Commonwealth: Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 (Cth)

Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 No. 84, 2018 An Act to amend the law relating to taxation, and for related purposes Contents 1 Short title 2 Commencement 3 Schedules Schedule 1—OECD Hybrid Mismatch Rules Part 1—Main amendments Income Tax Assessment Act 1997 Part 2—Other amendments Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Part 3—Application and transitional provisions Income Tax (Transitional Provisions) Act 1997 Schedule 2—Other effects of foreign income tax deductions Part 1—Denial of imputation benefits Income Tax Assessment Act 1997 Part 2—Foreign equity distributions Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Part 3—Application Schedule 3—Strengthening the integrity of the film producer offset Income Tax Assessment Act 1997 Schedule 4—Income tax and withholding exemptions for the ICC World Twenty20 Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Schedule 5—Deductible gift recipients Income Tax Assessment Act 1997 Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 No. 84, 2018 An Act to amend the law relating to taxation, and for related purposes [Assented to 24 August 2018] The Parliament of Australia enacts: 1 Short title This Act is the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018. 2 Commencement (1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms. Commencement information Column 1 Column 2 Column 3 Provisions Commencement Date/Details 1. The whole of this Act The first 1 January, 1 April, 1 July or 1 October to occur after the day this Act receives the Royal Assent. 1 October 2018 Note: This table relates only to the provisions of this Act as originally enacted. It will not be amended to deal with any later amendments of this Act. (2) Any information in column 3 of the table is not part of this Act. Information may be inserted in this column, or information in it may be edited, in any published version of this Act. 3 Schedules Legislation that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—OECD Hybrid Mismatch Rules Part 1—Main amendments Income Tax Assessment Act 1997 1 After Division 830 Insert: Division 832—Hybrid mismatch rules Table of Subdivisions Guide to Division 832 832‑A Preliminary 832‑B Concepts relating to mismatches 832‑C Hybrid financial instrument mismatch 832‑D Hybrid payer mismatch 832‑E Reverse hybrid mismatch 832‑F Branch hybrid mismatch 832‑G Deducting hybrid mismatch 832‑H Imported hybrid mismatch 832‑I Dual inclusion income 832‑J Integrity rule 832‑K Modifications for Division 230 (about taxation of financial arrangements) Guide to Division 832 832‑1 What this Division is about A "hybrid mismatch" arises if double non‑taxation results from the exploitation of differences in the tax treatment of an entity or financial instrument under the laws of 2 or more countries. There is double non‑taxation if a deductible payment is not included in a tax base (this is called a deduction/non‑inclusion mismatch), or if a payment gives rise to 2 deductions (this is called a deduction/deduction mismatch). Disallowing a deduction, or including an amount in assessable income, "neutralises" this tax advantage. Subdivision 832‑A—Preliminary Guide to Subdivision 832‑A 832‑5 What this Subdivision is about This Subdivision sets out some general rules that apply to the provisions of this Division. Table of sections Operative provisions 832‑10 Entitlement to receive payment 832‑15 Entitlement to receive non‑cash benefits 832‑20 Losses that arise from payments or parts of payments 832‑25 Recipients and payers of a payment 832‑30 Tax provisions to be disregarded in identifying payments and income or profits 832‑35 Single entity rule otherwise not disregarded 832‑40 Schemes outside Australia 832‑45 Relationship between this Division and other charging provisions in this Act 832‑50 Relationship between this Division and Division 820 832‑55 Division does not affect foreign residence rules 832‑60 Valuation of trading stock affected by hybrid mismatch rules Operative provisions 832‑10 Entitlement to receive payment This Division applies as if an entity (the payer) had made a payment to another entity (the recipient) if the recipient is entitled to receive the payment from the payer, even if the payment is not required to be made until a later time. 832‑15 Entitlement to receive non‑cash benefits This Division applies as if an entity (the payer) had made a payment to another entity (the recipient) if the recipient received a *non‑cash benefit from the payer. 832‑20 Losses that arise from payments or parts of payments (1) This section applies if: (a) a loss gives rise to: (i) a deduction for an entity (the payer) for an income year; or (ii) a *foreign income tax deduction for an entity (also the payer) for a *foreign tax period; and (b) in working out the amount of the loss: (i) all or a part of a payment made, or to be made, to one or more other entities is taken into account; or (ii) 2 or more payments made, or to be made, to one or more other entities are taken into account. Note: This section also applies to losses from Division 230 financial arrangements: see section 832‑780. Payments made to only one entity (2) If, in working out the amount of the loss, a payment or payments made to only one entity (the recipient) are taken into account, this Division applies as if: (a) at the end of the income year or *foreign tax period identified in paragraph (1)(a), the payer made a payment to the recipient; and (b) the amount of the payment was equal to the amount of the deduction or *foreign income tax deduction; and (c) the payment gave rise to the deduction or foreign income tax deduction. Payments made to 2 or more entities (3) If, in working out the amount of the loss, a payment or payments made to 2 or more entities (each of which is a recipient) are taken into account, this Division applies as if: (a) at the end of the income year or *foreign tax period identified in paragraph (1)(a), the payer made a payment to each recipient; and (b) the amount of each payment was equal to so much of the amount of the deduction or *foreign income tax deduction as is reasonable having regard to the amounts of the payments actually made to the recipients; and (c) the payment gave rise to a deduction or foreign income tax deduction equal to the amount of the payment. Working out whether the payment has been subject to tax (4) In working out for the purposes of this Division the extent to which a payment that is taken by this section to have been made is *subject to Australian income tax or *subject to foreign income tax, regard is to be had to the actual payments made to the recipient. 832‑25 Recipients and payers of a payment (1) To the extent this Division applies to a payment only because of section 832‑10 or 832‑15 (a payment provision), it applies as if: (a) the entity that made the payment were the entity identified in the payment provision as the payer; and (b) the recipient of the payment were the entity identified in the payment provision as the recipient. (2) If a payment would, apart from this subsection, be made to 2 or more recipients, then this Division applies as if each part of the payment made to each such recipient were a separate payment. 