Tax Integrity - Clarifying the Operation of the Hybrid Mismatch Rules


In the 2019-20 Budget, the Government announced the measure Tax Integrity – clarifying the operation of the hybrid mismatch rules. This measure will make a number of technical amendments to Australia’s hybrid mismatch rules to clarify their operation. 

The proposed amendments will:

  • stipulate how the rules apply to multiple entry consolidated (MEC) groups and trusts;
  • limit the meaning of foreign tax; and
  • specify that the integrity rule can apply where other provisions have applied.

The amendments will apply to income years commencing on or after 1 January 2019, with the exception of amendments to the integrity rule, which will apply to income years commencing on or after 2 April 2019.

The relevant measure description can be found in Budget Paper 2.

To further assist taxpayers in planning their affairs, Treasury sets out below the policy principles that will be used in developing the relevant amendments.

This is a statement of policy intent only. Exposure draft legislation for the measure will be released as soon as practicable.  


The hybrid mismatch rules, which generally apply to income years commencing on or after 1 January 2019, prevent entities that are liable to income tax in Australia from being able to avoid income tax, or obtain a double non-taxation benefit, by exploiting differences between the tax treatment of entities and instruments across different countries.  These amendments will clarify the operation of certain elements of the rules.

Further details

Application of the hybrid mismatch rules to MEC groups

This proposed amendment will clarify that the hybrid mismatch rules apply to members of MEC groups in the same way as they apply to members of consolidated groups.

Application of the hybrid mismatch rules to trusts

The definition of a liable entity is used throughout the hybrid mismatch rules to broadly determine whether an entity is considered to be a taxpayer or simply a flow-through entity in a particular jurisdiction.

However, under this definition, there is some uncertainty as to when a trust that applies Australian tax laws is a liable entity in Australia for these purposes. This proposed amendment will clarify that a trust will not be a liable entity in Australia if it is treated as a flow-through entity for Australian tax purposes. Such a trust may still be treated as a liable entity in a foreign country under  the foreign country’s laws. Trusts such as public trading trusts, complying superannuation entities, and trusts that have income to which beneficiaries are not presently entitled will be treated as liable entities in Australia.

While a flow-through trust will not be a liable entity in Australia for the purpose of the hybrid mismatch rules, the beneficiaries of the trust may be considered to be liable entities. In such circumstances any hybrid mismatch outcomes reflected in the calculation of the trust’s net income may be neutralised at the beneficiary level.

Limiting the meaning of foreign tax

This proposed amendment will clarify that only foreign income tax imposed at a national level is relevant in applying the hybrid mismatch rules. Foreign state or local taxes will be disregarded.

Application of the integrity rule

There are number of provisions (hybrid financial instruments mismatch, hybrid payer mismatch, reverse hybrid mismatch, branch hybrid mismatch, deducting hybrid mismatch, and imported hybrid mismatch) in the hybrid mismatch rules which may operate to neutralise a double non-taxation benefit arising for a hybrid mismatch arrangement. The integrity rule prevents these provisions from being compromised in some circumstances.

The hybrid mismatch rules contain ordering rules which prevent later provisions from applying once an earlier provision has applied. While the ordering rules generally operate appropriately, they can in some circumstances prevent the application of the integrity rule to inbound financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules.

For example an arrangement may give rise to both:

  • a double deduction outcome which would be subject to the deducting hybrid mismatch rules; and
  • an effective replication of a deduction/non-inclusion outcome by the interposition of a foreign entity located in a no or low tax jurisdiction which the integrity rule was designed to address.

In this situation, if the double deduction outcome triggers the deducting hybrid mismatch rules, the ordering rules currently prevent the integrity rule from applying to neutralise the replicated deduction/non-inclusion outcome, where the entitlement to a deduction in Australia has survived (e.g. because Australia is the secondary response country or the deduction has been sheltered by dual inclusion income).

The proposed amendment will ensure that the integrity rule can apply in these circumstances.