Private ruling: Mismatch hybrid rules
Date of advice: 26 March 2026
Published: 29 June 2026
Ruling period: DD MMM 2022 to DD MMM 2025
Date scheme commenced: DD MMM 2022

Ruling: Q1: Will any deductions be disallowed for Foreign Co under section 832-285 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) in respect of cash transfers made by the Australian branch of Foreign Co to its head office in a foreign country? | A1: No.

Relevant facts and circumstances: (1) Foreign Co is a company incorporated in a foreign country. (2) Foreign Co has a branch (Australian Branch) in Australia. The Australian Branch is a permanent establishment for the purposes of the relevant double tax agreement. (3) Foreign Co claims deductions in Australia in relation to expenses incurred that are reasonably attributable to the Australian branch. For internal record keeping purposes, the tax deductions claimed in respect of the Australian Branch are recorded as transfers between the Australian branch and its head office. (4) Internally recorded dealings have all been settled via cash transfers from the Australian Branch's Australian bank account to Foreign Co's foreign bank account. (5) Internally recorded dealings have been disclosed in question 18 of the international dealings schedule (IDS) of the Australian Branch for the 2023, 2024 and 2025 income tax year. (6) Foreign Co has claimed foreign tax credits in its income tax return for the Australian tax paid during the relevant period. (7) Foreign Co is taxed on the profits of the entire legal entity in its foreign country, including Australian Branch profits in the 2023, 2024 and 2025 income tax years. Foreign Co is not taxed on the internally recorded dealings. (8) Foreign Co is not party to any scheme under which a hybrid mismatch is priced into the terms of the scheme, or it is reasonable to conclude is a design feature of the scheme.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 832, and | Income Tax Assessment Act 1997 section 960-100.

