City Beach restructure was not a tax avoidance scheme, court finds

Last Wednesday (3 December), the Federal Court of Australia dismissed the ATO’s appeal in Commissioner of Taxation v Hicks, cementing the court’s position that the 2016 restructure of Australian apparel brand City Beach was not a tax avoidance scheme.

In 2024, City Beach founders Carmelo Ierna and Melville Hicks challenged assessments issued by the ATO that demanded millions in income tax over what it deemed “capital benefits” from restructuring to extinguish Division 7A loans.

The primary judge ruled that the restructuring was not to avoid the inclusion of the $52 million dividend in their assessable incomes but to “use pre-CGT assets to repay the Division 7A loans”.

In December 2025, the Federal Court dismissed the ATO’s appeal against this decision, ruling unanimously in favour of Ierna and Hicks. Global law firm Dentons, which represented City Beach in court, celebrated the “resounding win”.

“We welcome the Court’s decision, which confirms City Beach’s restructure was driven by sound commercial objectives,” Damien Bourke, lead corporate tax partner at Dentons, said.

“This ruling provides clarity for businesses managing complex trust and corporate structures. We wish the founders of City Beach and the business continued success as they move forward."

Ierna and Hicks ran their business through a trust structure called City Beach Trust (CBT). A majority of the trust units flowed through Ierna and Hicks’ family trusts to corporate beneficiary Mastergrove, which was ultimately controlled by Hicks and Ierna.

On the advice of Mazars (known as Hanrick Curran at the time), CBT was restructured in 2016 to address issues with Division 7A loans caused by taxation ruling TR 2010/2. The ruling, now replaced by TD 2022/11, made unpaid present entitlements owed by trusts to an associated private company Division 7A loans.

While the immediate impact of the ruling was “cushioned by reduced profits” of the business, by 2016, it meant that City Beach “no longer had any room to manoeuvre” over a number of its loans, the primary judge found.

The 2016 restructure interposed a new holding company over the CBT and implemented a selective share capital reduction of $52 million, which was used to discharge Div 7A loans owed by entities associated with the group’s principals.

The Commissioner of Taxation sought to apply anti-avoidance provisions under section 45B and Part IVA, but the court found that the capital return was not made in substitution for dividends.

It concluded that the dominant purpose of the restructure was to facilitate Division 7A loans while preserving the pre-CGT status of certain assets.

“The fact that a transaction is entered following the receipt of tax advice or the fact that the advice refers to “no adverse tax consequences” does not of itself support a conclusion that the dominant purpose of a person was to enable the taxpayers to obtain a tax benefit,” court documents read.

“The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies.”