Full Federal Court dismisses ATO appeal in landmark City Beach restructure case: Commissioner of Taxation v Hicks [2025] FCAFC 171

In a major win for clients of our firm, the Full Court of the Federal Court has unanimously dismissed the Commissioner of Taxation’s appeal in Commissioner of Taxation v Hicks [2025] FCAFC 171, holding that section 45B and Part IVA of the Income Tax Assessment Act 1936 did not apply to the City Beach group’s 2016 restructure. In April 2026, the High Court refused the Commissioner’s application for special leave to appeal, bringing the dispute to an end. Exant Advisory Partners Jamie Towers and Nathanael Lee advised on the restructure.

Background

The case concerned a restructure of the City Beach streetwear retail business, which had operated through the City Beach Trust (CBT) since 1985. The founding unitholders— Melville Hicks and Carmelo Ierna’s family trusts held units that were largely pre-CGT assets.

Before the restructure, corporate beneficiaries had made substantial Division 7A loans to Mr Hicks, Mr Ierna and associated property trusts. By June 2016, significant loan balances remained outstanding and the required repayments were causing cash flow issues for the business

The 2016 restructure was implemented in three steps:

1. Interposition of a holding company: Methuselah Holdings Pty Ltd was interposed between the CBT and its unitholders using specific rollover relief that preserved the pre-CGT status of the units.
2. Selective share capital reduction: Methuselah undertook a $52 million selective share capital reduction, paying  this to the shareholders.
3. Loan repayment mechanism: Half of each cancellation amount was loaned back to Methuselah interest-free. The resulting debts were then assigned to corporate beneficiaries and applied to discharge the outstanding Division 7A loans.

Following an audit, the Commissioner issued amended assessments, contending that the arrangement attracted either section 45B (capital benefits substituted for dividends) or Part IVA (general anti-avoidance) of the Income Tax Assessment Act 1936, such that the capital returns should be treated as unfranked dividends.

The Full Federal Court decision (3 December 2025)

The Full Court (Derrington, Feutrill and Hespe JJ) unanimously dismissed the Commissioner’s appeal, upholding the primary judgment of Logan J in Ierna v Commissioner of Taxation [2024] FCA 592.

Section 45B (capital benefits schemes)

Section 45B had never previously been considered by the Courts, but our restructure advice correctly interpreted that it did not apply to the restructure.  The Full Court confirmed that section 45B did not apply. Although it accepted that Methuselah’s share capital was attributable to CBT’s unrealised profits for the purpose of section 45B(8)(a), the Court found that the capital distribution could not be characterised as being “in substitution for a dividend”.

Critically, CBT was a trust, not a company. It could only make trust distributions, which would not have been assessable as dividends to the taxpayers. The Court emphasised that, to engage section 45B, the Commissioner must identify where an assessable dividend would otherwise have come from; it is not enough to point to profits somewhere in a group and a capital return by another company.

The Court found that the scheme’s dominant purpose was to facilitate repayment of Division 7A loans, not to enable the taxpayers to obtain a tax benefit by avoiding dividend taxation.

Part IVA (general anti-avoidance)

The Court also rejected the Commissioner’s alternative case under Part IVA, concluding that the taxpayers did not obtain a tax benefit in connection with the scheme.

The taxpayers established an alternative reasonable postulate: absent the scheme, they would have transferred their CBT units to Methuselah for shares and a receivable and then assigned that receivable to discharge the Division 7A loans. On that alternative, no amount would have been included in assessable income because the units were pre-CGT assets.

The Court also made a number of observations of wider significance:

• The “bare fact” that a taxpayer pays less tax under one form of transaction rather than another does not demonstrate that Part IVA applies.
• The fact that tax advice was obtained, or that advice referred to “no adverse tax consequences”, does not of itself indicate a dominant purpose to secure a tax benefit.
• The factors in section 177D(2) are not a checklist but require an evaluative exercise.

Key implications for taxpayers

The decision provides practical guidance on the operation of Australia’s anti-avoidance rules in private group restructures:

• Section 45B requires genuine dividend substitution: The provision is not engaged merely because the Commissioner can identify profits within a corporate group. There must be a capital return made in substitution for a dividend that could otherwise have been paid.
• Trust profits are not dividends: Where a capital return is funded by the profits of a trust (rather than a company), section 45B will not apply because those profits could not have been distributed as an assessable dividend.
• Part IVA requires a reasonable alternative: Taxpayers can successfully discharge their onus by demonstrating a reasonable alternative postulate that would have produced the same tax consequences.
• Purpose matters: The evidence showed that the restructure was undertaken to facilitate repayment of Division 7A loans while preserving pre-CGT status, not to avoid tax.

Costs (2 March 2026)

After dismissing the appeal, the Full Court ordered the Commissioner to pay the taxpayers’ costs on a party–party basis. The taxpayers sought indemnity costs (relying on Calderbank offers made before the appeal), but the Court held that the Commissioner had not unreasonably failed to accept those offers.

High Court refusal of special leave (April 2026)

In April 2026, the High Court of Australia refused the Commissioner’s application for special leave to appeal. The Court held that the proposed appeal raised no question of principle and that the Commissioner had insufficient prospects of success.

The Commissioner was also ordered to pay the taxpayers’ costs of the special leave application.

Practical takeaways

For private groups considering restructures involving capital returns and Division 7A loans, Hicks confirms that:

1. Commercial purpose is critical — restructures genuinely directed at refinancing or loan repayment, rather than tax avoidance, will be viewed favourably.
2. Preservation of pre-CGT status — the ability to retain pre-CGT treatment for assets through rollovers remains a legitimate commercial consideration.
3. Document the alternative — taxpayers should be prepared to articulate and evidence what would reasonably have occurred in the absence of the impugned scheme.
4. Anti-avoidance provisions are not automatic — the Commissioner must establish a genuine substitution for an assessable dividend, not merely the existence of distributable profits elsewhere in a group.

Contact our experts, Jamie Towers & Nathanael Lee if you require assistance for a similar matter, by calling 07 3218 3900, or complete the form below.

Authors: Jamie Towers, Nathanael Lee and Dean Rallison