OVERVIEW
In April 2025, the Full Court of the Federal Court of Australia handed down its decision in Merchant v Commissioner of Taxation [2025] FCAFC 56. This decision was appealed to the High Court, whose decision is still to be finalised.
This article is therefore prepared on the basis of the Full Court decision and briefly summarises the key issues being considered by the High Court.
This Merchant tax decision is not directly about SMSFs. However, certain earlier Administrative Appeals Tribunal (Tribunal) decisions contain valuable lessons for SMSF trustees.
Facts
In the 2015 financial year, the Gordon Merchant Superannuation Fund (GMSF) purchased listed shares in Billabong International Ltd (Billabong Shares) from the Merchant Family Trust (MFT). The trustee of the MFT was a related party of the SMSF. The Billabong Shares were sold at market value, which was $5.8 million.
The purchase crystallised a $56.5 million capital loss for the MFT. Mr Merchant, who was the founder of the Billabong surf brand business, would later submit that an objective advantage in the sale was liberating the $5.8 million from the ‘shackles of the superannuation environment’.
In the same financial year (FY2015), the MFT sold shares in Plantic Technologies Ltd to an unrelated Japanese purchaser. This sale realised a significant capital gain for MFT of $85 million. MFT had intended to offset the $56.5 million capital loss against the $85 million capital gain, leaving a net capital gain of $28.5 million.
The Commissioner contended that the predominant purpose of the GMSF’s acquisition was to crystalise the capital loss. The Commissioner contended that this in turn caused the reasonable conclusion to be drawn that the dominant purpose of the parties to the Billabong Share sale was to obtain a tax benefit by the capital loss being applied against the capital gain from sale of MFT’s shares in Plantic. The Commissioner considered that the Billabong Share Sale was analogous to a ‘wash sale’ given that the Billabong Shares would remain in the Merchant Group of which Mr Merchant was the ultimate owner. The Commissioner applied Part IVA of the Income Tax Assessment Act 1936 (Cth) to the arrangement; the general tax anti-avoidance provision.
Also, the Commissioner disqualified Mr Merchant from being eligible to be the trustee (or director of a trustee) of a regulated superannuation fund; refer to the following two tribunal decisions discussed below Merchant and Commissioner of Taxation [2021] AATA 915 and Merchant and Commissioner of Taxation [2024] AATA 1102.
The Commissioner’s reasons for the disqualification included that Mr Merchant had contravened the operating standards in s 34, the sole purpose test in s 62 and the prohibition of the provision of financial assistance to members/relatives in s 65 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
Mr Merchant applied to the AAT to review the disqualification. Despite finding that there were contraventions of the SISA, the AAT nevertheless set aside Mr Merchant’s disqualification for the reasons set out at the end of this article.
However, there were still the taxation questions, such as Part IVA.
Full Court’s finding
The Full Court held (2:1) that the dominant purpose was one of obtaining the tax benefit. More accurately, the Full Court held Mr Merchant and MFT has not made out its appeal grounds that an earlier Federal Court judge had erred in holding that the dominant purpose was one of obtaining a tax benefit.
High Court decision still pending
The High Court is currently determining two interconnected streams of cross-appeals. The taxpayer (Merchant, Appeal S158/2025) is appealing the Full Court majority’s finding (McElwaine and Hespe JJ; Logan J dissenting) that Part IVA applied to a share “wash sale”.
The High Court is testing whether the objective purpose analysis under s 177D captures a market-value asset transfer between a discretionary trust and a related SMSF where effective economic control of the asset does not change, or whether timing a realization to offset a prospective capital gain remains a permissible ordinary incident of commercial planning.
The Commissioner (Appeal S157/2025) is cross-appealing the Full Court’s partial clawback of the primary judge’s dividend stripping findings. The Full Court majority held that there was no dividend strip for the GSM debt forgiveness scheme, though they upheld it for the Tironui scheme. Interestingly, the majority of the Full Court held that the GSM debt forgiveness did not amount to a dividend strip as it resulted in more tax payable to GSM than would have arisen if Mr Merchant had of received fully franked dividends.
