Commissioner Wipes Out On 45B And Part IVA

Introduction

On 3 December 2025, the Full Court Federal Court handed down its judgment in Commissioner of Taxation v Hicks  [2025] FCAFC 171. 

The principal issue was whether a series of steps involving the top-hatting of a unit trust followed by a selective share reduction by the newly interposed company was a scheme to which p 45B (about capital benefit schemes) or Part IVA (the general anti-avoidance rule) of the Income Tax Assessment Act 1936  (ITAA 1936) applied.

The full court unanimously dismissed the appeal, agreeing with the conclusions reached by Logan J at first instance in Ierna v Commissioner of Taxation  [2024] FCA 592 (Ierna). In doing so, the court made a number of key observations concerning the ITAA 1936's anti-avoidance provisions, including with respect to p 45B and the recently decided Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 (PepsiCo).

The restructure

The restructure the subject of the appeal took place amongst several related entities associated with the "City Beach" fashion retailing business. The City Beach group consisted of the City Beach Trust (the unit trust which operated the business) and various entities associated with the ultimate owners of the business (Mr Ierna and Mr Hicks), including their family trusts and corporate beneficiaries of those trusts.

Relevantly, between 2006 and 2015 the corporate beneficiaries were made presently entitled to the income of the relevant trusts (though substantial amounts remained outstanding as unpaid present entitlements) and made loans to, varyingly, Mr Ierna and Mr Hicks and to certain trusts controlled by them. Such loans were subject to Division 7A of the ITAA 1936 and were made on terms that satisfied p 109N of that Division (to avoid their being treated as dividends for tax purposes). Those terms required that the loans be made at interest, and be for a term no greater than seven years. Between 2005 and 2013, one of the corporate beneficiaries paid dividends to enable Mr Ierna and Mr Hicks to pay interest and principal on these loans. 

In 2016, a restructure of the City Beach group took place in order to facilitate the repayment of the Division 7A loans. A new company, Methuselah Holdings Pty Ltd (Methuselah), was interposed between the City Beach Trust and its unitholders; those unitholders exchanged their units for shares in the interposed company under a restructure which qualified for rollover under Division 615. The rollover enabled the pre-CGT units in City Beach Trust to retain their pre-CGT status, and for the corresponding shares in Methuselah to be taken to be pre-CGT assets. Methuselah then undertook a $52 million selective share reduction funded by interest-free at-call loans from its shareholders. The loan receivables were then assigned by the shareholders through the group in satisfaction of the outstanding Division 7A loan balances such that the corporate beneficiaries which had advanced the Division 7A loans were the holders of interest-free at-call receivables from Methuselah in place of the prior Division 7A loan receivables. Methuselah became the head of a tax consolidated group with the City Beach Trust thereafter.

The Commissioner made a determination under p 45B that the capital benefits received by the shareholders in Methuselah (ie the selective share payments) were unfranked dividends or, in the alternative under p 177F, that the assessable income of both parties included an equivalent dividend and franking credit gross up.

Decision

p 45B

In rejecting the Commissioner's ultimate submissions, the court made a number of observations as to the operation of p 45B; the first time a Full Court has done so. 

• Approach to construction

After outlining the legislative history of the provision, the court observed (from [83]) that p 45B is (outside of the demerger context) directed towards ensuring that amounts are treated as assessable dividends if a distribution is made in substitution for dividends, and that the p must be construed in the context of that particular mischief which is expressly stated in p 45B(1)(b) (at [86] and [94]).

• An alternative tax benefit hypothesis need not be reasonable

The taxpayers failed to convince the court that p 45B(9), which defines the circumstances in which a taxpayer obtains a tax benefit, requires that it be reasonable for a dividend to have been paid in substitution for the provision of a capital benefit. Rather, it merely requires a comparison between the tax treatment of the actual capital benefit provided with the tax treatment that would apply if a dividend were paid instead, i.e. even if it would not be possible, or reasonable for a dividend to have been paid instead – those matters are instead relevant to the purpose analysis.

