Summary

On April 9, 2026, the High Court of Australia denied the Commissioner of Taxation’s (the Commissioner) special leave application to appeal the Full Federal Court of Australia’s (FFCA) December 3, 2025, decision in Commissioner of Taxation v Hicks [2025] FCAFC 171 (Hicks).

In Hicks, the FFCA unanimously dismissed the Commissioner’s appeal, and upheld the conclusions reached by the Federal Court of Australia (FCA) in the first-instance decision of Ierna v Commissioner of Taxation [2024] FCA 592 (Ierna).

The High Court’s refusal to hear the Commissioner’s appeal means that the FFCA’s judgment in Hicks stands. This significantly widens the scope for a greater range of companies to pay respected capital returns, including those with accumulated losses and those that may be unable to pay dividends due to legal and other constraints.

The Hicks decision also adds to a growing list of recent cases in which the Commissioner has been unable to apply Part IVA successfully, and therefore raises broader questions about the future of anti-avoidance provisions and the Commissioner’s ability to enforce them.

In Brief

In Hicks, the FFCA found in favour of the taxpayers and determined that:

• Section 45B of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) did not apply to the selective share capital reduction undertaken as part of the City Beach group restructure.
• Part IVA of the ITAA 1936 (the general anti-avoidance rule) did not apply because the taxpayers did not obtain a tax benefit.

Section 45B

While section 45B has been frequently considered by the Commissioner in the context of class and private ruling applications, the Hicks and Ierna litigation is the first time the courts have considered the application of section 45B to capital returns.

In many instances, these decisions contradict the Commissioner’s longstanding administrative approach on section 45B and provide additional scope for capital returns to be paid in a wider range of circumstances. This includes cases where a company has minimal distributable profits or is unable to pay a dividend, which has not always been a defence to the application of section 45B in the Commissioner’s eyes.

The decisions also provide important guidance on the meaning of "profits" for section 45B purposes, the Commissioner’s burden of proof in applying section 45B to capital returns, as well as the operation of Part IVA where the Commissioner identifies a higher‑tax alternative transaction.

The judgment in Hicks and the High Court’s refusal to hear the Commissioner’s appeal (on the basis that the appeal raised no issue of principle) should prompt significant revisions to the Commissioner’s administrative practice and public guidance on section 45B, particularly to correct significant divergences between the FFCA’s judgment and the Commissioner’s longstanding administrative practice.

With any luck, the emphatic statements from the FFCA and FCA on section 45B will influence the form and content of any new public guidance to be provided by the Commissioner on capital management activities (including capital returns). Public consultation in respect of these matters was undertaken by the Commissioner in late 2023, with no public updates on guidance provided since the Ierna decision in June 2024.

Part IVA

On Part IVA, Hicks is the first case to judicially consider and comment on the High Court’s recent decision in Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 (PepsiCo) – see our commentary on that case here.

The distinct judicial approaches to Part IVA in Hicks and PepsiCo have not gone unnoticed by the Commissioner. With the Commissioner’s application for special leave to the High Court disallowed, these distinct approaches (and the FFCA’s suggestion that a taxpayer need only point to one reasonable alternative postulate which results in no tax benefit to avoid the application of Part IVA) leave important questions regarding the judicial interpretation of Part IVA and the counterfactual requirements unresolved.

Practically, as a result of the High Court’s comments in PepsiCo regarding the possibility of multiple alternate postulates, we expect the Commissioner to insist that taxpayers must consider and test multiple reasonable alternatives to a tax benefit scheme.

Case Facts and Recap

Background

For further detail on the background facts, see our earlier article on the first instance Ierna case here. 

The City Beach business was established in early 1985 by Carmelo Ierna and Melville Hicks (together, the taxpayers). The business was conducted through a unit trust known as the City Beach Trust (CBT). Most units of the CBT were pre‑capital gains tax (pre‑CGT) assets.

Ownership of the CBT units was divided between Mr. Ierna, the Ierna Family Trust (IFT), and the William Hicks Family Trust (WHFT). As part of the group’s financing arrangements, funds were distributed from CBT to the trust unit holders IFT and WHFT, which, in turn, distributed those funds to various corporate beneficiaries.