832‑30 Tax provisions to be disregarded in identifying payments and income or profits (1) A number of provisions in this Division refer to an entity making a payment to another entity. To avoid doubt, whether an entity makes a payment to another entity is to be worked out disregarding: (a) subsection 701‑1(1) (the single entity rule); and (b) Part IIIB of the Income Tax Assessment Act 1936; and (c) any law of a foreign country that, for the purposes of a foreign tax, treats a different entity as having made the payment, or disregards the payment. (2) A number of provisions in this Division refer to the income or profits of an entity. To avoid doubt, these entities, and their income or profits, are to be identified disregarding: (a) subsection 701‑1(1) (the single entity rule); and (b) Part IIIB of the Income Tax Assessment Act 1936; and (c) any law of a foreign country that, for the purposes of a foreign tax, treats those income or profits as income or profits of a different entity. Note: As a consequence of paragraph (2)(a), a member of a consolidated group may be a hybrid payer under section 832‑320 or a deducting hybrid under section 832‑550 (it cannot be a reverse hybrid because of subparagraph 832‑410(2)(b)(ii)). 832‑35 Single entity rule otherwise not disregarded Subject to section 832‑30, subsection 701‑1(1) (the single entity rule) is not disregarded in applying this Division. 832‑40 Schemes outside Australia This Division applies in relation to a payment whether or not the *scheme under which the payment is made has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia. 832‑45 Relationship between this Division and other charging provisions in this Act (1) This section applies if an amount is included in the assessable income of an entity under a provision of this Division in relation to a payment. (2) An amount in relation to the payment that is to be included in the assessable income of the entity under a provision (other than a provision of this Division) is to be reduced to the extent (if any) necessary to ensure that the total amount included in the entity's assessable income in relation to the payment does not exceed the amount of the payment. Relationship with section 230‑20 (3) This section applies despite section 230‑20 (about taxation of financial arrangements). 832‑50 Relationship between this Division and Division 820 (1) In determining for the purposes of this Division whether a payment gives rise to a deduction, and the amount of the deduction, disregard the effect of Division 820 (about thin capitalisation). (2) Nothing in this Division limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, *debt deductions of an entity. 832‑55 Division does not affect foreign residence rules Nothing in this Division affects the operation of the provisions of Division 6 that provide for the significance of foreign residence for the assessability of ordinary and statutory income. Note: Amounts included in assessable income under this Division may be ordinary or statutory income for the purposes of Division 6. 832‑60 Valuation of trading stock affected by hybrid mismatch rules If: (a) an amount of a deduction for an outgoing is disallowed under this Division; and (b) the outgoing was incurred in connection with acquiring an item of *trading stock; and (c) the item is on hand at the end of an income year; the amount disallowed is to be disregarded in working out the *cost, market selling value or replacement value of the item at the end of the income year under section 70‑45. Subdivision 832‑B—Concepts relating to mismatches Guide to Subdivision 832‑B 832‑100 What this Subdivision is about This Subdivision sets out rules about identifying deduction/non‑inclusion mismatches and deduction/deduction mismatches. Table of sections Operative provisions 832‑105 When a payment gives rise to a deduction/non‑inclusion mismatch 832‑110 When a payment gives rise to a deduction/deduction mismatch 832‑115 Disregard effect of Division in determining deductions 832‑120 Meaning of foreign income tax deduction 832‑125 Meaning of subject to Australian income tax 832‑130 Meaning of subject to foreign income tax 832‑135 Safe harbour for translation rates Operative provisions 832‑105 When a payment gives rise to a deduction/non‑inclusion mismatch Australian deduction (1) If: (a) a deduction (other than a deduction that is solely attributable to a *currency exchange rate effect) is allowable to an entity in an income year in respect of a payment (including a part or share of the payment); and (b) the amount of the deduction exceeds the sum of the amounts of the payment that are: (i) *subject to foreign income tax in a foreign country in a *foreign tax period that starts no later than 12 months after the end of the income year; or (ii) *subject to Australian income tax for the income year; then the deduction is the deduction component of a deduction/non‑inclusion mismatch to which the payment gives rise. Note: A deduction/non‑inclusion mismatch might give rise to a hybrid financial instrument mismatch (see Subdivision 832‑C), a hybrid payer mismatch (see Subdivision 832‑D), a reverse hybrid mismatch (see Subdivision 832‑E), or a branch hybrid mismatch (see Subdivision 832‑F). Foreign income tax deduction (2) If: (a) an entity is entitled to a *foreign income tax deduction in a foreign country in a *foreign tax period in respect of a payment (including a part or share of the payment); and (b) the amount of the foreign income tax deduction exceeds the sum of the amounts of the payment that are: (i) *subject to foreign income tax in a foreign country in a foreign tax period that starts no later than 12 months after the end of the foreign tax period in which the foreign income tax deduction arose; or (ii) *subject to Australian income tax for an income year that starts no later than 12 months after the end of the foreign tax period in which the foreign income tax deduction arose; and (c) the foreign income tax deduction is not solely attributable to: (i) any currency exchange rate fluctuations; or (ii) a difference between an expressly or implicitly agreed currency exchange rate for a future date or time and the applicable currency exchange rate at that date or time; then the foreign income tax deduction is the deduction component of a deduction/non‑inclusion mismatch to which the payment gives rise. Amount of the deduction/non‑inclusion mismatch (3) The amount of the *deduction/non‑inclusion mismatch is the amount of the excess worked out under paragraph (1)(b) or (2)(b), as applicable. 