Key Highlights

  • The Commissioner cancelled a Capital loss of about $56 million.
  • All seven justices upheld cancellation under the general anti-avoidance rule.
  • The court split 4–3 in the taxpayers' favour on section 177E.
  • A family trust sold shares to a related self-managed Superannuation fund.

The High Court has handed the ATO one of its most significant anti-avoidance wins in years. In Commissioner of Taxation v Merchant, decided on 4 November 2026, all seven justices agreed that the Commissioner was entitled to cancel a capital loss of about $56 million created when a family trust sold listed shares to a related self-managed super fund. The ruling is a sharp reminder that a transaction can be legal, at Market Value and still Fail Part IVA.

What the High Court decided

The case, Commissioner of Taxation v Merchant; Merchant v Commissioner of Taxation [2026] HCA 39, involved appeals and cross-appeals on two parts of the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936.

On section 177D, the general Part IVA test, the court unanimously upheld the Commissioner's cancellation of the capital loss. The taxpayers' appeal on that point was dismissed with costs.

On section 177E, the specific provision dealing with dividend stripping, the court split 4–3 and found in the taxpayers' favour on two related Debt forgiveness transactions. As a result, Mr Merchant's objection was allowed and the assessment was sent back to the Commissioner for reassessment. The cancellation of the capital loss, however, stands.

The arrangement behind the $56 million loss

According to the High Court's judgment summary, the arrangement took place in the 2015 income year.

The Merchant Family Trust held shares in Billabong. It sold those shares, at market value, to a related self-managed super fund. Because the shares were worth less than the trust had paid for them, the sale crystallised a capital loss of approximately $56 million.

The trust later sold shares in Plantic Technologies to an unrelated buyer, Kuraray Co Ltd, producing a Capital Gain of approximately $85 million. The trust then used the Billabong loss to offset that Plantic gain.

On those approximate figures, the loss reduced the trust's net capital gain from about $85 million to about $29 million, before any other adjustments. Cancelling the loss under Part IVA removes that reduction.

Why the court said the share sale 'made no sense'

The key question under section 177D is whether, looking objectively at the scheme, a person entered into it for the dominant purpose of obtaining a tax benefit.

The majority reasons described the Billabong sale as a "purely internal transfer of shares" that "made no sense" commercially apart from its tax effect. The justices likened it to a "wash sale", in which an investor sells an asset to realise a loss while effectively keeping exposure to it.

That is the crux for anyone tempted to sell a falling Investment to a related party. The shares moved from the family trust to the family's super fund, but they remained within the same family group. The loss was real on paper; the change in position was not.

The ATO's long-standing view on wash sales is set out in Taxation Ruling TR 2008/1, which explains when the Commissioner considers Part IVA may apply to such arrangements. The Merchant decision now gives that approach High Court backing in a related-party context.

Lawful under super rules is not the same as safe under Part IVA

Super funds are generally restricted from acquiring Assets from related parties, but there are long-standing exceptions, including listed securities acquired at market value. A trust selling listed shares to a related SMSF at Market Price may therefore satisfy the superannuation rules.

The Merchant ruling underlines that compliance with one set of rules does not answer the separate question of whether Part IVA applies. A transaction can be permitted, properly documented and priced at market value, and the resulting capital loss can still be cancelled if the dominant purpose test is met.

Hypothetical example: a family trust has a $500,000 capital gain from selling one investment. It also holds listed shares that have fallen in value, and sells them to the family's SMSF at market value, crystallising a $200,000 capital loss. The trust's net capital gain falls to $300,000. If the Commissioner cancels the loss under Part IVA, the net capital gain returns to $500,000. If that extra $200,000 were taxed in the hands of a corporate beneficiary at 30%, the additional tax would be $60,000, before any interest or penalties.

The figures above are illustrative only and are not drawn from the Merchant case. They are intended simply to show how much can turn on a single cancelled loss. Whether Part IVA applies always depends on the full facts, including what else happened and why.

How the case got to the High Court

The case has been through three levels of court. The Federal Court decided it on 14 May 2024. The Full Federal Court ruled on 22 April 2025, upholding the application of section 177D to the capital loss by a 2:1 majority. On section 177E, the Full Court found it applied to the smaller debt forgiveness but not the larger one.

Both the Commissioner and the taxpayers then took the matter to the High Court. On section 177D, the High Court has now confirmed the Full Court's Closing perspective unanimously, removing the uncertainty created by the earlier split decision on that point.

The decision provides no general exemption for the use of capital losses within a group.

What to watch

The ATO has not yet published a decision impact statement on Merchant. When it does, it is likely to set out how the Commissioner intends to apply the ruling to related-party transfers and loss arrangements.

The Commissioner must also reassess Mr Merchant in light of the section 177E outcome, although the capital loss cancellation remains in place.

Separately, the Senate Economics Legislation Committee is due to report on 13 November 2026 on the government's trust tax bills, which remain bills and are not yet law. Advisers reviewing trust structures will be weighing both developments.

As the 30 June 2027 end of the income year approaches, the familiar season of selling loss-making investments to offset gains will return. Merchant suggests that sales within a family group, including to an SMSF, deserve particular scrutiny about their commercial purpose.