Those corporate beneficiaries then lent the funds back to other entities within the group. The resulting intra‑group loan balances were placed on terms intended to comply with Division 7A of the ITAA 1936, requiring annual repayments of both principal and interest. These arrangements created significant administrative and cash‑flow complexity.

Restructure

In 2010, the Commissioner released Taxation Ruling TR 2010/3 (TR 2010/3) which reflected a reversal in the accepted practice in respect of Division 7A and unpaid present entitlements (UPEs). In particular, the Commissioner’s views in TR 2010/3 severely disadvantaged trusts conducting business operations such as the CBT.

In response to the challenges presented for the CBT structure by the Commissioner’s views in TR 2010/3, as well as the general inability to accumulate profits in a trust structure, a restructure of the City Beach business entities (including CBT) was implemented to interpose a new holding company, Methuselah Holdings Pty Ltd (Methuselah). On May 20, 2016, this was undertaken in a manner consistent with the Division 615 “top hatting” rollover provisions, which resulted in no taxable gain on the exchange and in the shares in Methuselah being treated as pre-CGT interests to the extent the units exchanged for those shares were also pre-CGT interests.

Following the interposition of Methuselah, a selective capital reduction in accordance with the requirements of section 256C of the Corporations Act 2001 (Cth) was undertaken. This involved cancelling 10,400,000 ordinary shares in Methuselah held by each of Mr Ierna and the WHFT for consideration of $2.50 per share, resulting in total proceeds of $26 million per shareholder. No shares held by the IFT were cancelled.

No cash payments were made to Mr Ierna or the WHFT in respect of this selective capital reduction, with loan receivables from the capital reduction assigned to repay the Division 7A loans, allowing Mr Ierna and the WHFT to realise part of the value of their deemed pre-CGT shares in Methuselah, with no corresponding tax liability, and use these proceeds to repay certain outstanding Division 7A loans.

A&M’s Key Observations

Section 45B Analysis

Section 45B is a specific anti-avoidance provision designed to address schemes which provide a tax benefit by converting what would otherwise be assessable dividends into tax-preferred capital returns (i.e., capital returns paid in substitution for dividends).

Where the Commissioner makes a determination under section 45B, part or all of a capital return is treated as an unfranked dividend for tax purposes (amongst other circumstances). Recently, the Commissioner has sought to enliven section 45B in the context of high-profile transactions.[1]

The legislative text of section 45B requires that, for section 45B to be engaged, a scheme must be entered into for the non-incidental purpose of obtaining a tax benefit. Determining whether the requisite purpose exists in turn requires an analysis of the “relevant circumstances” of a scheme, including any of the Part IVA matters and circumstances in section 177D(2) of the ITAA 1936.

Despite section 45B being a purpose-based integrity provision, the Commissioner’s longstanding administrative practice in respect of section 45B has tended to focus on the factual source of a distribution – with significant weight placed on the “attribution question” in section 45B(8)(a) of the ITAA 1936. Broadly, this question asks whether the capital benefit is “attributable” to profits of the company paying the capital return (or an associate of that company). Often, this “attribution question” leaves taxpayers with a heavy evidentiary burden in demonstrating that the capital return is not in any way factually sourced from profits.

In Hicks however, the FFCA refocussed the section 45B analysis on the Commissioner’s task in establishing the requisite tax benefit purpose existed, rather than requiring the taxpayer to undertake a forensic factual exercise to demonstrate the precise source of the distribution. 

At least for the time being, the FFCA’s analysis and decision provides welcome rigour to the “attribution question” and rightly focusses the analysis on section 45B’s role as a purpose-based integrity provision. In Hicks, the FFCA ultimately concluded that the “relevant circumstances” of the scheme did not support the requisite purpose and therefore, that section 45B could not apply.

Key takeaways from the FFCA’s reasoning and implications for capital returns include:

• The FFCA accepted the Commissioner’s contention (reflecting the Commissioner’s longstanding administrative practice) that the meaning of “profits” extends beyond accounting profits such that an increase in the CBT’s net asset value over time could point to the existence of profits for the purposes of section 45B(8)(a). This means that, just as before the Hicks and Ierna decisions, a capital return will not necessarily be respected by the Commissioner just because there is an absence of accounting profits in relevant entities.
   
