Late last month, the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 (the act) received Royal Assent, giving effect to the OECD hybrid mismatch rules.
The rules aim to eliminate double non-taxation benefits from hybrid mismatch arrangements that exploit differences in the tax treatment of an entity or instrument under the income tax laws of two or more tax jurisdictions.
While the rules are now law, they have an application to income years commencing on or after 1 January 2019 and to certain payments made after 1 January 2019, while the direct and indirect imported mismatch rules will be delayed to income years commencing on or after 1 January 2020, to align with the EU introduction of the hybrid mismatch rules.
The enactment of the rules with a deferred date is intended to allow taxpayers time to review their existing hybrid arrangements and unwind or restructure out of such arrangements in advance of the rules, if they choose.
Speaking to Accountants Daily, HLB Mann Judd tax manager, Alexander King said corporate clients need to understand both the domestic and foreign tax treatment of a range of transactions and entities to determine whether a potential hybrid arrangement exists.
“There are provisions targeting ‘imported hybrid mismatches’ where Australian entities do not themselves create hybrid arrangements, however, receipts are sheltered from tax directly or indirectly by hybrid outcomes elsewhere in a group of entities or a chain of transactions,” said Mr King.
“The new rules also include 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 per cent or less.”
“There is no de minimis or materiality threshold – therefore, the rules must be considered regardless of a taxpayer’s size.”
Given the limited transitional period available, Mr King said clients need to act quickly, including gathering information on all arrangements with foreign group companies, estimate the potential impact on current and deferred tax balances, and consider any non-tax issues with implementing any restructure.
The ATO have said that they will be soon issuing guidance product to support taxpayers impacted by the amendments, with draft PCG 2018/D4 intended to provide greater certainty to taxpayers seeking to restructure out of hybrid arrangements.