Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 (84 of 2018)

Schedule 1   OECD Hybrid Mismatch Rules

Part 2   Other amendments

Income Tax Assessment Act 1936

6   At the end of Part IIIB

Add:

Division 5 - Modifications relating to hybrid mismatch rules

160ZZZL Certain "hybrid mismatch" deductions denied

(1) Subsection (2) applies if:

(a) either:

(i) an amount of interest (a notional payment ) is taken under section 160ZZZA to be incurred by an Australian branch of a foreign bank in respect of a notional borrowing; or

(ii) an amount (also a notional payment ) is taken under section 160ZZZE to be an amount paid by an Australian branch of a foreign bank in respect of a notional derivative transaction; and

(b) the amount would, apart from this section, give rise to a deduction for the Australian branch in a year of income; and

(c) the amount of the deduction exceeds the amount worked out under subsection (3).

Neutralising hybrid mismatch outcomes

(2) So much of the deduction as equals the excess worked out under paragraph (1)(c) is not allowable as a deduction for the year of income.

Extent to which notional payment gives rise to a deduction/non-inclusion outcome

(3) For the purposes of paragraph (1)(c), sum the following amounts:

(a) the amount of the notional payment that is subject to foreign income tax;

(b) so much (if any) of the amount of the notional payment as it is reasonable to conclude is effectively funding expenses covered by subsection (4) or (5) (about non-deductible third party expenses);

(c) the amount (if any) of income or profits of the Australian branch that is both:

(i) subject to Australian income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the year of income mentioned in paragraph (1)(b); and

(ii) subject to foreign income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the foreign country in which the foreign bank is a resident.

Non-deductible third party expenses

(4) For the purposes of paragraph (3)(b), if:

(a) the notional payment is in respect of a notional borrowing; and

(b) it is reasonable to conclude that the notional borrowing is effectively funded by actual borrowings by the foreign bank;

then the expenses in respect of the actual borrowings are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.

(5) For the purposes of paragraph (3)(b), if:

(a) the notional payment is in respect of a notional derivative transaction; and

(b) it is reasonable to conclude that the foreign bank has hedged or managed all or part of its risk in relation to the notional derivative transaction by entering into actual transactions;

then the expenses in respect of the actual transactions are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.

Safe harbour

(6) The deduction is taken for the purposes of paragraph (1)(c) not to exceed the amount worked out under subsection (3) if the foreign bank adopts a recognised transfer pricing methodology in allocating expenditure and income between itself and all its branches.

160ZZZN Adjusting if Australian branch derives dual inclusion income in a later year

(1) There is an adjustment under subsection (2) for the Australian branch in a year of income (the adjustment year ) if:

(a) an amount of a deduction was not allowable for the branch in an earlier year of income under subsection 160ZZZL(2); and

(b) this Part applies in the calculation of the foreign bank's taxable income in the adjustment year; and

(c) an amount of income or profits of the Australian branch is:

(i) subject to Australian income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the adjustment year; and

(ii) subject to foreign income tax for the purposes of that subsection in the foreign country in which the foreign bank is a resident.

(2) So much of the amount of income or profits that satisfies paragraph (1)(c) as does not exceed the amount of the deduction that was not allowable is an amount the Australian branch can deduct in the adjustment year.

(3) For the purposes of a later application of this section, treat the amount of the deduction that was not allowable under subsection 160ZZZL(2) as being reduced by the amount deducted under subsection (2).

160ZZZP Dual inclusion income not to be applied more than once

(1) For the purposes of paragraphs 160ZZZL(3)(c) and 160ZZZN(1)(c), an amount of income or profits is to be disregarded if:

(a) the amount is dual inclusion income; and

(b) the amount has been applied by a provision of Division 832 of the Income Tax Assessment Act 1997.

(2) For the purposes of Division 832 of that Act, an amount of dual inclusion income is not available to be applied by a provision of that Division if it has been taken into account under paragraph 160ZZZL(3)(c) or subsection 160ZZZN(2).

160ZZZR Interpretation

In this Division:

dual inclusion income has the same meaning as in the Income Tax Assessment Act 1997.

foreign income tax deduction has the same meaning as in the Income Tax Assessment Act 1997.

subject to Australian income tax has the same meaning as in the Income Tax Assessment Act 1997.

subject to foreign income tax has the same meaning as in the Income Tax Assessment Act 1997.