• Purpose of a party

The court spent significant time (from [103]) discussing the approach to determining whether a person who entered into or carried out the subject scheme did so for a purpose of enabling the relevant taxpayer to obtain a tax benefit. 

In general terms, and consistent with the approach taken to assessing purpose in Part IVA, the court rejected an approach which simply considers the number of factors point towards or against the requisite purpose (at [104]); instead, it described the exercise as "evaluative", "in light of the mischief" addressed by p 45B and in a way that "give[s] effect to the statutory purpose of the p". If a taxpayer would never have been subject to tax on a dividend at all, as in this case where the profits to which the Commissioner directed the court's attention were profits of a trust which (not being a company) is not an entity that can pay dividends, the court considered it "difficult to comprehend" how such a purpose could be identified.

The court also considered individual relevant circumstances listed in p 45B(8). 

• The court accepted that the increasing value of the net assets of the City Beach Trust, as an associate of Methuselah, could amount to profits (at [115]) for the purpose of p 45B(8)(a) (about whether a distribution was attributable to profits), and that the existence of profits in an associate could point to the requisite purpose even if the company which actually provided the capital benefit had no profits available for a dividend (such as a new, interposed holding company over subsidiary companies with retained earnings: at [114]). Practically, this means that a capital return paid by a company interposed between an existing corporate group which has profits may be subject to p 45B, even though a different conclusion may arise where a company is interposed between a trust and its unitholders, as explained below.
• However, the court reinforced that the relevant circumstances must be considered in light of p 45B's purpose – to treat capital distributions "as dividends if they are made in substitution for dividends" (emphasis in original at [118]). As such, the court considered that p 45B(8)(a) did not assist the commissioner where the profits were those of the City Beach Trust and therefore could not be distributed as a dividend. In those circumstances, a distribution by Methuselah could not, "in any sense", substitute for such a dividend (at [119]).
• The court rejected the Commissioner's approach to p 45B(8)(b), relating to a pattern of distributions. The court redrew attention to the purpose of p 45B, and the role of the relevant circumstances in p 45B(8) in the same (at [125]). It was "not sufficient", according to the court, "to show that a dividend might have been paid by an associate" if that dividend would not have been included in assessable income (at [125]). The court therefore reached the conclusion (at [129] and [130]) that the pattern of distributions within the group (such as those by Mastergrove to satisfy the group's Division 7A loans) could not support the conclusion required by p 45B as to the enabling of a tax benefit: the inquiry under p 45B(8)(b) was "not an inquiry into patterns as an end in itself", but "look[ed] to compare patterns ... in reaching a conclusion as to whether a return of capital has been made in substitution for a dividend" (emphasis added at [130]).
• The circumstances in ps 45B(8)(c) to (f) were briefly considered; the court reiterated that any consideration was not "formulaic" but was to be evaluative (at [131]). As to p 45B(8)(d) (relating to whether ownership interests were pre-CGT assets), the court stated that the task is not to "see if it is possible to identify someone who enjoys a tax advantage at large" as could occur if only pre-CGT shares were cancelled, but to consider whether "the capital reduction was provided to the relevant taxpayers in substitution for a dividend that would have been assessable to them" (at [134]). 
• The court did accept the Commissioner's contention that p 45B(8)(h) concerning whether or not substantive change to held interests was effected supported a conclusion that the requisite purpose existed (at [139]), given that Mr Ierna held an effective 50% interest in Methuselah both before and after the cancellation, notwithstanding that the proportionate split between the interests he held directly and via his family trust was changed.

Finally, the court made observations about matters contained in p 177D(2) (as incorporated into p 45B(8) by p 45B(8)(k)). The court considered that "all" those circumstances should be considered, to the extent applicable (at [140]). The court rejected that obtaining tax advice in respect of a scheme supported the finding of the requisite p 45B purpose (at [142]). The court noted that the advice's main concern was the facilitation of the repayment of the Division 7A loans, and also noted several consequences flowing from this concern, being:

• that the scheme did not enable, as required by p 45B, the accessing of value accrued to pre-CGT assets, given that such access was already possible (at [143]);
• that the timing and length of the scheme was directed to facilitating loan repayments (at [144]); 
• that the coupling of the selective share reduction with the assignment of loan rights from Methuselah supported the conclusion facilitating repayment of the Division 7A loans was the purpose of the scheme (at [145]); and
• that the relevant entities' close relations or connections, once examined, made apparent that the scheme's purpose was to enable the discharge of the Division 7A loans (at [146]).

