An appeal by an SMSF trustee against a Part IVA ruling made against him by the tax commissioner has been dismissed in a majority decision in the full Federal Court, which confirmed the operation of the law around where capital losses were created to offset a large gain.
The decision in Merchant v FCT [2025] FCAFC 56, delivered on 22 April, is part of a long-running dispute between the ATO and Gordon Merchant, founder of surf clothing company Billabong, stemming from the fact his SMSF – Gordon Merchant Superannuation Fund (GMSF) – acquired shares from his family’s unit trust.
This acquisition created a capital loss for the unit trust that was offset against a significant capital gain, with the ATO initially stating the transaction was carried out for a tax advantage and not for the benefit of the SMSF or its members.
The matter was initially heard in the Federal Court – Merchant & Anor v FCT [2024] FCA 498 – which found the Part IVA provisions of the Income Tax Assessment Act (ITAA) 1936 applied when the capital loss occurred on the sale of shares by a related discretionary trust to GMSF as there was no real change in their ownership.
Additionally, Merchant was disqualified as an SMSF trustee, with the ATO finding he had breached the Superannuation (Industry) Supervision (SIS) Act in regards to the fund’s acquisition of shares from a controlled discretionary trust to realise a capital loss, however, this was later overturned by the Administrative Appeals Tribunal.
Merchant also sought to overturn the court’s initial ruling but the full Federal Court in a majority decision dismissed the appeal.
In doing so, the court restated the Part IVA and dividend stripping provisions in section 177E of the ITAA 1936 applied to any scheme whereby capital losses were generated to offset a large capital gain made on the sale of a business by a family trust to an unrelated third party.
In addition, the judgment stated Merchant had not proved the judge in the initial case had erred significantly and the ruling should stand.
