The ATO updated its Hybrid Mismatch guidance on 4 November 2025 to clarify when the rules apply, incorporating changes linked to Australia’s adoption of the Pillar 2 GloBE framework under the 2024 consequential legislation, which aligns with OECD BEPS Action 2 standards.
The Australian Taxation Office (ATO) has revised its guidance on the Hybrid Mismatch rules, clarifying how the provisions operate and when they are triggered on 4 November 2025.
The key updates relate to Australia’s adoption of the Pillar Two GloBE framework under the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024.
Australia’s hybrid mismatch rules largely follow the Organisation for Economic Cooperation and Development (OECD) hybrid mismatch and branch mismatch rules from Action Item 2 of the OECD Base Erosion and Profit Shifting (BEPS) action plan.
The ATO, in consultation with the Board of Taxation, designed and implemented hybrid mismatch rules to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements.
Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of 2 or more tax jurisdictions. This has an overall negative impact on competition, efficiency, transparency and fairness.
What the rules apply to
The rules apply to payments that give rise to hybrid mismatch outcomes, which can be summarised as:
- deduction or non-inclusion mismatches (D/NI) where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction
- deduction or deduction mismatches (D/D) where the one payment qualifies for a tax deduction in 2 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.
These rules operate in Australia to neutralise hybrid mismatches by cancelling deductions or including amounts in assessable income.
The rules also contain 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% or less.
Subject to some exceptions, the rules apply to certain payments after 1 January 2019, and to income years commencing on or after 1 January 2019. Limited transitional arrangements – impacting frankable distributions – apply for Additional Tier 1 regulatory capital issued by banks or insurance companies.
In addition, the imported mismatch rules will only apply in respect of ‘structured arrangements’ for income years commencing on or after 1 January 2019. The complete imported mismatch rule will be delayed to income years starting on or after 1 January 2020. This aligns with the European Union (EU) introduction of the hybrid mismatch rules.
Who the rules apply to
The rules apply to payments between:
- related parties
- members of a control group
- parties under a structured arrangement.
Unlike the diverted profits tax or multinational anti-avoidance law measures, the hybrid mismatch rules do not have a de minimis or materiality threshold
Clarifying the operation of hybrid mismatch rules
Australia’s hybrid mismatch rules have been updated with a number of technical amendments in order to clarify and improve the rules’ operation.
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 announced a number of minor technical amendments to Australia’s hybrid mismatch rules to clarify and improve their operation.
On 3 September 2020 the Treasury Laws Amendment (2020 Measures No.2) Act 2020, which fully implemented the above measures and some additional changes, received royal assent.
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
- expanding the definition of dual inclusion income group such that, if in a country 2 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 Income Tax Assessment Act 1997 (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
- 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 Franked distributions on AT1 capital instruments.
Furthermore, on 10 December 2024, the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024, implementing the Global Anti-Base Erosion Model Rules (Pillar Two) received royal assent.
This Act further amended the meaning of ‘subject to foreign income tax’ for the purpose of applying the hybrid mismatch rules, clarifying that foreign GLoBE tax (that is, foreign DMT tax, foreign IIR tax and foreign UTPR tax) and other foreign minimum taxes are disregarded in determining if an amount is subject to foreign income tax. These amendments clarify that Australia’s hybrid mismatch rules will continue to operate notwithstanding the implementation of Pillar Two by Australia and other jurisdictions.
Application dates for the amendments
The September 2020 amendments apply to income years starting on or after 1 January 2019, except for amendments to the:
- integrity rule (other than the state and municipal taxes changes), which applies apply to income years starting on or after 2 April 2019
- definition of ‘foreign hybrid mismatch rules’, which applies to income years starting on or after 1 January 2020.
The December 2024 amendments apply in relation to income years ending on or after 1 January 2024.
Administering amendments to the hybrid mismatch rules
As a number of the changes have retrospective effect, taxpayers will need to either:
- decide to comply with the law (pre-amendments), or
- ‘anticipate’ the amendments (now enacted law) for the purposes of their income tax return lodgments.
ATO won’t apply its resources to checking whether these self-assessments are correct (in accordance with the law (pre-amendments)), but taxpayers will need to review their lodged returns now that the proposed amendments have been enacted.
Franked distributions on Additional Tier 1 capital instruments
Where franked distributions made on AT1 capital instruments give rise to a foreign income tax deduction, the retrospective changes ensure:
- franking benefits on those distributions continue to be allowed (assuming relevant requirements are satisfied, such as the holding period rule, the related payments rule and the dividend washing integrity rule)
- an amount equal to the amount of the foreign income tax deduction is included in the assessable income of the entity that makes the distribution.
For investors in AT1 capital instruments, your ability to claim franking benefits attached to franked distributions that are paid on these capital instruments won’t be impacted by a foreign income tax deduction that arises for that distribution.
