Billabong co-founder loses Part IVA appeal in Merchant case

On Part IVA, there was consensus among all seven justices that the Billabong sale (BBG share sale scheme) was a “purely internal transfer of shares between entities” controlled by Billabong co-founder Gordon Merchant. The court upheld the commissioner’s cancellation of a $56.6 million capital loss generated when the Merchant Family Trust sold Billabong shares to a related SMSF.

The judgment read that “as a commercial proposition, it ‘made no sense’, as is clear from the findings of the primary judge”.

“But as an example of tax planning, it made perfect sense: it produced a large capital loss which was then available to shelter from taxation the expected capital gain from the sale of Plantic shares,” the judgment read.

“As such, the BBG share sale scheme is only explicable by reference to its valuable tax consequences.”

Background of the case

In April 2025, the Full Court of the Federal Court of Australia ruled that the tax scheme involving the sale of Billabong shares from a family trust to a super fund had the dominant purpose of obtaining a tax benefit.

The case of Merchant v Commissioner of Taxation [2025] FCAFC 56, involved certain tax schemes undertaken by Billabong founder Gordon Merchant, based on advice provided by EY. The decision was related to transactions linked to the sale of shares in Billabong International Ltd and a bioplastics company, Plantic Technologies.

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

As a result, GM2 incurred a capital loss of $56,561,940. At this time, GM2 held all the issued shares in Plantic, which depended on cash injections from GM2 and loans from other Merchant Group companies as it was not profitable.

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

The ATO 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.

The commissioner believed the Billabong share sale scheme had been entered into or carried out for the dominant purpose of allowing the Merchant Family Trust to obtain a tax benefit, which was the capital loss incurred by it on the Billabong share sale.

2 decisions

In the current High Court case, GSM provided two submissions to show that no person who entered into or undertook the scheme had a dominant purpose of obtaining a tax benefit. The first submission said that differences arising from the change in ownership of the BBG shares were not considered below or were erroneously set aside or dismissed.

It said the majority of the Full Court failed to take into account the legal, “commercial financial” and taxation differences between Merchant Family Trust and GMSF.

The second submission was that a comparison of five alternative ways of carrying out the scheme showed that none of them was capable of achieving the commercial outcomes achieved by the BBG share sale scheme.

However, the majority of the justices decided that there was no other plausible or meaningful result achieved by the share sale other than the tax benefit.

In last year’s Full Court case, evidence was also produced that suggested that Merchant had engaged in a form of tax avoidance known as dividend stripping, shrinking the distribution of Merchant group company profits by forgiving $55 million in related party debts to avoid paying tax at his marginal rate.

The commissioner determined that the entirety of the forgiven amounts should be included in the assessable income of Gordon Merchant, the sole shareholder of GSM.

However, the justices upheld Merchant’s appeal in relation to the application of 177E to the GSM debt forgiveness scheme. They found that the quantitative elements of dividend stripping were not satisfied in relation to the scheme. But the court found that section 177E did apply to the debt forgiveness scheme of related company Tironui Pty Ltd.

In the latest High Court ruling, four out of the seven justices held that the debt forgiveness was not a scheme in the nature of dividend stripping as there was no sale of the shares in each of the target companies (namely GSM and Tironui), no dividend was paid to any stripper, no stripper sold the shares in the target companies at a loss, and any dividends that might have been paid to Merchant by GSM and Tironui would have been fully franked and not have been fully taxable.

“The commissioner accepted that the debt forgiveness schemes lacked the common characteristics of dividend stripping identified in previous cases,” the judgment read.

The commissioner’s appeal was dismissed, and Merchant’s cross-appeal was allowed with costs, and section 177E did not apply to treat the forgiven debts as dividend stripping.

In a statement, the ATO said the High Court decision confirms the application of the general anti-avoidance rules to transactions that “lack meaningful or commercial objectives”.

“The ATO is considering the broader implications of the decision and will publish a Decision Impact Statement to provide further guidance as soon as possible," it said.