The ATO has released a guide, summarising the application of Australia’s hybrid mismatch rules. The guide seeks to explain how the rules work and when they apply.

The Australian hybrid mismatch rules are incredibly complex, and the recent release of this guide would indicate that they may be perceived to be not well understood, notwithstanding they have been in operation for over 4 years.ato mismatch

Compliance with the Australian hybrid mismatch rules and subsequent completion of associated disclosures required in Section G of an entities International Dealings Schedule (“IDS”) is burdensome to many Australian entities that form part of groups that operate internationally.

The guide is broken up into ten key sections and the associated references represent almost 1000 pages of material on Australia’s hybrid mismatch rules.

Notwithstanding this, a number of technical questions regarding Australia’s hybrid mismatch rules still remain, particularly regarding certain foreign tax rules and whether they correspond or are broadly equivalent to certain Australian tax rules – which can turn off the application of the hybrid mismatch rules. These questions are very complex, and guidance would be welcomed in this respect.

Why we have the hybrid mismatch rules?

The guide starts by providing an explanation of the context and purpose of the rules. The ATO indicates that, broadly, they are designed to prevent multinational companies from avoiding income tax or obtaining double tax benefits by exploiting differences in the tax treatment of entities and instruments across different countries.

While the guide states that Australia’s hybrid mismatch rules largely follow the OECD Base Erosion and Profit Shifting (“BEPS”) action plan on hybrid mismatches and branch mismatches, the Australian rules do diverge in a number of key areas and go beyond the OECD recommendations in certain respects.

What the rules apply to?

The guide summarises the three types of hybrid mismatch outcomes that a payment can give rise to, including:

  • 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 one payment qualifies for a tax deduction in two jurisdictions.
  • Imported hybrid mismatches: where receipts are sheltered from tax directly or indirectly by hybrid outcomes in a group of entities or a chain of transactions.

Australia’s hybrid mismatch rules also contain a targeted (financing) integrity measure for payments of interest that replicate hybrid mismatch outcomes but are not capture by the core set of rules.

Who the rules apply to?

The hybrid mismatch rules can essentially apply to any payment and certain “deemed payments”. Unlike other international anti-avoidance measures, the hybrid mismatch rules do not have a de minimis or materiality threshold and can apply (under the general rules) without consideration of purpose.

When the rules apply?ato tax

The ATO guide provides a timeline relating to the implementation of the hybrid mismatch rules the dates that various aspects of the rules are effective. This also includes substantial discussion relating to amendments made in 2020 to correct technical deficiencies in the rules and clarify or otherwise improve their operation (refer to RSM Article - Hybrid Mismatch Amendments)

Administering amendments to the hybrid mismatch rules

The guide acknowledges that many of the amendments to the hybrid mismatch rules have retrospective effect. Helpfully, the ATO provides some guidance on the administrative treatment of retrospective legislation including links to an ATO practical guideline for taxpayers when faced with questions of what to do with retrospective legislation - as well as the ATO’s Law Administration Practice Statement PS LA 2007/11.

In general, the ATO indicates that it will not apply resources to checking whether self-assessments are correct (in accordance with the law as enacted pre-amendments, although taxpayers are encouraged to review lodged returns to consider any proposed amendments that have been enacted.

This is seemingly becoming more relevant with an increasing prevalence of retrospective legislation, including the proposed thin capitalisation amendments and implementation of new intangible measures which appear will apply to taxpayers retrospectively.

Legislation and supporting material

The guide also provides links to all legislation and supporting material including the underlying legislation and explanatory memoranda (both original and amendments), law companion rulings, taxation determinations, and practical compliance guidelines. The references are expansive and represents over 1,000 pages of legislation, guidance, and related information.

Highlighted Arrangementsmismatch tax

One of the key complexities of the hybrid mismatch rules is the identification of a hybrid mismatch arrangement. Often, this is because groups – or particularly Australian subsidiaries of foreign groups – are either unaware that an arrangement exists which gives rise to D/NI or D/D outcome, or, the arrangement that gives rise to a hybrid mismatch is a commonly adopted election or practice in one jurisdiction, which is not associated with tax avoidance outcomes in that jurisdiction.

In some of the guidance and related information provided, the ATO have provided a few examples of arrangements that can give rise to a hybrid mismatch. It is therefore interesting that amongst all of the arrangements that could have been discussed by the ATO in this guide, it highlights only two examples, which reflect a very small subset of potentially impacted arrangements. These are;

1.     Franked distributions on Additional Tier1 capital instruments

Specifically, the guide addresses retrospective changes where franked distributions made on AT1 capital instruments give rise to a foreign income tax deduction.

2.    Payments within United States (US) consolidated groups

The ATO guide provides a simple example following questions it has received in relation to intercompany payments within a US consolidated group on whether amounts are “subject to foreign income tax”.

The example makes reference to the US “check-the-box” regime but does not provide detail in relation to the entity types which can determine how income and how this interacts with the US entity election regime and consolidation rules.

In short, the example illustrates an Australian subsidiary of a group that makes a payment of interest to its ultimate parent company which is “subject to foreign income tax”. However, on the basis it is “disregarded” by its immediate parent company, a deduction is claimed for the interest expense both in Australia and the US. This gives rise to a deduction/deduction mismatch outcome. Whether or not the payment is subject to a denial under the deducting hybrid mismatch provisions or reduced by any dual inclusion income is not addressed.

One insight into the ATO’s proposed review approach is the comments that the ATO will likely request copies of relevant parts of the US consolidated tax return and relevant supporting documents as evidence of the extent to which an intercompany payment has been included in a recipient member’s ‘separate taxable income’ in a foreign tax period.hybrid ato help

The ATO has previously outlined their compliance approach in respect of the “imported mismatch rules” – a subset of the regime, which gives rise to the greatest practical difficulty in applying – in Practical Compliance Guideline (“PCG”) 2021/5. PCG 2021/5 sets out the proposition that taxpayers should not claim a deduction for a payment unless they are able to obtain sufficient information to support a conclusion that they deduction in respect of the payment is not disallowed under the hybrid mismatch rules. This PCG allows for either a “top down” or “bottom-up” approach in assessing the application of the rules. However, this new ATO guide would seem to indicate that in a review process the ATO are likely to focus more on the bottom-up approach as part of their enquiries.

We recommend that any groups that have either of the arrangements outlined above consider closely whether they may have a hybrid mismatch exposure.

Media releases and contact information

Finally, the ATO provide a dedicated contact email [email protected]. for any questions in relation to the guide or the application of the hybrid mismatch rules as well as references to initial media releases announcing the intention to clampdown on multinational tax avoidance through measures such as the hybrid mismatch rules and others.


The ATO release of this detailed guide on the application of the Australian hybrid rules seems to reiterate continued emphasis on the complexity and broad application of these rules to many Australian taxpayers, particularly those that are US parented. It is important taxpayers, that have not already done so, consider the application of these rules to their circumstances in detail. This guide reiterates many of the themes in practical compliance guides issued by the ATO on the hybrid mismatch rules, in particular PCG 2021/5, which set a high bar for the analysis taxpayers are expected to perform.  


If you would like to learn more about the topics discussed in this article, please contact your local RSM office.