Michael May (led by J Gleeson SC and leading P Bristow) represented the respondents in S157/2025 and the appellants in S158/2025, instructed by HLS Tax Law.
The appeals concerned the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (‘the Act’) to transactions within the Merchant Group prior to the sale of Plantic Technologies Ltd. The Merchant Family Trust sold Billabong shares to a related superannuation fund, crystallising a capital loss of approximately $56.5 million. Related companies subsequently forgave approximately $54 million of Plantic’s debts, before the trust sold its shares at a capital gain of approximately $85 million. Under s 177D of the Act, the Commissioner cancelled the capital loss. Separately, the Commissioner treated the debt forgiveness as having the practical effect of a dividend stripping scheme under s 177E and assessed Mr Merchant on the forgiven amounts.
The Court considered three questions: first, whether the main purpose (the “dominant purpose”) of the Billabong share sale was to obtain a tax benefit; second, the meaning of “dividend stripping” under s 177E, including the common characteristics identified in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235; and third, whether the cancellation of the capital loss was relevant to applying s 177E. The Court unanimously upheld the s 177D determination, with Mr Merchant’s objection to the s 177E assessment was allowed, with costs.
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