Reasons for decision: Summary: (9) Division 832 of the ITAA1997 contains hybrid mismatch rules. In broad terms, these rules are designed to prevent multinational corporations from exploiting differences in the tax treatment of an entity or instrument under the laws of 2 or more tax jurisdictions. Legislative background (10) Enacted in 2018, the hybrid mismatch rules aim to prevent multinational companies and privately owned groups from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements. These arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. (11) The hybrid mismatch rules apply to payments that result in hybrid mismatch outcomes such as where: • a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction; • one payment qualifies for a tax deduction in 2 jurisdictions; • a payment indirectly funds a hybrid mismatch in another jurisdiction, and • the routing of investment or financing into Australia including via an entity located in a no- or low-tax (10% or less) jurisdiction. (12) The hybrid mismatch rules will neutralise hybrid mismatches by cancelling deductions or including amounts in assessable income. The following documents provide guidance on the application of the hybrid mismatch rules: • Practical Compliance Guideline PCG 2018/7 Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements provides guidance on when restructures may attract our attention. • Law Companion Ruling LCR 2021/1 OECD hybrid mismatch rules - targeted integrity rule outlines the ATO's interpretation of the targeted integrity rule resulting in the denial of interest deductions set out in Subdivision 832-J of ITAA 1997. (13) The types of hybrid mismatch arrangements include: • a deduction/deduction mismatch, i.e. when a business receives a deduction in two countries for the same payment, and • a deduction/non-inclusion mismatch , i.e. when a deduction is provided for a payment in one country, but the corresponding income is not included as assessable income in the recipient country. (14) A mismatch will be covered by Division 832 of the ITAA 1997 if it is one of the following hybrid mismatches: • a hybrid financial instrument mismatch (Subdiv 832-C) • a hybrid payer mismatch (Subdiv 832-D) • a reverse hybrid mismatch (Subdiv 832-E) • a branch hybrid mismatch (Subdiv 832-F) • a deducting hybrid mismatch (Subdiv 832-G), or • an imported hybrid mismatch (Subdiv 832-H). | Detailed Reasoning - Hybrid payer mismatch under Subdivision 832-D: (15) Section 832-285 of the ITAA 1997 sets out the primary response within the hybrid mismatch rules that denies tax deductions for payments creating a "hybrid payer mismatch". It prevents double non-taxation by disallowing deductions where payments are deductible in Australia but not included in the recipient's taxable income elsewhere. (16) Section 832-285 of the ITAA 1997 provides: SECTION 832-285 Deduction not allowable - Australian primary response | Detailed Reasoning - 832-285(1): This section applies to an entity if: (a) apart from this section, the entity would be entitled to a deduction in an income year in respect of a payment; and (b) the deduction is the * deduction component of a * hybrid payer mismatch to which the payment gives rise. 832-285(2) So much of the deduction as does not exceed the • neutralising amount for the * hybrid payer mismatch is not allowable as a deduction. Note: The neutralising amount is worked out under section 832-330. (17) Section 832-305 of the ITAA 1997 states: SECTION 832-305 When a payment gives rise to a hybrid payer mismatch | Detailed Reasoning - 832-305(1): A payment gives rise to a hybrid payer mismatch if: (a) the payment gives rise to a * hybrid mismatch under section 832-310; and (b) subsection (3) or (4) applies. | Detailed Reasoning - 832-305(2): The deduction component of the * hybrid payer mismatch is the * deduction component of the * deduction / non-inclusion mismatch mentioned in section 832-310. | Detailed Reasoning - 832-305(3): This subsection applies if the following entities are in the same * Division 832 control group: (a) the • hybrid payer; (b) each entity that is a * liable entity in respect of the income or profits of the hybrid payer. Note: For the meaning of Division 832 control group , see section 832-205. | Detailed Reasoning - 832-305(4): This subsection applies if the payment is made under a * structured arrangement. Note: For the meaning of structured arrangement , see section 832-210. (18) Section 832-310 of the ITAA 1997 provides that a hybrid mismatch occurs where: SECTION 832-310 Hybrid mismatch | Detailed Reasoning - 832-310(1): A payment gives rise to a hybrid mismatch if: (a) the payment gives rise to a * deduction / non-inclusion mismatch; and (b) the payment meets the hybrid requirement in section 832-315. | Detailed Reasoning - 832-310(2): The amount of the * hybrid mismatch is the lesser of: (a) the amount of the * deduction / non-inclusion mismatch; and (b) if there is an excess under either subparagraph 832-315(2)(b)(i) or 832-315(3)(b)(i) - the amount of the excess. | Detailed Reasoning - 832-310(3): However, a payment does not give rise to a hybrid mismatch under this section if it gives rise to a * hybrid financial instrument mismatch. (19) Section 832-315 of the ITAA 1997 provides: SECTION 832-315 Hybrid requirement - assume payment was made to same recipient but by an ungrouped payer | Detailed Reasoning - 832-315(1): The payment meets the hybrid requirement in this section if: (a) the payment is made by a * hybrid payer; and (b) subsection (2) or (3) applies. ... | Detailed Reasoning - 832-315(3): This subsection applies if: (a) the non-including country identified in subsection 832-320(3) is a foreign country; and (b) either: (i) the amount of the * deduction / non-inclusion mismatch exceeds the amount that would be the amount of that mismatch if the amount of the payment that was * subject to foreign income tax for a * foreign tax period was instead worked out on the assumption in subsection (4); or (ii) on the assumption in subsection (4), the payment would have given rise to a * hybrid financial instrument mismatch. | Detailed Reasoning - 832-315(4): For the purposes of subsections (2) and (3), assume that the payment had instead been made: (a) to the same recipient; but (b) by an entity that was a * liable entity in the non-including country identified in subsection 832-320(3) only in respect of its own income or profits | Detailed Reasoning - Note:: For the meaning of liable entity , see section 832-325. (20) Section 832-320 of the ITAA 1997 sets out that a hybrid payer is: SECTION 832-320 Hybrid payer | Detailed Reasoning - 832-320(1): An entity (the test entity ) is a hybrid payer in relation to a payment it makes if: (a) subsection (2) applies to the entity in relation to a country and the payment; and (b) subsection (3) applies to the entity in relation to a different country and the payment. Note: The entity, the payments it makes, and its income or profits are generally identified disregarding tax provisions: see section 832-30. | Detailed Reasoning - 832-320(2): This subsection applies to a test entity in relation to a country (the deducting country ) and a payment the test entity makes if: (a) the test entity, or another entity, is a * liable entity in the deducting country in respect of income or profits of the test entity (or a part of those income or profits); and (b) that liable entity is not also a liable entity in the deducting country in respect of income or profits of the recipient of the payment. | Detailed Reasoning - 832-320(3): This subsection applies to a test entity in relation to a country (a non-including country ) and a payment the test entity makes if: (a) the test entity, or another entity, is a * liable entity in the non-including country in respect of income or profits of the test entity (or a part of the income or profits); and (b) that liable entity is also a liable entity in the non-including country in respect of income or profits of the recipient of the payment. (21) Section 832-285 of the ITAA 1997 will apply to disallow a deduction in respect of a payment where: (a) the payment must give rise to a deduction in Australia and results in deduction / non-inclusion mismatch; (b) the payment must be made by an entity that is 'hybrid payer' in respect of the payment; (c) the hybrid payer and each entity that is a liable entity in respect to the income or profits of the hybrid payer must be in the same Division 832 control group, or the payment is paid under a structured arrangement ; and (d) the payment must satisfy the hybrid requirement which requires the amount of the deduction/non-inclusion mismatch exceeds the amount that would be the amount of that mismatch if the amount of the payment that was subject to foreign income tax for a foreign tax period was worked out on the assumption that the payment had instead been made to the same recipient, but by an entity that was a liable entity in the foreign country only in respect of its own income or profits. [1] | Detailed Reasoning - Are the cash transfers between the Australian Branch and Foreign Co's head office disallowed?: (22) For an entity to be a hybrid payer in respect of a payment, there must be a payment between two entities where: (a) the same entity is not a liable entity in respect of the income or profits of both the payer and recipient of the payment in the deducting country (i.e. Australia); and (b) the same entity is a liable entity in respect of the income or profits of both the payer and recipient of the payment in the non-including country (i.e. foreign country) (23) As a branch and head office are not separate entities (as defined in section 960-100 of the ITAA 1997), transactions between a branch and head office cannot satisfy the requirement in section 832-320 of the ITAA 1997. Therefore, no deductions will be disallowed for Foreign Co under section 832-285 of the ITAA 1997 in respect of cash transfers made by its Australian branch to its head office in the foreign country. [1] Or on the same assumption the payment would have given rise to a hybrid financial instrument mismatch