The Full Federal Court decision demonstrates the full reach of Part IVA and has important implications for SME advisers, a tax specialist has cautioned.

Last month, the Full Federal Court handed down its decision in Merchant v Commissioner of Taxation [2025] FCAFC 56, which involved certain tax schemes undertaken by Billabong founder Gordon Merchant, based on advice provided by EY.

Jeffreys said the case is highly relevant to accountants in public practice as it deals with some of the most contentious areas of the general anti-avoidance provisions in Australian tax law, such as sections 177D and 177E of Part IVA of the Income Tax Assessment Act 1936.

The decision concerned transactions relating to the sale of shares in Billabong International Ltd and a bioplastics company, Plantic Technologies.

In September 2014, Gordon Merchant Pty Ltd (GM2), as trustee of the Merchant Family Trust, transferred approximately 10 million in Billabong shares to GSM Superannuation, the trustee of the Gordon Merchant superannuation fund, for a consideration of $5,844,827.82.

In doing so, GM2 incurred a capital loss of $56,561,940. At the time, GM2 held all the issued shares in Plantic, which was not profitable and relied on cash injections from GM2 and loans from other Merchant Group companies.

In April 2015, GM2 sold all of its shareholding in Plantic to Kuraray Co Ltd, an unrelated Japanese corporation, which resulted in the Merchant Family Trust deriving a capital gain of approximately $85 million. A condition of the sale required that related company loans, which totalled approximately $55 million, be waived or forgiven.

The Tax Office determined that Merchant had used the Merchant Family Trust to engage in an asset “wash sale” by selling the $5.8 million in Billabong shares (BBG) to his SMSF to crystallise a $56.6 million capital loss. The capital loss was then used to offset the $85 million capital gain on the Merchant Family Trust's sale of Merchant’s shares in Plantic to Kuraray.

Speaking in a recent webinar, Jeffreys said the case was important for three main reasons.

"Firstly, it's about the application of Part IVA to a relatively routine kind of tax planning that many clients engage in - realising a capital loss in anticipation of a capital gain," he said.

"There's no offshore tax haven, no exotic hybrid mismatch or Cayman Islands unit trust. It's just a private group managing its investments, and yet it ended up in the Federal Court, and was found to be a scheme to which Part IVA applied."

The case also dealt with dividend stripping under section 177E. Jeffreys said while this part of Part IVA was often overlooked, it was still alive.

"The commissioner argued that forgiving debts in a corporate group before a share sale amounted to dividend stripping. That argument was only partially successful," he said.

The case also dealt with the taxation of financial arrangements (TOFA) and provided useful guidance on the interpretation of earn out rights and future contingent payments.

The Full Federal Court was divided in its decision, with Justice Logan determining that the appeal should have been allowed in full.

However, the majority of the court, which included Justices Hespe and McElwain, upheld the Commissioner's determinations under Section 177D but substantially not in relation to the section 177E dividend stripping issue.

The appeal in relation to the application of 177E to the GSM debt forgiveness scheme was upheld. However, the court found that section 177E did apply to the Tironui debt forgiveness scheme.

Implications for accountants from the decision

Jeffreys said there are some important lessons for accountants from the decision.

One is that the ATO will scrutinise transactions between related parties, even where they occur at market value, if there is a clear tax benefit obtained.

"Secondly, commercial reasons do not always save a transaction if the tax benefit dominates. Part IVA can still apply," Jeffreys said.

"Thirdly, debt forgiveness within a group can create unintended tax consequences, especially when it alters the value of other assets."

Jeffreys said some accountants might be surprised by the decision, given that the taxpayer has done something that many accountants have advised a client to do: crystallise a capital loss in order to reduce the tax on a capital gain.

"[Some accountants] might question what's wrong with that? That is a fair question, given] none of the transactions were contrived or illegal."

He said the sale of the BBG shares to the super fund was at market value and within the bounds of the superannuation rules. Merchant had a clear objective of maintaining control over the BBG shares so that he could provide some influence as to the way the company was operated.

"This was a company that he started and from which he derived his wealth. Although he was no longer the majority shareholder, he still was a substantial shareholder, and this provided him with an opportunity to sit on the BBG board and he did not want to relinquish this position."

The sale of Plantic, Jeffreys said, was to an arm's length party.

"Merchant had decided to quit the investment in Plantic and get the best price for it. This resulted in an $85 million capital gain. I suspect that most accountants would have looked for a method of reducing the tax on the gain and the unrealised loss on the BBG shares would have immediately come to mind.

"[However], the mere realisation of this capital loss, in the view of the majority of the court, was a scheme to which Part IVA applied."

Jeffreys said while some people might conclude that EY designed an egregious tax minimisation scheme for their client, many would not consider that to be the case.

"EY recommended what I think most [accountants] would have recommended to their client. That process of minimising tax resulted in the conclusion that the taxpayers had become tax avoiders with significant penalties," he said.

"It was made plain in the judgment that if the sale of the BBG shares had been to an arm's length third party, Part IVA would have not been applied because the shares were thought to be under the same control."

Jeffreys said this transaction likely attracted the ATO's attention, given the large amounts involved, but it demonstrated the reach of Part IVA where the ATO intended to apply it.

"Most accountants would consider these transactions to be well within the range of normal non-offensive tax planning. In other words, most would consider these transactions to ordinary family or commercial dealings, but not so."

"The key message is that accountants need to be wary of anything that is done to save tax that does not involve arms length parties."

While transactions involving smaller amounts are likely to fly under the ATO's radar, Jeffreys warned that for larger transactions, the Tax Office's use of Part IVA would be fortified from this decision.