (for D/NI, D/D, imported hybrid mismatches, and payments caught by the integrity rule); or
    • including an amount in the recipient's assessable income - where it otherwise would not be included and the payer jurisdiction allows a deduction or offset against the payer's income tax base (for D/NI mismatches); and
    • cancelling franking benefits on franked distributions (where applicable) made by a corporate tax entity (for D/NI mismatches).

    The rules will apply to payments made six months following the date of Royal Assent. Limited transitional arrangements will apply for Additional Tier 1 regulatory capital issued by banks or insurance companies.

    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 DPT or MAAL measures, the hybrid mismatch rules do not have a de minimis or materiality threshold. Furthermore, the hybrid mismatch rules are outcome focused and do not require an avoidance purpose.

    Legislation and supporting material

    Updated exposure draft legislation and explanatory materialsExternal Link were released for consultation on 7 March 2018. Submissions close on 4 April 2018.

    This updated exposure draft expands on the previously released exposure draft legislation on the hybrid mismatch core rules and includes the additional measures announced by the Government in November 2017.

    The Board of Taxation recommended that the ATO provide guidance on:

    • Structured arrangements;
    • The imported mismatch rule; and
    • The application of Part IVA to restructures to avoid the application of the hybrid mismatch rules.

    We are currently developing guidance which will include Law Companion Rulings (LCRs) covering these and other new concepts under the law, and a Practical Compliance Guideline (PCG) covering our administrative approach.


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

    See also:

      Last modified: 20 Mar 2018QC 48876