What happened in Merchant v Commissioner of Taxation is something many of us in practice would recognise – a taxpayer with a large capital gain (sale of Plantic shares) crystallised a capital loss (BBG shares) to reduce their tax bill. Many of us would have given similar advice.
The sale of BBG shares was at market value and complied with superannuation rules. Mr Merchant had a clear commercial motive – to keep influence over a company he’d founded.
On the other side, the sale of Plantic shares was a clean exit to an arm’s length buyer, realising an $85 million capital gain. It’s natural to then look for offsetting losses. The BBG shares were sitting in a loss position. Crystallising that loss would seem like standard tax planning. And note that the BBG share sale loss occurred several months before the capital gain.
The majority of the Full Federal Court said it wasn’t just tax planning – it was a scheme to which Part IVA applied.
That’s a confronting conclusion. Some might think EY (the advisers) designed an aggressive tax avoidance scheme. But to most in the profession, it looks like they did what we all try to do – find a legitimate way to reduce a client’s tax burden within the rules. And yet, their client has now been labelled a tax avoider, maybe with penalties.
What triggered the ATO? It appears to be the fact that the BBG shares were sold to a related party (a super fund under Mr Merchant’s influence) rather than to an arm’s length third party.
So this raises the question – can a taxpayer ever sell assets within their control to realise a loss without triggering Part IVA if at some time in the future the loss will be set off against a gain?
Justice Logan (dissenting) didn’t think Part IVA should apply here. In fact, he strongly criticised the ATO’s approach, saying they applied “tunnel vision” – pulling apart the transactions and ignoring the broader, legitimate commercial context. His judgement is compelling. But it didn’t carry the day.
At the time of writing (5 May 2025), we don’t know whether the taxpayer will seek special leave to appeal to the High Court. But even if they do, this case is a wake-up call.
The reality is this: Part IVA can be applied to transactions that most of us would regard as standard, even conservative, tax planning – especially where large amounts of money are involved and related parties are in play.
The takeaway?
If there’s a tax-saving step involving a related entity – even where everything is at market value and commercially justifiable – you need to stop and consider the Part IVA risk. The higher the dollar value, the more likely it is that the ATO will take interest. And this decision has now given them more confidence to do so.