832‑110 When a payment gives rise to a deduction/deduction mismatch (1) A payment gives rise to a deduction/deduction mismatch if the payment, or a part or share of the payment: (a) gives rise to a *foreign income tax deduction in a foreign country in a *foreign tax period; and (b) also gives rise to: (i) a deduction in an income year; or (ii) a foreign income tax deduction in a foreign country (other than the country mentioned in paragraph (a)). Note: A deduction/deduction mismatch might give rise to a deducting hybrid mismatch (see Subdivision 832‑G). (2) Each of the following is a deduction component of the *deduction/deduction mismatch: (a) the *foreign income tax deduction mentioned in paragraph (1)(a); (b) the deduction mentioned in subparagraph (1)(b)(i), or the foreign income tax deduction mentioned in subparagraph (1)(b)(ii), as the case requires. Amount of the deduction/deduction mismatch (3) The amount of the *deduction/deduction mismatch is the lesser of: (a) the amount of the *foreign income tax deduction mentioned in paragraph (1)(a); and (b) the sum of the amounts of the deduction, or foreign income tax deduction, mentioned in subparagraph (1)(b)(i) or (ii). Extended operation in relation to non‑payment deductions (4) This section applies in relation to the following amounts in the same way as it applies in relation to a payment: (a) an amount representing the decline in value of an asset; (b) an amount representing a share in the net loss of a partnership or other transparent entity. (5) If: (a) an amount representing a share in the net loss of a partnership gives rise to a deduction; and (b) in a foreign country: (i) the same share in the income or profits of the partnership forms part of the tax base of an entity under a law of the foreign country dealing with *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax); but (ii) that share is brought to account in that tax base on an item‑by‑item basis, instead of on a net basis; the amount is taken for the purposes of subsection (1) to also give rise to a *foreign income tax deduction in the foreign country, for an amount representing the share in the net loss of the partnership, and equal to the amount of the deduction mentioned in paragraph (a). (6) For the purposes of subsection (4), a reference in this Division to the *scheme under which a payment is made is taken to be a reference to: (a) if paragraph (4)(a) applies—the scheme under which the asset is held; or (b) if paragraph (4)(b) applies—the scheme under which the net loss arose. 832‑115 Disregard effect of Division in determining deductions In determining for the purposes of this Division whether a payment gives rise to a deduction, disregard the effect of this Division. 832‑120 Meaning of foreign income tax deduction (1) An amount of a loss or outgoing is a foreign income tax deduction in a foreign country in a *foreign tax period to which an entity is entitled, if the entity is entitled to deduct the amount in working out its tax base for the foreign tax period under a law of the foreign country dealing with *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax). (2) To avoid doubt, an amount of a loss or outgoing may be a foreign income tax deduction in a foreign country in a *foreign tax period even if the relevant entity's tax base is nil, or a negative amount. Effect of foreign hybrid mismatch rules (3) In determining for the purposes of this section whether an entity is entitled to deduct an amount as mentioned in subsection (1), disregard the effect of the following: (a) any provisions of *foreign hybrid mismatch rules of a foreign country; (b) any provisions of another law of a foreign country relating to *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) that has substantially the same effect as foreign hybrid mismatch rules. 832‑125 Meaning of subject to Australian income tax (1) An amount of income or profits is subject to Australian income tax in an income year if it is an amount that is included in an entity's assessable income for the income year. (2) However, if: (a) the entity is a trust or partnership; and (b) the trust or partnership has net income for the income year; then the amount is only subject to Australian income tax to the extent it reasonably represents amounts: (c) included in the assessable income of another entity for the income year (other than an entity that is a partnership or the trustee of a trust); or (d) for a trust—on which the trustee is liable to be assessed and to pay *tax. Effect of CFC regimes (3) An amount of income or profits of an entity is subject to Australian income tax if the amount is included under section 456 or 457 of the Income Tax Assessment Act 1936 in the assessable income of another entity. (4) In determining for the purposes of this Division whether an amount of income or profits is *subject to Australian income tax, disregard the effect of this Division, unless the contrary intention appears. 832‑130 Meaning of subject to foreign income tax (1) An amount of income or profits is subject to foreign income tax in a foreign country in a *foreign tax period if *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) is payable under a law of the foreign country in respect of the amount because the amount is included in the tax base of that law for the foreign tax period. Note: Subdivision 832‑C (Hybrid financial instrument mismatch) has effect as if certain amounts that are subject to a concessional rate of foreign income tax were not subject to foreign income tax: see section 832‑235. (2) To avoid doubt, an amount of income or profits may be subject to foreign income tax in a foreign country in a *foreign tax period even if the relevant entity's tax base is nil, or a negative amount. Effect of credits etc. for underlying taxes (3) Despite subsection (1), if: (a) an amount (the pre‑credit amount) of income or profits would, apart from this subsection, be *subject to foreign income tax in a foreign country; and (b) an entity is entitled under the law of the foreign country to a credit, rebate or other tax concession in respect of the amount for foreign tax (other than a withholding‑type tax) payable under a tax law of a different country (including Australia); then only so much of the pre‑credit amount as reasonably represents an amount not effectively sheltered from *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) by the credit, rebate or tax concession is subject to foreign income tax. Note: This subsection is disregarded in working out whether an amount of income or profits is dual inclusion income: see subsection 832‑680(3). Effect of "dividend received deductions" in foreign countries (4) Despite subsection (1), if: (a) an amount (the pre‑deduction amount) of income or profits would, apart from this subsection, be *subject to foreign income tax in a foreign country; and (b) the amount consists of a dividend received by an entity from a company; and (c) the entity is entitled to a *foreign income tax deduction in respect of all or part of the amount of the dividend; then only so much of the pre‑deduction amount as reasonably represents an amount not effectively sheltered from *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) by the foreign income tax deduction is subject to foreign income tax. Effect of CFC regimes (5) An amount of income or profits of an entity is subject to foreign income tax if the amount is included in working out the tax base of another entity under a provision of a law of a foreign country that corresponds to section 456 or 457 of the Income Tax Assessment Act 1936 (including a tax base that is nil, or a negative amount). Effect of foreign hybrid mismatch rules (6) In determining for the purposes of this section whether a payment is included in a tax base of a law of a foreign country as mentioned in subsection (1), disregard the effect of the following: (a) any provisions of *foreign hybrid mismatch rules of a foreign country; (b) any provisions of another law of a foreign country relating to *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) that has substantially the same effect as foreign hybrid mismatch rules. 