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Australia Enacts Legislation to Clarify the Operation of Hybrid Mismatch Rules — Orbitax Tax News & Alerts

Australia has published the Treasury Laws Amendment (2020 Measures No. 2) Act 2020, which received royal assent (was enacted) on 3 September 2020. As provided in a release from the Australian Taxation Office (ATO), the main purpose of the Act is to provide technical amendments to clarify the operation of the hybrid mismatch rules. In particular, the amendments:

  • clarify the operation of the hybrid mismatch rules for trusts and partnerships;
  • clarify the circumstances in which an entity is a deducting hybrid;
  • clarify the operation of the dual inclusion income rule by:
    • deeming certain types of foreign sourced income to be subject to Australian income tax in determining if that income is dual inclusion income;
    • removing the need for non-corporate entities to reduce their dual inclusion income where they have a foreign income tax offset;
    • clarifying the operation of the dual inclusion income on-payment rule; and
    • expanding the definition of dual inclusion income group such 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;
  • amend the definition of 'foreign hybrid mismatch rules' so that it refers to a foreign law corresponding to any of Subdivisions 832-C to 832-H of the ITAA 1997 and clarify the operation of provisions that have regard to the operation of corresponding foreign hybrid mismatch rules;
  • clarify that, for the purpose 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 that the hybrid mismatch rules apply to multiple entry consolidated (MEC) groups in the same way as they apply to consolidated groups;
  • ensure that the integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and
  • allow franking benefits on franked distributions made on certain Additional Tier 1 (AT1) capital instruments that would otherwise be denied.

The amendments 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 apply to income years commencing on or after 2 April 2019, and amendments to the definition of 'foreign hybrid mismatch rules', which apply to income years commencing on or after 1 January 2020.