Save article




Australia issues draft tax guidance on restructures of hybrid mismatch arrangements and the impact of tax avoidance rules

Executive summary

On 21 June 2018, the Australian Taxation Office (ATO) released draft Practical Compliance Guideline Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements (PCG 2018/D4).

The hybrid mismatch rules contained in Treasury Laws Amendment (Tax Integrity and Other Measures No.2) Bill 20181 represent the Australian implementation of the Organisation of Economic Co-operation and Development (OECD) Action 2 (Neutralising the Effect of Hybrid Mismatch Arrangements). These rules target certain hybrid arrangements which exploit differences in the tax treatment of an instrument or entity under the income tax laws of different jurisdictions by disallowing an income tax deduction or including an amount in assessable income. It is expected that many taxpayers may choose to restructure existing hybrid arrangements to be in compliance with the hybrid mismatch rules and preserve tax benefits (e.g., income tax deductions).

PCG 2018/D4 (ATO Link) provides draft guidance as to how the ATO may apply Australia’s general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (Part IVA) to these restructures. Submissions in relation to PCG 2018/D4 are due by 20 July 2018.

Detailed discussion

Overview of PCG 2018/D4

The stated purpose of PCG 2018/D4 is to allow taxpayers to manage their compliance risk by illustrating various straight forward scenarios to confirm the type of restructures which may generally be considered ”low risk” by the ATO from a Part IVA perspective. The ATO considers a low-risk restructure would involve removing the hybrid feature of the structure while keeping all associated facts and circumstances unchanged. In this regard, the ATO is focused on the overall commerciality of the arrangement rather than the technical existence of the tax benefit itself. The hybrid feature may be removed, for example, in the context of a deduction/non-inclusion mismatch where income is included in the tax base of an entity or, in the context of a deduction/deduction mismatch, where there is no longer a deduction available in one of the jurisdictions.

The following features have been identified in PCG 2018/D4 as being consistent with low-risk restructures:

  • There is no change to the jurisdictions of the entities involved under the replacement arrangement.
  • The original arrangement makes commercial sense for the parties involved (prior to the restructure it would not have attracted Part IVA).
  • The replacement arrangement makes commercial sense for the parties involved.
  • The restructure and replacement arrangement are effected in a straightforward way having regard to the circumstances and are implemented on arm’s-length terms.
  • The replacement arrangement is otherwise tax effective, disregarding the potential application of Part IVA, to preserve a tax benefit.

PCG 2018/D4 provides various examples of restructures containing the above features and also certain restructures which do not and thereby have a higher compliance risk. These include conduit financing via a low-tax jurisdiction.

The guidance is not intended to provide detailed technical Part IVA guidance. The examples presented in PCG 2018/D4 only include minimal facts, so they may have limited practical application to many taxpayers. Thus, a detailed analysis of the application of Part IVA to a taxpayer’s circumstances or separate engagement with the ATO may still be required.

Start date

PCG 2018/D4 will be effective from the date of enactment of the hybrid mismatch rules. However, it will apply to restructures entered into before and after the date of enactment.

While it has been a generally accepted view that the CPH Property Pty Ltd & Ors v. FC of T 98 ATC 4983 (CPH) case establishes the precedent that Part IVA cannot apply to restructures in advance of the relevant law being enacted, the ATO takes the position in PCG 2018/D4 that it should not be assumed that a restructure in anticipation of the hybrid mismatch rules cannot be subject to Part IVA. In particular, PCG 2018/D4 states this may be the case where parts of the relevant scheme continue to be carried out or are given effect after the enactment of the hybrid mismatch rules. The ATO does not advance any technical analysis to support its brief comments on this case. Taxpayers that have undertaken a restructure in advance of the hybrid rules should consult with their tax advisors on the related Part IVA matters.

As an overall observation, PCG 2018/D4 does little more than provide support for the existing assumption that “vanilla” restructures (for example, merely replacing a hybrid instrument with an ordinary loan with the same counterparty) should not attract the focus of the ATO.

However, for taxpayers that have any element of additional complexity to their restructuring, the PCG provides limited practical reference points and therefore the restructuring is likely to require substantive analysis to properly assess the Part IVA risk.


1. See EY Global Tax Alert, Australia introduces bill on hybrid mismatch tax rules into Parliament, dated 24 May 2018.

EYG no. 010008-18Gbl

Download this Tax Alert as a PDF file.

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.



Font size

Tax topics >

No filter criteria selected.

Industries >

No filter criteria selected.

Countries >

No filter criteria selected.

 < Close


 < Close


 < Close

Tax topics

 < Close


 < Close


 < Close

0 articles have been saved