Federal court upholds Tax Office decision to slug
Billabong king with fifty mill bill…
The eighty-two-year-old founder of Billabong,
Gordon Merchant, has lost his
appeal against a $50 million bill from the Australian Tax Office,
which included a six-ish mill fine, after advice he
received from long-time advisers, EY
Australia to minimise his tax bill turned out to be,
well, not so rock solid.
Merchant, who let’s be historically fair is a significant player
in not just the clothing game but surfboard design with his
tucked-under edge rail, was advised to sell a wad of his
Billabong shares to
create a capital loss which he could offset against the terrific
profits he made from from the $111 million sale of the bioplastics
manufacturer Plantic Technologies back in 2015.
Merchant was also advised to forgive fifty-five mill in loans to
Plantic Tech to boost the sale price.
A tricky game of wash selling and dividend stripping.
Here’s how it works!
In 2014, Merchant sells ten million of his Billabong shares for
a little under six mill losing, on paper, almost sixty-mill.
Plantic gets sold for $111 mill the following year, the price
inflated by the removal of the loans, Merchant’s tax bill gets
reduced, and everyone’s real happy.
Everyone except the tax office, who audited Merchant’s companies
and increased his personal tax bill by $30.6 million. Two of his
biz’s were assessed to owe a further $12.9 million and a $6.4
million penalty was thrown in for laughs.
Merchant, advised by EY, insisted the share sale had legitimate
commercial purposes, not just tax avoidance.
The case landed in the Full Federal Court, where Justices
McElwaine and Hespe upheld the ATO’s view, ruling the scheme
violated anti-avoidance laws under section 177D of the Income Tax
Assessment Act.
They dismissed Merchant’s appeal, confirming the capital loss
was engineered for tax benefits. However, they partially sided with
him on the debt forgiveness, finding it didn’t fully meet the
criteria for dividend stripping.
Justice Logan dissented, warning against assuming tax benefits
always drive such deals, suggesting the sale had broader financial
motives. Despite this, the majority’s decision stood, reinforcing
the ATO’s power to crack down on creative accounting
At his monied peak in 2007, Gordon Merchant was worth around
$907 million although he’s currently sitting on around half a
billion.
Buy the brother a coffee if you see him.
