Australia: Implementation of the OECD hybrid mismatch rules

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The Government of Australia has committed to the implementation of Action Item 2 of the G20/OECD BEPS Action Plan, which recommends neutralizing the effects of hybrid mismatch arrangements that occur due to the different treatment of an entity or instrument, under the laws of two or more tax jurisdictions.

The rules will apply to related parties, members of a control group and structured arrangements that involve cross-border hybrid financial instruments and/or hybrid entity structures.

The OECD anti-hybrid rules operate to deny deductions for the payer (or alternatively include taxable income in the hands of the payee) where an entity is able to claim a tax deduction in one jurisdiction but not include an income amount in the other tax jurisdiction; and deny duplicate deductions where an entity is able to claim a tax deduction in both tax jurisdictions for a single payment.

The rules will apply to payments made on or after the later of 1 January 2018 or six months following the date of Royal Assent for the legislation.

On 9 May 2017, the Government announced specific rules to eliminate hybrid mismatches that occur in relation to regulatory capital known as Additional Tier 1 (AT1), issued by regulated entities such as banks and insurers, by preventing returns on AT1 capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction and where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.

Subject to transitional arrangements, these rules will apply to returns on AT1 instruments paid from the later of 1 January 2018 or six months after Royal Assent.

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