The High Court of Australia has unanimously rejected an appeal by Billabong co-founder Gordon Merchant over a tax arrangement involving the sale of Billabong shares from a family trust to a related self-managed super fund (SMSF).
The decision is an important reminder that transactions between related entities can attract scrutiny from the Australian Taxation Office (ATO), particularly where the commercial purpose is difficult to establish and the tax benefits are substantial.
In Commissioner of Taxation v Merchant and Merchant v Commissioner of Taxation [2026] HCA 39, the High Court considered two provisions of the Income Tax Assessment Act 1936: Part IVA, the general anti-avoidance rule, and section 177E, which deals with dividend stripping.
Although the Court rejected the tax benefit claimed from the Billabong share transaction, it also found that section 177E did not apply to certain debt forgiveness arrangements.
How the Billabong share transaction created a $56.6 million capital loss
The dispute centred on transactions involving companies, trusts and an SMSF controlled by Gordon Merchant.
In September 2014, Gordon Merchant Pty Ltd, acting as trustee of the Merchant Family Trust, transferred approximately 10 million Billabong shares to GSM Superannuation, the trustee of Merchant's superannuation fund.
The consideration was approximately $5.84 million.
The transaction resulted in the family trust recording a capital loss of approximately $56.56 million.
At the time, the family trust also held all the shares in Plantic Technologies, a bioplastics business that depended on financial support from Merchant Group companies.
In April 2015, the family trust sold its entire Plantic shareholding to Japanese corporation Kuraray for a substantial gain of approximately $85 million.
The sale agreement required related company loans totalling approximately $55 million to be waived or forgiven.
The capital loss generated through the Billabong share transaction was then available to offset the capital gain from the Plantic sale, substantially reducing the trust's potential tax liability.
The ATO considered the Billabong transaction an artificial arrangement designed to generate a capital loss for tax purposes.
Why the High Court rejected the Part IVA appeal
The central issue was whether the Billabong share sale had been entered into or carried out for the dominant purpose of obtaining a tax benefit.
Part IVA allows the Commissioner to cancel certain tax benefits where a scheme has been entered into for the dominant purpose of obtaining that benefit.
Merchant's side argued that the transaction had genuine differences in ownership, financial and tax consequences between the family trust and the SMSF. It also argued that alternative ways of achieving the commercial outcomes would not have produced the same result.
The High Court rejected those arguments.
All seven justices agreed that the transaction was essentially an internal transfer of shares between entities controlled by Merchant.
The Court considered that the transaction made little commercial sense but was readily explained by its tax consequences.
The judgment observed that the arrangement produced a substantial capital loss that could be used to shelter the expected capital gain from the Plantic sale.
The Court therefore upheld the Commissioner's cancellation of the $56.56 million capital loss.
The decision reinforces an important principle: a transaction does not necessarily have a genuine commercial purpose simply because it involves a legally effective transfer of assets between separate entities.
The separate dividend stripping and debt forgiveness issue
The High Court also considered a separate dispute involving the forgiveness of related-party debts within the Merchant Group.
The ATO argued that the debt forgiveness arrangements amounted to dividend stripping under section 177E.
Dividend stripping generally involves arrangements designed to extract company profits in a way that avoids or reduces the tax that would otherwise arise from distributing those profits as dividends.
The Commissioner considered that the forgiven amounts should be included in Gordon Merchant's assessable income.
However, the High Court reached a different conclusion on the relevant arrangements.
Four of the seven justices found that the debt forgiveness schemes did not have the necessary characteristics of dividend stripping.
Among the factors considered were that there had been no sale of shares in the relevant target companies, no dividend had been paid to a stripper, and no stripper had sold shares in those companies at a loss.
The Court also considered the tax treatment of dividends that might otherwise have been paid.
The Commissioner's appeal on this issue was dismissed, and Merchant's cross-appeal was allowed with costs. Section 177E did not apply to treat the relevant forgiven debts as dividend stripping.
Importantly, the Court also found that section 177E applied to the separate debt forgiveness scheme involving Tironui Pty Ltd. The outcome therefore depended on the particular arrangements being examined.
What does the decision mean for SMSF trustees and business owners?
Although the case involved a substantial private business group, the principles are relevant to smaller businesses, family trusts and SMSF trustees.
There are several practical lessons.
1. Related-party transactions need genuine commercial justification
Transferring an asset between a family trust, company and SMSF does not automatically make the transaction acceptable for tax purposes.
The transaction should have a genuine commercial or investment rationale, and the supporting documentation should clearly explain why it was undertaken.
2. Generating a tax loss is not enough to justify a transaction
The Billabong share transaction created a substantial capital loss. However, the High Court considered the broader purpose and circumstances of the arrangement rather than simply accepting the tax outcome.
Transactions that appear to exist primarily to manufacture tax losses can attract Part IVA scrutiny.
3. SMSF investments must be considered carefully
SMSFs can invest in a range of assets, but transactions involving related parties are subject to specific superannuation rules.
Trustees need to consider the investment strategy, valuation requirements, related-party restrictions and the fund's compliance obligations before proceeding.
4. Professional advice should be obtained before complex transactions
Seeking advice after a transaction has been completed may be too late to address structural or tax problems.
Where a transaction involves multiple entities, substantial asset transfers or related-party arrangements, the tax and superannuation consequences should be assessed beforehand.
The ATO's response
Following the High Court decision, the ATO said it was considering the broader implications of the ruling.
It confirmed that the decision reinforced the application of general anti-avoidance rules to transactions lacking meaningful commercial objectives.
The ATO also indicated that it would publish a Decision Impact Statement to provide further guidance.
That guidance will be worth watching, particularly for advisers dealing with complex transactions involving family trusts, companies and SMSFs.
Final thoughts
The Merchant case demonstrates that the tax consequences of a transaction cannot be considered in isolation from its commercial purpose.
A transfer between related entities may be legally effective, but that does not prevent the ATO from examining why it occurred and whether the dominant purpose was to obtain a tax benefit.
For SMSF trustees and business owners, the practical message is straightforward: ensure transactions are properly structured, commercially justified and supported by appropriate documentation before proceeding.
At Guidance Accounting, we help SMSF trustees understand their compliance obligations and identify potential issues with the structure and operation of their funds.
If you are considering an SMSF transaction involving related parties or want to review your fund's compliance position, contact Guidance Accounting.
Disclaimer: This article provides general information only and should not be relied upon as taxation, financial or legal advice. The application of Part IVA and superannuation legislation depends on the specific circumstances of each arrangement. Obtain professional advice before undertaking complex transactions.