832‑135 Safe harbour for translation rates If: (a) a payment has any of the following effects: (i) it gives rise to a deduction; (ii) it gives rise to a *foreign income tax deduction; (iii) it is *subject to Australian income tax; (iv) it is *subject to foreign income tax; and (b) for the purposes of this Division, the amount of one or more such effects is to be translated under Subdivision 960‑C into an entity's *applicable functional currency, or into Australian currency; then it is reasonable for the purposes of item 11A of the table in subsection 960‑50(6) (as modified by the regulations) to apply an exchange rate to each translation so as best to achieve a consistent measure of the extent to which the payment had each such effect. Note: Item 11A is added to the table in subsection 960‑50(6) by the regulations. Subdivision 832‑C—Hybrid financial instrument mismatch Guide to Subdivision 832‑C 832‑175 What this Subdivision is about This Subdivision neutralises a hybrid financial instrument mismatch if it involves a deduction, or non‑inclusion, in Australia. A deduction/non‑inclusion mismatch is a hybrid financial instrument mismatch if it is attributable to hybridity in the treatment of a financial instrument or an arrangement to transfer a financial instrument, and either the relevant parties are related or the mismatch arose under a structured arrangement. There is also an integrity rule that covers payments that are made in lieu of hybrid payments. This Subdivision has an extended application in relation to payments that are subject to concessional tax rates in a foreign country. A hybrid financial instrument mismatch that is not neutralised by this Subdivision (or by foreign hybrid mismatch rules) is an offshore hybrid mismatch, which might give rise to an imported hybrid mismatch under Subdivision 832‑H. Table of sections Operative provisions 832‑180 Deduction not allowable—Australian primary response 832‑185 Inclusion in assessable income—Australian secondary response 832‑190 Exception where entity not a party to the structured arrangement 832‑195 When a hybrid financial instrument mismatch is an offshore hybrid mismatch 832‑200 When a payment gives rise to a hybrid financial instrument mismatch 832‑205 Meaning of Division 832 control group 832‑210 Meaning of structured arrangement 832‑215 Hybrid mismatch 832‑220 Hybrid requirement—payments under financial instruments 832‑225 Hybrid requirement—payments under transfers of certain financial instruments 832‑230 Hybrid mismatch—integrity rule for substitute payments 832‑235 Extended operation of this Subdivision in relation to concessional foreign taxes 832‑240 Adjustment if hybrid financial instrument payment is income in a later year Operative provisions 832‑180 Deduction not allowable—Australian primary response (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 financial instrument mismatch to which the payment gives rise. (2) So much of the deduction as does not exceed the amount of the *hybrid financial instrument mismatch is not allowable as a deduction. 832‑185 Inclusion in assessable income—Australian secondary response (1) This section applies to an entity if: (a) the entity is the recipient of a payment that gives rise to a *hybrid financial instrument mismatch; and (b) the *deduction component of the mismatch is a *foreign income tax deduction; and (c) the secondary response is required (see subsection (2)). (2) For the purposes of paragraph (1)(c), the secondary response is required unless the *foreign income tax deduction is in a foreign country that has *foreign hybrid mismatch rules, or another law that has substantially the same effect as foreign hybrid mismatch rules. Inclusion of amount in assessable income (3) An amount equal to the amount of the *hybrid financial instrument mismatch is included in the entity's assessable income for the income year mentioned in subsection (4). The assessable income is taken to have been derived from the same source as the payment. (4) The income year is: (a) if the *foreign tax period in which the *foreign income tax deduction arises falls wholly within an income year of the entity—that income year; or (b) if the foreign tax period in which the foreign income tax deduction arises straddles 2 income years of the entity—the earlier of those income years. 832‑190 Exception where entity not a party to the structured arrangement Sections 832‑180 and 832‑185 do not apply to an entity in respect of a payment if: (a) the payment is made under a *structured arrangement to which the entity is not a *party; and (b) subsection 832‑200(3) does not apply. 832‑195 When a hybrid financial instrument mismatch is an offshore hybrid mismatch (1) A *hybrid financial instrument mismatch is an offshore hybrid mismatch if: (a) the *deduction component of the mismatch is a *foreign income tax deduction; and (b) no amount becomes *subject to Australian income tax as a result of the application of section 832‑185 in relation to the mismatch; and (c) none of the following countries has *foreign hybrid mismatch rules, or another law that has substantially the same effect as foreign hybrid mismatch rules: (i) the country in which the foreign income tax deduction arose; (ii) any country in which income or profits of the recipient of the payment are *subject to foreign income tax. Note: An offshore hybrid mismatch might give rise to an imported hybrid mismatch: see Subdivision 832‑H. (2) The amount of the *offshore hybrid mismatch is the amount of the *hybrid financial instrument mismatch. 832‑200 When a payment gives rise to a hybrid financial instrument mismatch (1) A payment gives rise to a hybrid financial instrument mismatch if: (a) the payment gives rise to a *hybrid mismatch under section 832‑215 or 832‑230; and (b) subsection (3) or (6) applies. Note: As a result of ordering rules in later Subdivisions, a payment that gives rise to a hybrid financial instrument mismatch does not also give rise to a hybrid mismatch under a later Subdivision of this Division. (2) The deduction component of the *hybrid financial instrument mismatch is the *deduction component of the *deduction/non‑inclusion mismatch. (3) This subsection applies if the following entities are related for the purposes of subsection (4): (a) the entity that made the payment; (b) each entity that is a *liable entity in respect of the income or profits of the recipient of the payment. Note: For the definition of liable entity, see section 832‑325. Related persons (4) Two entities are related for the purposes of this subsection if any of the following apply: (a) the entities are in the same *Division 832 control group; (b) one of the entities holds a *total participation interest of 25% or more in the other entity; (c) a third entity holds a total participation interest of 25% or more in each of the entities. (5) For the purposes of subsection (4), treat the *direct participation interest of an entity (the holding entity) in another entity (the test entity) as being the sum of the direct participation interests held by the holding entity and its *associates in the test entity. Structured arrangement (6) This subsection applies if the payment is made under a *structured arrangement. 