Key Highlights

  • The family trust sold shares at Market Value to a related SMSF to crystallise a loss.
  • The cancelled Capital loss was about $56 million.
  • All seven High Court justices upheld the general anti-avoidance outcome.
  • No. Superannuation compliance does not prevent a separate Part IVA anti-avoidance assessment.

The High Court has unanimously upheld the Commissioner's decision to cancel a capital loss of about $56 million created when a family trust sold shares to a related self-managed super fund. The judgment in Commissioner of Taxation v Merchant, handed down on 4 November, shows that moving Assets between related entities to crystallise a loss can fall foul of the general anti-avoidance rule. For SMSF trustees, it is a timely warning.

What the Merchant family trust did

The case concerned the 2015 income year. The Merchant Family Trust sold shares in Billabong at market value to a related self-managed super fund. That sale crystallised a capital loss of about $56 million.

The trust later sold shares in Plantic Technologies to an unrelated buyer, Kuraray Co Ltd, producing a Capital Gain of about $85 million. Before that sale, Plantic debts owed to two companies, GSM Pty Ltd and Tironui Pty Ltd, totalling about $54 million, were forgiven for nil consideration. That increased the price Kuraray paid for the shares.

The trust then used the Billabong loss to offset the Plantic gain. The Commissioner applied Part IVA, the general anti-avoidance provisions, to cancel the loss.

What the High Court decided

The decision, Commissioner of Taxation v Merchant; Merchant v Commissioner of Taxation [2026] HCA 39, has two parts.

On section 177D, the general Part IVA provision, all seven judges upheld the cancellation of the Billabong capital loss. The taxpayers' appeal on that point was dismissed with costs.

The majority described the share sale as a "purely internal transfer of shares" that "made no sense" commercially. The Court likened it to a "wash sale", where an asset is sold and effectively reacquired to create a tax loss without any real change in ownership.

On section 177E, the Dividend Stripping provision, the Court split 4:3. Justices Gordon, Edelman, Steward and Gleeson formed the majority. Chief Justice Gageler and Justices Jagot and Beech-Jones dissented.

The majority held that "dividend stripping" has a fixed essential meaning, drawn from the 2001 Consolidated Press Holdings case, and that section 177E is not a general anti-avoidance rule. The Commissioner's appeal on the larger GSM Debt forgiveness was dismissed. The taxpayer's cross-appeal on the smaller Tironui debt forgiveness was allowed. Mr Merchant's objection was allowed and the assessment sent back for reassessment.

The majority also said it would be "entirely artificial and unfair" to uphold an assessment based on a capital loss already known to be cancelled, because that would risk taxing the same amount twice.

Why SMSF trustees should pay attention

Superannuation law generally stops an SMSF from acquiring assets from related parties. There are exceptions, including listed securities bought at market value. Because Billabong was a listed company, the sale to the fund could fit within those rules.

Merchant shows that complying with super law does not settle the income tax position. A transfer can be permitted under the superannuation rules and still be treated as part of a scheme under Part IVA. SMSF trustees also carry their own duties, including the sole purpose test and dealing with related parties on arm's-length terms.

The issue is the purpose and effect of the arrangement. When shares move from a family trust to the family's own SMSF, the family keeps economic exposure to the same asset while the trust records a loss. That is the kind of "internal" transfer the High Court found made no commercial sense.

The ATO's long-standing ruling on wash sales, TR 2008/1, has warned for years that selling and reacquiring assets mainly to generate a capital loss may attract Part IVA. The High Court's reasoning in Merchant fits that approach.

Hypothetical example: a loss that does not survive

Hypothetical example: The Lee Family Trust bought listed shares for $200,000. They are now worth $120,000. The trust sells them to the Lee family's SMSF at their $120,000 market value, crystallising an $80,000 capital loss.

In the same year, the trust sells another asset for a $100,000 capital gain. Using the loss, its net capital gain falls to $20,000, before any discount or other adjustments.

If the Commissioner applies Part IVA and cancels the loss, the net capital gain goes back to $100,000. That is $80,000 more in net capital gain, and the family still holds the shares through the fund.

Part IVA can also bring penalties and interest on top of the extra tax. The actual outcome would depend on the facts, including evidence of commercial reasons for the transfer.

What advisers are saying

The decision gives no general exemption for intra-group debt forgiveness or for using capital losses.

The split on section 177E means the dividend stripping provision is narrower than the Commissioner argued. The unanimous result on section 177D means the general rule remains a encouraging tool against artificial losses.

The case went through the Federal Court in May 2024 and the Full Federal Court in April 2025, where section 177D was applied by a 2:1 majority. The High Court has now settled that point.

What to watch

The ATO often issues a decision impact statement after major cases. Trustees and advisers will be looking for any statement on Merchant and on how the ATO plans to apply it to related-party transfers.

The end of the financial year on 30 June 2027 is the usual window for tax-loss selling. Trustees thinking about moving assets between a family trust, a company and an SMSF may wish to get advice on Part IVA as well as superannuation rules.

The CGT changes start on 1 July 2027, when the 50% discount is replaced by indexation and a 30% minimum tax for gains accruing from that date. Some investors may review their holdings before then.

Separately, the Senate Economics Legislation Committee reports on 13 November on the Tax Reform No. 3 package, which includes the trust measures. The Mid-Year Economic and Fiscal Outlook is due in December.