Implications for SMSFs
Remember that, from the GMSF’s viewpoint, all that the fund did was acquire listed securities at market value, albeit from a related party.
Note that s 66 of SISA broadly prohibits the acquisition of an asset from a related party. However, the main exceptions include:
- listed securities acquired at market value; and
- business real property.
Thus, many advisers might say that it is fine for an SMSF to acquire listed securities at market value. However, clearly it is not always that straight forward: while Mr Merchant was ultimately not disqualified, various contraventions nevertheless occurred.
Therefore, advisers should be aware that transactions that appear ‘ordinary’ may still attract ATO scrutiny, particularly where additional facts might exist. Again, in this instance, the GMSF was acquiring listed securities from a related party at market value.
Advisers should remember to obtain a proper understanding of the overall proposal and, where necessary they should ‘dig deep’ and consider whether there are any additional or unusual facts that need investigating.
While Mr Merchant could ultimately retain his SMSF, the MFT or its beneficiaries are likely to be subject to significant extra tax as a result of Part IVA.
The disqualification case in the Tribunal
The following should also be noted:
- The ATO initially disqualified Mr Merchant as a director of an SMSF trustee under s 126A of SISA on 21 July 2020, refer: Merchant and Commissioner of Taxation [2021] AATA 915.
- Mr Merchant sought a stay on the initial disqualification matter pending the outcome of his tax dispute with the ATO; this submission was rejected. Broadly, Mr Merchant argued that his defence in respect of the tax dispute would shed relevant light and material on his standing to be a fit and proper person as an SMSF trustee director.
- Mr Merchant did not have his disqualified status removed until May 2024, refer Merchant and Commissioner of Taxation [2024] AATA 1102. Mr Merchant’s position as an SMSF trustee director and member was therefore uncertain for years.
The following are key points from the Tribunal decision, extracted from Merchant and Commissioner of Taxation [2024] AATA 1102:
The fund’s investment strategy
The Tribunal found the GMSF did not give effect to the fund’s investment strategy and breached s 34(1) of the SISA for, among other reasons, the following:
- Mr Merchant wanted to keep control of the Billabong Shares in his family group, rather than having a genuine purpose of investing for the fund.
- Mr Merchant did not turn his mind to the matters in reg 4.09(2)(a) – (e) (including risk, cash flow, diversification, etc), rather he undertook the purchase of Billabong Shares in the fund for tax purposes for his related entities.
- The fund had 74.4% of its assets in Billabong Shares when the investment strategy had a maximum range of 40% and lacked diversification. This certainly points to continually reviewing SMSF investment strategies and revising them when things change.
Refer to paragraphs [125] to [133] of the 2024 Tribunal decision for further details.
Sole purpose test
Both parties referred to Aussiegolfa Pty Ltd v Commissioner of Taxation [2018] FCAFC 122 (Aussiegolfa). The Tribunal referred to the following extract from the principal judgment in Aussiegolfa by Moshinsky J:
At [176], Moshinsky J stated:
Although the cases discussed above concerned other provisions, they usefully discuss the concept of “purpose” in a similar statutory context. (As noted by Gleeson CJ in News Limited v South Sydney District Rugby League Football Club Limited (2003) 215 CLR 563 at [18], the appropriate description or characterisation of the end sought to be accomplished (purpose), as distinct from the reason for seeking that end (motive), may depend upon the legislative or other context in which the task is undertaken.) Consistently with the approach taken in the above cases, the word “purpose” in s 62 of the SIS Act is concerned with the way in which the fund is being maintained; the term does not look primarily to the subjective factors actuating the trustee. Further, the statutory context in which s 62 appears does not suggest that a fund will not be treated as being maintained solely for the core purposes, or the core purposes and the ancillary purposes, simply because the trustee enters into a transaction with a related party.
The Tribunal decided at [150] to [151]:
[150] The predominant reason Mr Merchant, as director of GSMS, agreed to entering into the Billabong Share Sale transaction was to crystallise a capital loss in the MFT which was expected to make significant capital gains from selling the Plantic shares. I accept that a substantial purpose (but not the predominant purpose) of GSMS was to keep ultimate beneficial or economic ownership of the Billabong Shares within the Merchant Group. Neither of these purposes was a core purpose within the meaning of s 62(1).
