In April 2025, the Full Court of the Federal Court of Australia (Full Court) handed down the latest decision in respect of the Merchant group. This decision is not directly about SMSFs. However, it nevertheless contains an important lesson for SMSFs.
The full decision is available at <https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC/2025/56.html>
Facts
In the 2015 financial year, the Gordon Merchant Superannuation Fund (SMSF) purchased certain listed securities (BBG Shares) from the Merchant Family Trust (MFT). The trustee of the MFT was a related party of the SMSF. The BBG Shares sale was at market value, which was $5.8 million.
The purchase crystallised a $56.5 million capital loss for MFT. Mr Merchant 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, the MFT sold certain other shares. This sale realised a significant capital gain for MFT. By reason of the sale to the SMSF, the MFT had capital losses sufficient to absorb the whole capital gain.
The Commissioner contended that the predominant purpose of the SMSF’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 BBG Share sale was to obtain a tax benefit. The Commissioner applied Part IVA of the Income Tax Assessment Act 1936 (Cth) to the arrangement; the general taxation 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.
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 provision of financial assistance in s 65 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
Merchant applied to the Administrative Appeals Tribunal (AAT) to review the disqualification. Last year, despite finding that there were contraventions of the SISA, the AAT nevertheless set aside Mr Merchant’s disqualification. Specifically, the AAT found that the risk of future non-compliance was unlikely for the following reasons:
- Mr Merchant was a fit and proper person.
- There was no evidence that Mr Merchant was advised by his advisers that the transaction risked breaching the SISA.
- Mr Merchant had given undertakings to mitigate the future risk of non-compliance.
- The contraventions of the SISA, while serious, all related to a single course of conduct.
- In relation to protecting the investing public, Mr Merchant was only likely to be a director of the trustee of his own superannuation fund. Further, he did not need protecting from himself.
- The offending transaction was suggested by the SMSF’s auditor without any warning of compliance issues.
- There was no useful purpose served by disqualification in this instance.
However, there was still the taxation questions, such as Part IVA.
The recent Full Court decision was considering these taxation questions.
Full Court’s finding
The Full Court held (2:1) that the dominant purpose was one of obtaining the tax benefit. (Or, 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 the described tax benefit.)
There were other tax related findings too. For those interested in all the minutiae, see the full decision (again, link available at the start of this article).
Implications for SMSFs
Remember that, from the SMSF’s point of view, all that the SMSF did was acquire listed securities at market value, albeit from a related party.
Many advisers might say that it is definitely fine for an SMSF to acquire listed securities at market value. However, clearly it not necessarily 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 SMSF 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 retain his SMSF, the MFT or its beneficiaries were likely to be subject to significant extra tax as a result of Part IVA.
Related articles
- Merchant v Commissioner of Taxation [2024] AATA 1102 — Latest AAT decision on disqualification
- Merchant and Commissioner of Taxation [2021] AATA 915 – surprise risk to SMSF acquiring listed shares
- Are you disqualified from having an SMSF?
- New option for SMSFs with bankrupt member
- More clarity for SMSFs with a bankrupt member
* * *
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 Bryce Figot ([email protected]), Special Counsel, and Daniel Butler ([email protected]), Director, DBA Lawyers
DBA LAWYERS
30 April 2025
