Australia’s High Court has delivered a divided outcome in long-running tax litigation involving Gordon Merchant’s corporate group, upholding the Commissioner of Taxation’s treatment of a Billabong share sale while rejecting the Commissioner’s dividend-stripping case over related debt forgiveness.
The transactions were arranged before the 2015 sale of Plantic Technologies. A Merchant family trust sold Billabong shares to a related self-managed superannuation fund, crystallising a capital loss of about A$56.6 million. That loss was then used against a capital gain of about A$85 million arising from the sale of Plantic shares.
The Court held unanimously that the Billabong share-sale scheme was entered into or carried out for the dominant purpose of obtaining a tax benefit under section 177D of the Income Tax Assessment Act 1936. The Commissioner’s cancellation of the capital loss therefore stood, subject to reassessment in accordance with the Court’s reasons.
The result differed on debts of roughly A$54 million that related Merchant entities forgave before the Plantic sale. A majority concluded that those arrangements did not have substantially the effect of a dividend-stripping scheme within section 177E. The Commissioner’s appeal on that issue was dismissed and the taxpayers’ cross-appeal allowed.
The orders send the assessment concerning the share-sale scheme back to the Commissioner for recalculation. They also set aside the separate assessment that had increased Merchant’s taxable income by the forgiven debts. The judgment draws a careful boundary between the general anti-avoidance rule and the more specific dividend-stripping provision: one transaction was caught by its tax-avoidance purpose, while the other did not acquire the essential character required by the statute.
The High Court’s judgment in Commissioner of Taxation v Merchant; Merchant v Commissioner of Taxation [2026] HCA 39 is available here.
