The Australian Taxation Office has issued a release on pending legislation to clarify the operation of the hybrid mismatch rules. A related Law Companion Ruling, LCR 2019/D1, has also been published with amendments for consultation, which is open for comments until 24 July 2020.
Clarifying the operation of the hybrid mismatch rules
In the 2019–20 Budget on 2 April 2019, the government announced the measure Tax Integrity – clarifying the operation of the hybrid mismatch rules. Subsequently, the government handed down the 2019–20 Mid-Year Economic and Fiscal Outlook (MYEFO) on 16 December 2019 and announced Tax integrity – improving the operation of the hybrid mismatch rules. These measures will make a number of minor technical amendments to Australia's hybrid mismatch rules to clarify and improve their operation.
On 13 May 2020 the Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 and explanatory material was introduced into parliament. Schedule 1 to the Bill contains the previously announced amendments and some additional changes. The amendments:
- clarify that the hybrid mismatch rules apply to multiple entry consolidated (MEC) groups, in the same way as consolidated groups
- clarify that, for the purposes of applying the hybrid mismatch rules, foreign income tax does not include foreign municipal or state taxes (except in considering the application of the integrity rule)
- clarify the operation of the hybrid mismatch rules for trusts and partnerships
- clarify that, individuals will not be disallowed an Australian deduction merely because they are entitled to a deduction in a foreign country, in respect of income that is taxable in that foreign country. For example, if they have a rental property in another country and are allowed deductions in respect of their rental income that is taxed in that country
- clarify the operation of the dual inclusion income on-payment rule
- deem certain types of foreign sourced income to be subject to Australian income tax in determining if that income is dual inclusion income
- specify that, if in a country two or more entities share the same multiple liable entities (and those alone), then those entities are members of a dual inclusion income group in that country
- remove the need for non-corporate entities to reduce their dual inclusion income where they have a foreign income tax offset
- ensure that the integrity rule can apply appropriately to inbound financing arrangements that have been designed to circumvent the operation of the rules. And specify that, in certain circumstances, the integrity rule can apply where other hybrid mismatch provisions have applied
- amend the definition of 'foreign hybrid mismatch rules' so that, broadly, consideration is given to whether a foreign country's laws relate to a corresponding hybrid mismatch subdivision in Division 832 of the Income Tax Assessment Act 1997
- allow franking benefits on franked distributions made on certain Additional Tier 1 (AT1) capital instruments that would otherwise be denied. For further information on these amendments and their specific administrative treatment, refer to Amendments affecting franked distributions on AT1 capital instruments.
Application dates for the amendments
The amendments will apply to income years commencing on or after 1 January 2019, except for amendments:
- to the integrity rule (other than the state and municipal taxes changes), which will apply to income years commencing on or after 2 April 2019
- to the definition of 'foreign hybrid mismatch rules', which will apply to income years commencing on or after 1 January 2020.
Legislation and supporting material
This change is not yet law and is subject to the normal parliamentary process.
Interim administration of the proposed amendments to the hybrid mismatch rules
As a number of the changes have retrospective effect, taxpayers will either decide to comply with the existing law, or alternatively 'anticipate' the proposed amendments for the purposes of their income tax return lodgements. We will not apply our resources to checking whether these self-assessments are correct (in accordance with the existing law), but taxpayers will need to review their lodged returns once the outcome of the proposed amendments is known.
Taxpayers should refer to Administrative treatment of retrospective legislation for further information and practical guidance on our administrative approach to law change proposals with retrospective effect.
Taxpayers should also refer to Lodgment and payment obligations and related interest and penalties, which sets out our administrative approach to lodgment and payment obligations and related charging of interest and penalties where taxpayers may be affected by the introduction of a new tax measure.
Amendments affecting franked distributions on Additional Tier 1 capital instruments
In addition, the Bill contains amendments that will allow franking benefits on franked distributions made on certain Additional Tier 1 (AT1) capital instruments that would otherwise be denied, because the distribution gives rise to a foreign income tax deduction.
Instead, the amendments introduced by the Bill will require the issuer of such AT1 capital instruments to include an amount in their assessable income equal to the foreign income tax deduction that arises.
Additional information for investors in AT1 capital instruments – administration of current law
If the proposed amendments for AT1 capital instruments referred to above become law, your ability to claim franking benefits attached to franked distributions paid to you on these capital instruments will not be impacted.
The current law may impact your ability to claim franking benefits attached to franked distributions paid to you on AT1 capital instruments. The current law raises complex issues, which we are working through with issuers of AT1 capital instruments. We recognise and appreciate that investors may not currently be in a position to determine whether the current law does impact their ability to claim franking benefits. Accordingly, we are not planning to take any action in respect of your compliance with the law at this time.
We will provide further advice, including when the proposed amendments for AT1 capital instruments referred to above become law, or if those amendments do not proceed.
If you have any questions or would like to contact us, email us at firstname.lastname@example.org