832‑205 Meaning of Division 832 control group (1) Two or more entities are in the same Division 832 control group if any of the following apply: (a) each of the entities is a member of a group of entities that are consolidated for accounting purposes as a single group; (b) one of the entities holds a *total participation interest of 50% or more in each of the other entities; (c) a third entity holds a total participation interest of 50% or more in each of the entities. (2) For the purposes of subsection (1), in determining a *direct participation interest of one entity in another entity, disregard paragraph 350(1)(b) of the Income Tax Assessment Act 1936 (rights of shareholders to vote or participate in certain decision‑making). 832‑210 Meaning of structured arrangement (1) A payment that gives rise to a *hybrid mismatch is made under a structured arrangement if: (a) the hybrid mismatch is priced into the terms of a *scheme under which the payment is made; or (b) it is reasonable to conclude that the hybrid mismatch is a design feature of a scheme under which the payment is made. (2) The question whether a *hybrid mismatch is a design feature of a *scheme must be determined by reference to the facts and circumstances that exist in connection with the scheme, including the terms of the scheme. (3) An entity that entered into or carried out the *scheme or any part of the scheme is a party to the *structured arrangement unless: (a) the entity could not reasonably have been expected to be aware that the scheme gave rise to a *hybrid mismatch; and (b) no other entity in the same *Division 832 control group as the entity could reasonably have been expected to be aware that the scheme gave rise to a hybrid mismatch; and (c) the financial position of each entity in the Division 832 control group would reasonably be expected to have been the same if the scheme had not given rise to the hybrid mismatch. 832‑215 Hybrid mismatch (1) A payment gives rise to a hybrid mismatch if: (a) the payment is made under any of the following: (i) a *debt interest; (ii) an *equity interest; (iii) a *derivative financial arrangement; (iv) an *arrangement covered by subsection (2); and (b) the payment might reasonably be expected to give rise to a *deduction/non‑inclusion mismatch; and (c) the mismatch that might reasonably be expected to arise, or a part of that mismatch, meets a hybrid requirement in section 832‑220 or 832‑225. Transfers of financial instruments (2) An *arrangement is covered by this subsection if: (a) the arrangement is any of the following: (i) a reciprocal purchase agreement (otherwise known as a repurchase agreement); (ii) a securities lending arrangement; (iii) a similar arrangement; and (b) an entity acquires any of the following under the arrangement: (i) a *debt interest; (ii) an *equity interest; (iii) a *derivative financial arrangement. Amount of the hybrid mismatch (3) The amount of the *hybrid mismatch is: (a) the amount of the *deduction/non‑inclusion mismatch, unless paragraph (b) applies; or (b) if only a part of the deduction/non‑inclusion mismatch meets a hybrid requirement mentioned in paragraph (1)(c)—the amount of that part of the deduction/non‑inclusion mismatch. 832‑220 Hybrid requirement—payments under financial instruments (1) A *deduction/non‑inclusion mismatch, or a part of such a mismatch, meets the hybrid requirement in this section if: (a) the payment that gives rise to the mismatch is made under any of the following: (i) a *debt interest; (ii) an *equity interest; (iii) a *derivative financial arrangement; and (b) the mismatch, or the part of the mismatch, is attributable to differences in the treatment of the debt interest, equity interest or derivative financial arrangement, arising from the terms of the interest or arrangement; and (c) the exception in subsection (2) does not apply. Example: Redeemable preferences shares that are treated under this Act as a debt interest, and in a foreign country as an equity interest. Exception for deferrals not exceeding 3 years (2) This exception applies if: (a) the difference in treatment mentioned in paragraph (1)(b) primarily relates to a deferral in the recognition of income or profits under the *debt interest, the *equity interest or the *derivative financial arrangement; and (b) the term of the interest or arrangement is 3 years or less. 832‑225 Hybrid requirement—payments under transfers of certain financial instruments (1) A *deduction/non‑inclusion mismatch, or a part of such a mismatch, meets the hybrid requirement in this section if: (a) the payment that gives rise to the mismatch is made under an *arrangement covered by subsection 832‑215(2); and (b) the mismatch, or the part of the mismatch, is attributable to differences in the treatment of the arrangement; and (c) the exception in subsection (2) of this section does not apply. Exception for deferrals not exceeding 3 years (2) This exception applies if: (a) the difference in treatment mentioned in paragraph (1)(b) primarily relates to a deferral in the recognition of income or profits under the *arrangement; and (b) the term of the arrangement is 3 years or less. 832‑230 Hybrid mismatch—integrity rule for substitute payments (1) A payment also gives rise to a hybrid mismatch if: (a) the payment gives rise to a *deduction/non‑inclusion mismatch; and (b) the payment is made under an *arrangement under which any of the following is transferred: (i) a *debt interest; (ii) an *equity interest; (iii) a *derivative financial arrangement; and (c) the payment, or a part of the payment, (the substitute payment) could reasonably be regarded as having been converted into a form that is in substitution for a *return (however described) on the interest or arrangement; and (d) the return is covered by subsection (2). (2) This subsection covers a *return (however described) on a *debt interest, an *equity interest, or a *derivative financial arrangement, that is transferred if any of the following apply: (a) the return is made to the payer of the substitute payment, and is not *subject to foreign income tax or *subject to Australian income tax; (b) the return is not made to the payer of the substitute payment, but if it had been it would not have been subject to foreign income tax or subject to Australian income tax; (c) if the return were instead made to the payee of the substitute payment: (i) it would be subject to foreign income tax or subject to Australian income tax; or (ii) it would give rise to a *hybrid mismatch under section 832‑215. Amount of the hybrid mismatch (3) The amount of the *hybrid mismatch is the amount of the *deduction/non‑inclusion mismatch. 