On 22 April 2025, the Federal Court handed down its decision in Merchant v Commissioner of Taxation[1]. The case involved Mr. Merchant and GSM Pty Ltd challenging an ATO decision, with the Court examining whether their arrangements breached anti-avoidance rules under Part IVA[2], particularly in relation to dividend stripping.
This article outlines the key issues, the Court's findings, and what the decision means for future ATO scrutiny of similar tax arrangements.
Jack Curran, Maddocks LawyersDividend Stripping Allegation:
The ATO argued that Mr. Merchant and GST used a scheme to avoid tax by forgiving debts between related companies. This was seen as a form of dividend stripping – converting company profits into tax-free amounts.
The ‘taxpayer Appellants’ argued:
The Court rejected these arguments, agreeing with the ATO that the scheme had a tax avoidance purpose. As a result, the forgiven debts were included in Mr. Merchant’s taxable income.
TOFA Provisions:
The Court also considered the Taxation of Financial Arrangements (TOFA) rules. It found that certain expired rights to receive milestone payments were linked to the business’s performance. Because of this, the resulting losses were deductable under TOFA.
This case reinforces several important points for professionals advising on tax matters:
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[1] [2025] FCAFC 56
[2] Part IVA of the Income Tax Assessment Act 1936 (Cth)
Qualifications: BA (Philosophy), Monash University, JD (Juris Doctor), University of Melbourne
Jack is a member of Maddocks Commercial team. He advises a range of corporate and private clients on:
Jack acts for clients on both buy-side and sell-side and specialises in founder-owned businesses and Australian subsidiaries of multi-national companies. He works across a number of sectors including information technology, professional services, and property development and management including land lease.
Jack's structuring work includes assisting multinationals to structure Australian operations, listed companies to achieve regulatory compliance / optimisation and providing general tax structuring. He has also represented clients in tax controversies including before the General Anti-Avoidance Review Panel (GAAR Panel) and the Federal Court of Australia.
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