[151] It follows that GSMS did not “ensure that the fund [was] maintained solely” for one of the purposes in s 62(1).
Financial Assistance: Section 65 SISA
Section 65 of the SISA addresses the conferral of impermissible financial assistance on members and their relatives:
Lending to members of regulated superannuation fund prohibited
Prohibition
(1) A trustee or an investment manager of a regulated superannuation fund must not:
(a) lend money of the fund to:
(i) a member of the fund; or
(ii) a relative of a member of the fund; or
(b) give any other financial assistance using the resources of the fund to:
(i) a member of the fund; or
(ii) a relative of a member of the fund.
Note: Section 166 imposes an administrative penalty for a contravention of subsection (1) by a trustee in relation to a self managed superannuation fund.
The Tribunal decided at [159] to [160]:
[159] I am satisfied that financial assistance was given to Mr Merchant who was a discretionary object of the MFT. The Billabong Share Sale was entered into for the predominant and immediate purpose of crystallising a capital loss in the MFT. GSMS purchased the shares with cash in the GMSF for the purpose of increasing the financial resources of the MFT for the benefit of the discretionary objects of the MFT, specifically Mr Merchant.
[160] Having regard to the evident object of the provision, s 65(1)(b) is not limited to financial assistance of a direct nature. It prohibits financial assistance via an intermediary, including via a discretionary trust.
Note that SMSFR 2008/1 provides a list of factors at [15] which indicate that an arrangement or transaction is in substance a financing arrangement providing financial assistance to a member or a relative using SMSF resources.
Summary of Tribunal findings in Merchant
The Tribunal decided that the GMSF had contravened:
- Section 34(1) of the SISA as did not give effect to the fund’s investment strategy.
- Section 62 the sole purpose test as the predominate purpose of entering the purchase of Billabong shares was for the tax reasons of related parties.
- Section 65 by providing financial assistance the fund provided to Mr Merchant via the MFT.
Despite these contraventions, the Tribunal did not disqualify Mr Merchant. Instead, the Tribunal considered the risk of future non-compliance to be unlikely for the following reasons:
- Mr Merchant’s advisers did not put him on notice of any risk of contravening SISA.
- Mr Burgess of EY advised on the sale of Billabong Shares and he was the Merchant Group’s tax agent and the GMSF’s auditor.
Relevantly, the Tribunal stated at:
[183] … Mr Merchant would fairly have thought that the transaction was lawful from a superannuation compliance perspective in those circumstances. It would not be expected that the GMSF’s auditor would put forward a transaction which would cause breaches of the SISA.
[184] Secondly, Mr Merchant has given undertakings which the Tribunal accepts as appropriate and reasonable. These undertakings mitigate the risk of future non-compliance.
[185] Thirdly, although the breaches of the SISA were serious ones, they all arose from one course of conduct, the Billabong Share Sale. That is, the one course of conduct (put forward by the GMSF’s auditor) has given rise to multiple breaches. This is not a case of multiple breaches on multiple occasions.
[186] I do not place significant weight on protecting the investing public against the risk of re-offending. Having regard to his personal circumstances, Mr Merchant is only ever likely to be a director of the trustee of his own superannuation fund. To the extent that it is relevant, I do not believe Mr Merchant needs protecting from himself. To the extent he does, compliance with his undertakings offers sufficient protection.
Conclusion
The outline above provides a very interesting practical application on how the tax and super rules intersect. What appeared to be a simple superannuation query (ie, can a member or related party transfer listed securities at market value to an SMSF) resulted in a lengthy dispute that has been heard in the tribunal, the Federal Court, the Full Federal Court with the final decision yet to issue from the High Court.
Advisers and SMSF trustees should seek advice if there is any doubt.
Related articles:
- The sole purpose test substantially clarified by the Full Federal Court in Aussiegolfa Pty Ltd v Commissioner of Taxation
- NALE legislation finally becomes law
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]), Bryce Figot, Special Counsel, ([email protected]) and Tim Ly, Lawyer ([email protected]).
DBA LAWYERS
7 August 2026