832‑235 Extended operation of this Subdivision in relation to concessional foreign taxes (1) This section applies in working out, for the purposes of this Subdivision, whether an amount is *subject to foreign income tax. (2) An amount of income or profits of an entity is treated as if it were not *subject to foreign income tax if: (a) apart from this section, the amount would be *subject to foreign income tax; and (b) the rate of *foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) (the lower rate) on the amount under the law of the relevant foreign country is lower than the rate (the ordinary rate) that would ordinarily be imposed on interest income derived by an entity of that kind in the foreign country. Amount of a deduction/non‑inclusion mismatch (3) However, for the purposes of working out the amount of a *deduction/non‑inclusion mismatch that is affected by this section, the amount of a payment that is treated by this section as not being *subject to foreign income tax is to be discounted by multiplying it by the following fraction: where: lower rate means the lower rate mentioned in paragraph (2)(b). ordinary rate means the ordinary rate mentioned in paragraph (2)(b). 832‑240 Adjustment if hybrid financial instrument payment is income in a later year (1) There is an adjustment under this section for an entity in an income year (the adjustment year) if: (a) an amount was not allowable as a deduction for the entity in an earlier income year under section 832‑180 in respect of a payment that gave rise to a *hybrid financial instrument mismatch; and (b) an amount (the taxed amount) of the payment is: (i) *subject to foreign income tax in a foreign country in a *foreign tax period that ends within 12 months after the end of the adjustment year; or (ii) *subject to Australian income tax in the adjustment year. (2) The taxed amount is an amount the entity can deduct in the adjustment year. (3) The total amounts deducted under this section in respect of a payment must not exceed the amount that was not allowable as a deduction in respect of the payment as mentioned in paragraph (1)(a). No adjustment for concessional taxes (4) This section does not apply if the *hybrid mismatch would not have arisen apart from section 832‑235. Subdivision 832‑D—Hybrid payer mismatch Guide to Subdivision 832‑D 832‑280 What this Subdivision is about This Subdivision neutralises a hybrid payer mismatch if it involves a deduction, or non‑inclusion, in Australia. A deduction/non‑inclusion mismatch is a hybrid payer mismatch if it is made by a hybrid payer, and the mismatch would not have arisen, or would have been less, if the payment had instead been made by an ungrouped entity. It is also a requirement that the relevant parties are in the same control group or the mismatch arose under a structured arrangement. An entity is a hybrid payer if a payment it makes is disregarded for the purposes of the tax law of one country (resulting in non‑inclusion), but is deductible for the purposes of the tax law of another country. The neutralising amount for the hybrid payer mismatch is reduced by dual inclusion income. A hybrid payer mismatch that is not neutralised by this Subdivision (or by foreign hybrid mismatch rules) is an offshore hybrid mismatch, which might give rise to an imported hybrid mismatch under Subdivision 832‑H. Table of sections Operative provisions 832‑285 Deduction not allowable—Australian primary response 832‑290 Inclusion in assessable income—Australian secondary response 832‑295 Exception where entity not a party to the structured arrangement 832‑300 When a hybrid payer mismatch is an offshore hybrid mismatch 832‑305 When a payment gives rise to a hybrid payer mismatch 832‑310 Hybrid mismatch 832‑315 Hybrid requirement—assume payment was made to same recipient but by an ungrouped payer 832‑320 Hybrid payer 832‑325 Meaning of liable entity 832‑330 Neutralising amount 832‑335 Adjustment if hybrid payer has dual inclusion income in a later year Operative provisions 832‑285 Deduction not allowable—Australian primary response (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. (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. 832‑290 Inclusion in assessable income—Australian secondary response (1) This section applies to an entity if: (a) the entity is the recipient of a payment that gives rise to a *hybrid payer mismatch; and (b) the *deduction component of the mismatch is a *foreign income tax deduction; and (c) the secondary response is required (see subsection (2)). When secondary response is required (2) For the purposes of paragraph (1)(c), the secondary response is required unless the *foreign income tax deduction is in a foreign country that has *foreign hybrid mismatch rules, or another law that has substantially the same effect as foreign hybrid mismatch rules. Inclusion of amount in assessable income (3) An amount equal to the *neutralising amount for the *hybrid payer mismatch is included in the entity's assessable income for the income year mentioned in subsection (4). The assessable income is taken to have been derived from the same source as the payment. (4) The income year (the inclusion year) is: (a) if the *foreign tax period in which the *foreign income tax deduction arises falls wholly within an income year of the entity—that income year; or (b) if the foreign tax period in which the foreign income tax deduction arises straddles 2 income years of the entity—the earlier of those income years. 832‑295 Exception where entity not a party to the structured arrangement Sections 832‑285 and 832‑290 do not apply to an entity in respect of a payment if: (a) the payment is made under a *structured arrangement to which the entity is not a *party; and (b) subsection 832‑305(3) does not apply. 832‑300 When a hybrid payer mismatch is an offshore hybrid mismatch (1) A *hybrid payer mismatch is an offshore hybrid mismatch if: (a) the *deduction component of the mismatch is a *foreign income tax deduction; and (b) no amount becomes *subject to Australian income tax as a result of the application of section 832‑290 in relation to the mismatch; and (c) none of the following countries has *foreign hybrid mismatch rules, or another law that has substantially the same effect as foreign hybrid mismatch rules: (i) the country in which the *foreign income tax deduction arose; (ii) any country in which income or profits of the recipient of the payment are *subject to foreign income tax. Note: An offshore hybrid mismatch might give rise to an imported hybrid mismatch: see Subdivision 832‑H. (2) The amount of the *offshore hybrid mismatch is the *neutralising amount for the *hybrid payer mismatch. 832‑305 When a payment gives rise to a hybrid payer mismatch (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. (2) The deduction component of the *hybrid payer mismatch is the *deduction component of the *deduction/non‑inclusion mismatch mentioned in section 832‑310. Control group (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. Structured arrangement (4) This subsection applies if the payment is made under a *structured arrangement. Note: For the meaning of structured arrangement, see section 832‑210. 832‑310 Hybrid mismatch (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. Amount of the hybrid mismatch (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. Ordering rule (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. 832‑315 Hybrid requirement—assume payment was made to same recipient but by an ungrouped payer (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. Payment would have been taxed in Australia (2) This subsection applies if: (a) the non‑including country identified in subsection 832‑320(3) is Australia; 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 Australian income tax for an income year 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. Payment would have been taxed in a foreign country (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. Assumption—payer was an ungrouped entity (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. Note: For the meaning of liable entity, see section 832‑325. 