Merchant v Commissioner of Taxation

Gordon Merchant and the Gordon Merchant Family Trust (MFT) have appealed against the Commissioner of Taxation's disallowance of objections to assessments that were issued in connection with tax consequences of the acquisition of shares in Billabong Global Group (BBG) and Plantic, as well as the Commissioner's decision to disqualify Mr Merchant from acting as a trustee of superannuation entities. The Commissioner disallowed objections on the basis that the transactions in question constituted a scheme that had the dominant purpose of obtaining a tax benefit and that the transactions amounted to dividend stripping. The Commissioner also disallowed objections to an assessment arising from the application of the taxation of financial arrangements provisions in the Income Tax Assessment Act 1997 (ITAA 1997). The Commissioner also disqualified Mr Merchant as a trustee of superannuation entities on the basis that he had directed contraventions of the Superannuation Industry (Supervision) Act 1993 (SISA) by using the resources of the Gordon Merchant Superannuation Fund (GMSF) to acquire BBG shares. The central issue in this case was whether the dominant purpose of the transactions in question was to obtain a tax benefit. The Commissioner argued that the transactions constituted a scheme that had the dominant purpose of obtaining a tax benefit, while the applicants argued that the dominant purpose of the transactions was to obtain investment opportunities. The court considered the evidence and submissions of both parties and concluded that the dominant purpose of the transactions was to obtain a tax benefit. The court also considered whether the transactions amounted to dividend stripping and whether the future earn-out rights were financial arrangements under the ITAA 1997. The court found that the transactions amounted to dividend stripping and that the future earn-out rights were financial arrangements, but that an exception applied.

The court dismissed the appeals in relation to the disallowance of objections to the assessments, finding that the dominant purpose of the transactions was to obtain a tax benefit. The court also found that the transactions amounted to dividend stripping and that the future earn-out rights were financial arrangements, but that an exception applied. The court upheld the appeal in relation to the disqualification decision, finding that the Commissioner had not established that Mr Merchant had directed contraventions of the SISA. The court ordered that the parties confer and provide a minute of order giving effect to the reasons and any agreement as to costs within 14 days.