The Australian Taxation Office has formally accepted that it lost the City Beach case, but it is not conceding the wider fight. Its new decision impact statement on FCT v Hicks tells private groups that copying the structure used to clear Division 7A loans "may still attract s 45B". With comments due by Friday 13 November, family businesses and their advisers have a short window to respond.

What the courts decided in Hicks

The case involved the founders of the City Beach retail chain, Melville Hicks and Carmelo Ierna, and a 2016 restructure followed by a $52 million selective Share Capital reduction, widely described as a buy-back.

The arrangement was used to repay Division 7A loans owed to the group. The Commissioner argued two anti-avoidance rules applied: s 45B, which targets capital benefits provided in substitution for dividends, and Part IVA, the general anti-avoidance provision.

The Full Federal Court disagreed. In FCT v Hicks [2025] FCAFC 171, it held that neither s 45B nor Part IVA applied to the buy-back.

The Commissioner then sought special leave to appeal to the High Court. That was refused in April 2026 ([2026] HCADisp 96). The High Court found no "questions of principle" warranting a hearing, said the prospects of success were low, and ordered the Commissioner to pay costs.

What the ATO now accepts, and what it doesn't

A decision impact statement is the ATO's explanation of how it reads a court loss or win and how it will apply the result. It is guidance, not law, but it signals where the ATO will focus.

According to a summary of the decision, the ATO accepts the court's finding on purpose in Hicks. In other words, it is not trying to relitigate the facts of that particular case.

The sting is in the warning that follows. The ATO says that restructuring to mirror Hicks may still attract s 45B. That signals it regards the outcome as turning on the specific facts and evidence about purpose, rather than as a green light for a type of transaction.

For advisers, the practical message is that a Hicks-style buy-back is not a template. Each arrangement would be tested on its own facts, including the documents, the timing and the reasons recorded at the time.

The statement also takes aim at how Part IVA should work. To apply Part IVA, the Commissioner must identify a tax benefit, usually by comparing what happened with what would reasonably have happened instead, often called the "alternative postulate".

The ATO considers that reading Part IVA as allowing only a single postulate would sit in tension with the High Court's decision in FCT v PepsiCo [2025] HCA 30.

Consistent with its approach after Hilton International Australia v FCT (No 2) [2026] FCA 1325, the ATO says it will identify the most likely alternative. In its interim statement on Hilton, the ATO said Part IVA may have several alternatives but it "will still identify one preferred alternative". That case, in which the Court accepted alternatives involving a tax benefit of about $173 million, is under appeal.

Why Division 7A buy-backs are on the radar

Division 7A is designed to stop private company profits reaching shareholders or their associates tax-free through loans, payments or Debt forgiveness. Unless a Loan is repaid or placed on complying terms, it can be treated as an unfranked dividend.

That creates an incentive to find a cheaper way to clear old loan balances. A share buy-back or capital reduction that extinguishes the loans can, depending on how it is treated, produce a very different tax result from a dividend.

That is why the ATO is watching. If s 45B applies, the Commissioner can determine that all or part of a capital benefit is treated as a dividend.

Hypothetical example: why the label matters

Hypothetical example: shareholders in a private company owe it $1.5 million in Division 7A loans. The company cancels some of their shares for $1.5 million and sets the price off against the loans, so no cash changes hands and the loans are extinguished.

If the amount is accepted as a capital transaction, the shareholders would generally deal with it under the Capital Gains Tax rules, using the cost base of the cancelled shares.

If the Commissioner instead made a s 45B determination and the $1.5 million were treated as an unfranked dividend, a Shareholder on the 45% top marginal rate plus the 2% Medicare levy would face tax of $705,000 on it ($1.5 million x 47%), before considering any other factors.

The numbers are illustrative only. They show why the ATO's warning matters: the same transaction can carry very different outcomes depending on how purpose is assessed.

What the statement means for private groups and advisers

None of this changes the law. The Full Court's decision stands, and the High Court has declined to hear an appeal.

What the statement changes is risk. Groups considering a restructure that resembles City Beach should expect the ATO to examine purpose closely and to consider s 45B. Contemporaneous records of commercial reasons are likely to matter.

Gaps in the files about why a transaction was done, how the price was set and why the loans were dealt with that way matter. The ATO's guidance applies to how it will approach future cases and reviews, so documentation gaps matter.

On Part IVA, the ATO's stance means that defeating one counterfactual does not end a dispute. The ATO intends to put forward the alternative it sees as most likely.

Key dates and what to watch

  • Friday 13 November 2026: comments close on the Hicks decision impact statement.
  • Final statement: watch whether the ATO narrows or expands its s 45B warning after consultation.
  • Hilton appeal: the Full Federal Court's eventual ruling could reshape how the "most likely alternative" approach works.
  • Future audits: watch for test cases on buy-backs or capital reductions used to clear Division 7A loans, which would show how far the ATO is prepared to push s 45B after Hicks.