832‑320 Hybrid payer (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 identified disregarding tax provisions: see section 832‑30. Deducting country—entity is not grouped with recipient (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. Non‑including country—entity is grouped with recipient (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. 832‑325 Meaning of liable entity Entity is a taxpayer in respect of its own income or profits (1) An entity is a liable entity, in a country, in respect of its income or profits if: (a) for Australia—*tax is imposed on the entity in respect of all or part of its income or profits for an income year; and (b) for a foreign country—*foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) is imposed under the law of the foreign country on the entity in respect of all or part of its income or profits for a *foreign tax period. Note 1: The entity, and its income or profits, are identified disregarding tax provisions: see section 832‑30. Note 2: An example is an entity that is a company (and is not a member of a consolidated group). In Australia, a company is the liable entity in respect of its income or profits. Entity is a taxpayer in respect of another entity's income or profits (2) An entity is a liable entity, in a country, in respect of the income or profits of another entity (the test entity) if: (a) for Australia—*tax is imposed on the entity in respect of all or part of the income or profits of the test entity for an income year; and (b) for a foreign country—*foreign income tax (except *credit absorption tax, *unitary tax or a withholding‑type tax) is imposed under the law of the foreign country on the entity in respect of all or part of the income or profits of the test entity for a *foreign tax period. Note 1: The test entity, and its income or profits, are identified disregarding tax provisions: see section 832‑30. Note 2: An example is a test entity that is a partnership. In Australia, each partner in the partnership is a liable entity in respect of the income or profits of the partnership. (3) To avoid doubt, the following outcomes may arise under subsection (2) in a country: (a) there may be one or more *liable entities in respect of the income or profits of a test entity; (b) there may be one or more interposed entities between the test entity and an entity that is a liable entity in respect of the income or profits of the test entity. Entity not required to be actually liable to pay tax or foreign income tax (4) To avoid doubt, an entity may be a *liable entity in respect of its own, or another entity's, income or profits in a country even if any of the following situations exist: (a) there are no actual income or profits; (b) there are income or profits, but no part of the income or profits is: (i) for Australia—*subject to Australian income tax; or (ii) for a foreign country—*subject to foreign income tax in that foreign country; (c) the entity is not actually liable to pay an amount of *tax or *foreign income tax. Note: In determining whether an entity is a liable entity in such a situation, assume that income or profits within the tax base of the country exist. Effect of CFC regimes (5) An entity is not a liable entity in respect of income or profits of another entity (the test entity) merely because all or part of the income or profits of the test entity are: (a) included under section 456 or 457 of the Income Tax Assessment Act 1936 in the assessable income of the other entity; or (b) included under a corresponding provision of a law of a foreign country in working out the tax base of the other entity (including a tax base of nil, or a negative amount). 832‑330 Neutralising amount (1) The neutralising amount for a *hybrid payer mismatch is the amount of the *hybrid mismatch from subsection 832‑310(2), reduced (but not below nil) by the amount of any *dual inclusion income that is available to be applied in working out the neutralising amount. Australian deduction—inclusions must be in Australia and in the non‑including country (2) An amount of *dual inclusion income is available to be applied to reduce the *neutralising amount for a *hybrid payer mismatch to which section 832‑285 applies if: (a) the *hybrid payer is eligible to apply the amount (see subsection 832‑680(7)); and (b) the amount is *subject to Australian income tax for the purposes of subsection 832‑680(1) in the income year mentioned in subsection 832‑285(1); and (c) the amount is *subject to foreign income tax for the purposes of subsection 832‑680(1) in the non‑including country identified in subsection 832‑320(3). Note: Section 832‑680 modifies the meanings of subject to Australian income tax and subject to foreign income tax for the purpose of working out dual inclusion income. Australian non‑inclusion—inclusions must be in Australia and in the deducting country (3) An amount of *dual inclusion income is available to be applied to reduce the *neutralising amount for a *hybrid payer mismatch to which section 832‑290 applies if: (a) the *hybrid payer is eligible to apply the amount (see subsection 832‑680(7)); and (b) the amount is *subject to Australian income tax for the purposes of subsection 832‑680(1) in the inclusion year mentioned in subsection 832‑290(4); and (c) the amount is *subject to foreign income tax for the purposes of subsection 832‑680(1) in the deducting country mentioned in subsection 832‑320(2). Offshore hybrid mismatch—inclusions must be in the deducting country and the non‑including country (4) An amount of *dual inclusion income is available to be applied to reduce the *neutralising amount for a *hybrid payer mismatch that is an *offshore hybrid mismatch if: (a) the *hybrid payer is eligible to apply the amount (see subsection 832‑680(7)); and (b) in the same *foreign tax period as the period in which the *foreign income tax deduction arose, the amount is *subject to foreign income tax for the purposes of subsection 832‑680(1) in the deducting country mentioned in subsection 832‑320(2); and (c) the amount is *subject to foreign income tax for the purposes of subsection 832‑680(1) in the non‑including country identified in subsection 832‑320(3). 