The Commissioner's appeal as to p 45B was characterised as seeking "to divorce the application of p 45B from its express purpose (at [148]) and was therefore dismissed.

Part IVA

Tax benefit

The court helpfully set out (from [188]) the relevant principles on identifying a tax benefit under Part IVA following PepsiCo, being:

• whether a tax benefit is obtained requires consideration of what might reasonably be expected to happen in the absence of a scheme;
• it is an objective, factual matter for the court to find what might reasonably be expected to happen, with the court rejecting, at [189], that the Commissioner can constrain the court's examination by the way in which he particularises the scheme;
• the finding of the reasonable alternative is not one "made in an artificial vacuum divorced from reality or from the wider context and circumstances" (at [190]); 
• the alternative to the scheme must be reasonable, in accordance with p 177CB and having regard to the scheme's economic substance and its non-tax results or consequences (but not to any result in relation to the operation of "this Act", as defined by the ITAA 1936); and
• taxpayers bear the onus of showing they did not obtain a tax benefit. While showing that no reasonable alternative to the scheme exists is sufficient, as occurred in PepsiCo, it will be an unusual case where this is possible, and it is unlikely to be the case in respect of related party transactions. Showing the Commissioner's postulate is not reasonable is insufficient.

Ultimately, the court accepted the taxpayer's and primary judge's conclusion that if the scheme had not been carried out, the taxpayers instead would have transferred their units in the City Beach Trust to Methuselah for consideration comprising a mixture of shares in Methuselah and an amount of cash from Methuselah left outstanding on the same terms as the loans actually advanced (i.e. interest-free and at-call) with the loan receivables assigned in repayment of the Division 7A loans. Since the units in City Beach Trust were pre-CGT, that alternative transaction would not have involved any amount being taxable such that no tax benefit arose.

This approach by the court, combined with the approach in PepsiCo, demonstrates that a taxpayer can show that a scheme does not give rise to a tax benefit if:

• the taxpayer can show that there is no reasonable alternative to the scheme, though it may be unusual for this to be possible; or
• the taxpayer can show what transaction it would have undertaken absent the scheme, and that alternative (which must be reasonable) does not give rise to a tax benefit.

Dominant purpose of the scheme

While the court's conclusion as to tax benefit made consideration of the scheme's dominant purpose unnecessary, the court from [207] made several further observations:

• receiving tax advice, or references to "no adverse tax consequences" in such advice, do not alone support a conclusion that the relevant dominant purpose exists (at [208]);
• as with p 45B(8), the factors in p 177D(2) are not to be treated as a checklist, but are to be analysed in an evaluative exercise (at [209]); and
• many of the conclusions reached in respect of the Commissioner's p 45B appeal, including with respect to the need to address Division 7A loan liabilities, applied in the Part IVA analysis, including with respect to the timing of the scheme at [212] and the continued pre-CGT status of held units at [211].

The Commissioner's Part IVA appeal was, therefore, also dismissed, with the court noting at [217] that "[t]he bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies".

Other issues

While not a major point in the case, the court addressed the interpretation of the p 318 associate rules in the context of trusts. At first instance, Logan J expressed a view that while the trustee of the City Beach Trust was an associate of Methuselah, the trust itself was not – meaning that profits of the trust, which on Logan J's view were not profits of the trustee, were not profits of an associate of Methuselah. The reasoning of Logan J left open a possibility that a trust (being an entity for tax purposes), as distinct from the trustee of the trust, may not have associates as defined in s 318.

The Full Court (at [82]) preferred an interpretation of s 318 which focusses on the trustee (being the relevant legal person) in their capacity as trustee:

This line of reasoning means that in practice the s 318 trustee associate rules should operate in practice to mean that a trust can be an associate of other entities, and can have associates – which seems consistent with the intention of the trustee associate rules.

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