A structured arrangement is one where the tax mismatch is built into the design of the arrangement, either intentionally or with enough indicators that the taxpayer should have known. A “structured arrangement” is when the hybrid mismatch was either:

•             Priced into the terms of the deal (first limb), or
•              Deliberately designed to produce the hybrid mismatch (second limb).

If either test is satisfied, the ATO may treat the arrangement as structured and potentially deny deductions.

ATO identifies features showing that the price or terms rely on the tax benefit such as:

•              Formula links pricing to a party’s tax rate (explicit tax‑driven pricing).
•              Below or above market pricing is explainable only by the hybrid mismatch.
•              Gross‑up clauses compensating one party if the hybrid benefit disappears.
•              Renegotiation clauses triggered if the hybrid outcome fails.
•              Break clauses allowing termination if the tax benefit does not materialise.
•              Product offered broadly but only taken up in one jurisdiction because the hybrid outcome makes it attractive there.

•              Advice was sought to intentionally produce a hybrid mismatch (emails, working papers, memos).
•              A term or step exists that serves no commercial purpose besides creating the hybrid mismatch.
•              The arrangement is marketed as tax‑advantaged, with part of the benefit coming from the hybrid feature.
•              Product is only offered to investors who can benefit from the hybrid mismatch (e.g., specific jurisdictions).
•              In imported hybrid cases¹, the Australian payment forms part of a chain linking directly or indirectly to an offshore hybrid mismatch.

¹ An Australian entity incurs a deductible payment to a related party, and that payment (or related funding) is linked, directly or indirectly, to a hybrid mismatch offshore, for example, a deduction that is not matched by taxable income in any country.

Identify where your payments flow (directly or indirectly), including:

• Lenders
•  Intermediaries
• Related-party entities
• Any special‑purpose vehicles

This helps determine if a hybrid mismatch might exist higher up.

The ATO expects “reasonable enquiries,” such as:

• Tax treatment of payments in the foreign jurisdiction
• Whether any hybrid instruments or entities exist
• Whether the counterparty markets the product as tax‑efficient

• Unusual pricing
• Tax‑driven clauses
• Complex interposed entities
• Documentation referring to tax benefits

This includes:

• Emails confirming foreign tax treatment
• Internal memos documenting your analysis
• Advice from external tax advisers
• Board papers or business case materials

If risk indicators exist, consider:

• Restructuring the transaction
• Changing the instrument type
• Removing hybrid features
• Repricing without tax‑driven elements