832‑335 Adjustment if hybrid payer has dual inclusion income in a later year (1) There is an adjustment under this section for an entity in an income year (the adjustment year) if: (a) in an earlier income year, all or part of a deduction of the entity in respect of a payment that gave rise to a *hybrid payer mismatch was not allowable under section 832‑285; and (b) an amount of *dual inclusion income is: (i) available to be applied by the *hybrid payer in the adjustment year; and (ii) *subject to Australian income tax for the purposes of subsection 832‑680(1) in the adjustment year; and (iii) *subject to foreign income tax for the purposes of subsection 832‑680(1) in the non‑including country identified in subsection 832‑320(3). (2) So much of the amount of *dual inclusion income that satisfies paragraph (1)(b) as does not exceed the amount that was not allowable as a deduction is an amount the entity can deduct in the adjustment year. (3) For the purposes of a later application of this section, treat the amount that was not allowable as a deduction under section 832‑285 as being reduced by the amount deducted under subsection (2) of this section. Subdivision 832‑E—Reverse hybrid mismatch Guide to Subdivision 832‑E 832‑375 What this Subdivision is about This Subdivision neutralises a reverse hybrid mismatch if it involves a deduction in Australia. A deduction/non‑inclusion mismatch is a reverse hybrid mismatch if it is made directly or indirectly to a reverse hybrid, and the mismatch would not have arisen, or would have been less, if the payment had instead been made directly to an investor in the reverse hybrid. An entity is a reverse hybrid if it is transparent for the purposes of the tax law of the country in which it is formed, but non‑transparent for the purposes of the tax law of the country in which investors in it are subject to tax (resulting in non‑inclusion). A reverse hybrid mismatch that is not neutralised by this Subdivision (or by foreign hybrid mismatch rules) is an offshore hybrid mismatch, which might give rise to an imported hybrid mismatch under Subdivision 832‑H. Table of sections Operative provisions 832‑380 Deduction not allowable—Australian primary response 832‑385 Exception where entity not a party to the structured arrangement 832‑390 When a reverse hybrid mismatch is an offshore hybrid mismatch 832‑395 When a payment gives rise to a reverse hybrid mismatch 832‑400 Hybrid mismatch 832‑405 Hybrid requirement—assume payment was made to an investor 832‑410 Reverse hybrid Operative provisions 832‑380 Deduction not allowable—Australian primary response (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 *reverse hybrid mismatch to which the payment gives rise. (2) So much of the deduction as does not exceed the amount of the *reverse hybrid mismatch is not allowable as a deduction. 832‑385 Exception where entity not a party to the structured arrangement Section 832‑380 does not apply to an entity in respect of a payment if: (a) the payment is made under a *structured arrangement to which the entity is not a *party; and (b) subsection 832‑395(3) does not apply. 832‑390 When a reverse hybrid mismatch is an offshore hybrid mismatch (1) A *reverse hybrid mismatch is an offshore hybrid mismatch if: (a) the *deduction component of the mismatch is a *foreign income tax deduction; and (b) the country in which the foreign income tax deduction arose does not have *foreign hybrid mismatch rules. Note: An offshore hybrid mismatch might give rise to an imported hybrid mismatch: see Subdivision 832‑H. (2) The amount of the *offshore hybrid mismatch is the amount of the *reverse hybrid mismatch. 832‑395 When a payment gives rise to a reverse hybrid mismatch (1) A payment gives rise to a reverse hybrid mismatch if: (a) the payment gives rise to a *hybrid mismatch under section 832‑400; and (b) subsection (3) or (4) applies. (2) The deduction component of the *reverse hybrid mismatch is the *deduction component of the *deduction/non‑inclusion mismatch mentioned in section 832‑400. Control group (3) This subsection applies if the following entities are in the same *Division 832 control group: (a) the entity that made the payment; (b) the *reverse hybrid; (c) each entity that is an investor identified in paragraph 832‑410(2)(c) in relation to the reverse hybrid. Note: For the meaning of Division 832 control group, see section 832‑205. Structured arrangement (4) This subsection applies if the payment is made under a *structured arrangement. Note: For the meaning of structured arrangement, see section 832‑210. 832‑400 Hybrid mismatch (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 832‑405. Amount of the hybrid mismatch (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 832‑405(2)(b)(i) or (3)(b)(i)—the amount of the excess. Ordering rule (3) A payment does not give rise to a hybrid mismatch under this section if it gives rise to a *hybrid financial instrument mismatch or a *hybrid payer mismatch. 832‑405 Hybrid requirement—assume payment was made to an investor (1) The payment meets the hybrid requirement in this section if: (a) the payment is made directly, or indirectly through one or more interposed entities, to a *reverse hybrid; and (b) subsection (2) or (3) applies. Payment would have been taxed in Australia (2) This subsection applies if: (a) the investor country identified in subsection 832‑410(3) is Australia; 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 Australian income tax for an income year 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, a *hybrid payer mismatch or a *reverse hybrid mismatch. Payment would have been taxed in a foreign country (3) This subsection applies if: (a) the investor country identified in subsection 832‑410(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, a *hybrid payer mismatch or a *reverse hybrid mismatch. Assumption—payment was made to the investing taxpayer (4) For the purposes of subsections (2) and (3), assume that the payment had instead been made: (a) by the same entity; but (b) directly to the investing taxpayer identified in paragraph 832‑410(3)(a) or (b). 832‑410 Reverse hybrid (1) An entity (the test entity) is a reverse hybrid in relation to a payment made to it 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 identified disregarding tax provisions: see section 832‑30. Formation country—entity is transparent and payment is not within the tax base (2) This subsection applies to a test entity in relation to a country (the formation country) and a payment made to the entity if: (a) the test entity is formed in the formation country; and (b) for the formation country, the test entity is: (i) not a *liable entity; and (ii) for Australia—not a *member of a *consolidated group; and (c) for the formation country, another entity (an investor) is a liable entity in respect of income or profits of the test entity. Note: For the meaning of liable entity, see section 832‑325. Investor country—entity is not transparent (3) This subsection applies to a test entity in relation to a country (the investor country) and a payment made to the entity if, in the investor country: (a) an investor identified in paragraph (2)(c) is a *liable entity (an investing taxpayer) in respect of its own income or profits, but not in respect of the test entity's income or profits; or (b) an entity that is a liable entity (also an investing taxpayer) in respect of the investor's income or profits is not also a liable entity in respect of the test entity's income or profits. Subdivision 832‑F—Branch hybrid mismatch Guide to Subdivision 832‑F 832‑450 What this Subdivision is about This Subdivision neutralises a branch hybrid mismatch if it involves a deduction in Australia (and the non‑inclusion was not also in Australia). A deduction/non‑inclusion mismatch is a branch hybrid mismatch if it is made directly or indirectly to a branch hybrid, and the mismatch would not have arisen, or would have been less, if the residence country had not recognised the permanent establishment. An e