Hilton: Part IVA, Alternative Postulates And The Evidence Problem

In short

‘Hilton International Australia Pty Ltd v Commissioner of Taxation (No 2) [2026] FCA 1325’ is an important new Federal Court decision on Part IVA. It is particularly significant for its treatment of alternative postulates under s 177CB, and for the Court’s emphasis on the quality of evidence required to support a taxpayer’s reconstruction case.

The appeal concerned the sale of the Hilton Hotel in Sydney. The Commissioner had amended Hilton International Australia Pty Ltd’s assessable income for the 2015 income year by including approximately AUD 173.3 million, on the basis that Part IVA applied to a scheme involving the sale of shares in Admiral Holdings Australia Pty Ltd, an entity that held the hotel assets immediately before sale. The Federal Court dismissed Hilton’s appeal.

A developing issue: more than one reasonable alternative

The most significant legal development is the Court’s acceptance that Part IVA does not require the identification of a single reasonable alternative postulate. Hilton submitted that the Court’s task was to identify the one commercially preferable alternative that might reasonably be expected to have occurred if the scheme had not been carried out. The Commissioner contended that the Court may consider all alternative postulates that meet the statutory criterion of reasonableness.

Younan J preferred the Commissioner’s construction. Her Honour held that the statutory reference to “a reasonable alternative” does not require the Court to select only the most likely or preferred alternative. Rather, the Court is to ask whether one or more postulates is reasonable, having particular regard to the substance of the scheme and the non-tax consequences achieved by it.

That conclusion sits squarely in the current Part IVA landscape following PepsiCo, Minerva and Guardian. Those authorities continue to emphasise that Part IVA involves an objective inquiry, and that the taxpayer bears the onus of showing that the assessment is excessive. Hilton adds an important practical point: it may not be enough for a taxpayer to show that its preferred postulate is commercially attractive, or even that the Commissioner’s postulates are less attractive. If another postulate remains reasonable, and produces the relevant assessable income outcome, the tax benefit analysis may still be satisfied.

A Part IVA scheme cannot be the answer to another Part IVA scheme

A second important feature of the decision is the Court’s rejection of Hilton’s preferred alternative postulate. Hilton advanced an alternative under which the same sale vehicle would have been sold on a debt-free basis, with the relevant debt effectively replaced by share capital shortly before sale. The Court accepted that, leaving aside one critical issue, this may otherwise have been a reasonable commercial alternative.

The critical issue was that the taxpayer’s postulate was itself characterised as having the same tax avoidance hallmarks as the impugned scheme. Younan J held that a postulate that itself meets the description of a Part IVA scheme should not be used as the comparator for identifying the tax benefit under s 177C and s 177CB. Her Honour described the contrary approach as paradoxical: it would require the Court to assume away one scheme only to replace it with another scheme directed to achieving a similar tax effect.

That position may create difficulty in some circumstances. The reason the alternative postulate is excluded is that it is itself said to be a scheme to which Part IVA applies. But that conclusion depends on the scheme being one in respect of which the statutory criteria for Part IVA are satisfied. Put another way, if Part IVA does not apply to the scheme, the alternative postulate may remain a reasonable alternative for the purposes of s 177CB.

For taxpayers, this is a strategically important point. In Part IVA disputes, the alternative postulate is not just an accounting or transactional reconstruction. It must be capable of performing its statutory role as a genuine foil to the scheme. A counterfactual that simply preserves the tax advantage through different mechanics may be vulnerable to rejection.

Evidence was decisive

The evidentiary findings are likely to be just as important as the legal analysis. The taxpayer’s case depended heavily on explaining why its structure was commercially preferable and why the Commissioner’s alternatives would not have achieved the same commercial outcomes. That required persuasive evidence about market practice, buyer expectations, transaction risk, due diligence, negotiation leverage and the commercial significance of the hotel management agreement.

Two aspects of the evidence caused difficulty. First, parts of the lay evidence from a senior Hilton executive were not admitted as expert opinion. The Court held that the relevant statements were not shown to be wholly or substantially based on specialised knowledge, and that the evidence did not satisfy the requirements applicable to expert opinion evidence. The statements were admitted only as expressions of the witness’s belief. The Court emphasised the absence of the “connective tissue” between the witness’s experience and the opinions expressed.

Second, the Court preferred the Commissioner’s expert evidence over aspects of Hilton’s expert evidence. A key reason was that Hilton’s expert had not been provided with, and had not reviewed, a substantial set of documents from the transaction data room. Those documents included materials relevant to the internal restructure, the debt arrangements, the sale structure and the buyer’s concerns. The Court held that those omitted documents were relevant and had the potential to inform the expert’s opinion. As a result, less weight was placed on that evidence.

This provides a clear lesson for Part IVA cases. Evidence about commerciality must be built from the contemporaneous record and from witnesses who have been properly briefed on the critical facts. Assertions that a structure was simpler, faster, lower risk, market-standard or commercially necessary will be tested against the documents, the chronology and the objective commercial consequences. If the expert has not grappled with the documents that show how the transaction was actually negotiated and understood at the time, the opinion may not carry the required weight.

Commercial purpose is not enough

The Court accepted that the transaction achieved real commercial objectives: a sale of a valuable hotel asset in a strong market, retention of long-term hotel management rights, and deployment of sale proceeds within the corporate group. But that did not answer the Part IVA question. Applying the eight statutory factors in s 177D, the Court concluded that the manner in which the scheme was carried out, and the disparity between its form and substance, pointed to a dominant purpose of obtaining a tax benefit.

A recurring theme was that the chosen structure created transactional friction. The sale vehicle carried a complex debt history, the purchaser raised concerns, additional warranties and risk mitigation were required, and the purchaser later moved the hotel assets into its preferred structure. Against that background, the Court was not persuaded that the particular structure was necessary to achieve the commercial outcome. The stronger inference was that the sale succeeded because the hotel was a trophy asset being sold in a favourable market, rather than because of the impugned structure.

Practical implications

Hilton is a reminder that Part IVA strategy needs to be developed early. 

Taxpayers should identify, test and document the realistic commercial alternatives at the time the transaction is being designed. That includes recording why particular structures were adopted or rejected, and preserving the commercial evidence that supports those decisions.

The decision also underlines the importance of evidentiary discipline. Expert witnesses should be given the full factual record relevant to the opinions they are asked to express, including documents that may cut against the taxpayer’s case. Their reports should identify the assumptions, explain the reasoning process and engage with contemporaneous documents that bear on commercial substance, market practice and buyer behaviour.

Although there may be an appeal, Hilton is already an important decision to watch. Its approach to multiple reasonable alternative postulates, and to excluding an alternative that is itself characterised as a Part IVA scheme, will be closely examined in future disputes.

For taxpayers undertaking restructures, disposals, refinancing transactions or other transactions with material tax outcomes, now is the time to stress-test the Part IVA position. KordaMentha’s Tax Disputes team can assist with early-stage risk assessment, dispute strategy, evidence planning and review of transaction materials before positions become entrenched.