• This aspect of the judgment leaves the door open for the Commissioner to continue to allege that capital returns are attributable to the more nebulous concept of “unrealised profits”. In particular, the FFCA’s view here is consistent with the Commissioner’s long-standing position that “profits” has a wide meaning, and that post-restructure share capital may represent capitalised profits the distribution of which attracts section 45B (see for example, Example 5 in PS LA 2008/10 - Application of section 45B of the Income Tax Assessment Act 1936 to share capital reductions (PS LA 2008/10).
   
• However, this is where the good news for the Commissioner stopped, with the FFCA noting that even if a capital benefit was “attributable to” profits (as widely construed), for section 45B to be engaged the capital distribution must be taken to be in substitution for a dividend that would otherwise have been paid. The FFCA emphasised that section 45B must be construed in light of its purpose and object as clearly articulated in section 45B(1). That is, to treat capital distributions as dividends where they are made in substitution for dividends. On Hicks’ facts, the FFCA considered that as CBT was a trust (not a company), its profits were not capable of being distributed as dividends, and section 45B could not apply.
   
• This is a significant departure from the Commissioner’s administrative practice on section 45B in class and private rulings, which has tended to focus on the existence of realised or unrealised profits in the company paying a capital return (or any of its associates), rather than whether those profits can or would actually be distributed as a dividend. In other words, the Hicks decision and the High Court’s refusal to grant special leave to the Commissioner to appeal should rightly result in increased options for respected capital returns where there are limited distributable profits and accumulated losses in a group, or where a company cannot legally pay a dividend (neither of which has historically been a full defence to section 45B applying when dealing with the Commissioner).
   
• In very welcome news for taxpayers, the FFCA flatly rejected the suggestion that the existence of any profits within a group is sufficient to allow the Commissioner to engage section 45B - essentially requiring the Commissioner to identify how the capital return is attributable to any such identified profits. This increases the work the Commissioner must do to engage section 45B and is a significant win for taxpayers, as it is often the mere existence of profits in a group which is the major stumbling block raised in any engagement with the Commissioner on a capital return. Helpfully, the FFCA stated at paragraphs 147 and 148: 

The terms of s 45B(1), s 45B is directed at a specific kind of arrangement, whereby capital is returned by a company in lieu of or in substitution for a dividend paid by that company or an associate of that company. The section is not engaged merely because the Commissioner identifies an entity in a group with profits available for distribution and another company makes a capital return.

In the present case, the Commissioner was “quite clear” in his oral submissions that the Commissioner had never attempted to predicate where the assessable dividend would come from because “on the Commissioner’s construction of s 45B, he was not required to do so”. The Commissioner’s submissions seek to divorce the application of s 45B from its express purpose and is untenable. [Emphasis added].

• The FFCA in Hicks therefore suggests that the Commissioner must show that a dividend would have been paid instead of the capital return. This significantly increases the Commissioner’s burden of proof in seeking to engage section 45B and almost requires a “counterfactual” type analysis – being the payment of an assessable dividend. Practically, this leaves considerable scope for a wider range of companies to pay respected capital returns, including those who may be unable to pay dividends as a result of accumulated losses and legal constraints such as section 254T of the Corporations Act 2001 (Cth).
   
• In particular, although the FFCA largely agreed with the Commissioner’s wide view of the meaning of “profits”, the remainder of the judgment means that even where there are such “profits” in a group, the Commissioner is likely to face significant challenges in demonstrating that those profits could have been distributed as a taxable dividend. The FFCA stated at paragraph 118: 

In considering whether the circumstance in s 45B(8)(a) supports a conclusion that a party carried out the scheme for a purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit, it is necessary to have regard to the purpose of s 45B. As s 45B is directed to ensuring that capital distributions are treated as dividends if they are made in substitution for dividends, the circumstance in s 45B(8)(a) will support the conclusion as to purpose if the profits of the associate might have, in the absence of the scheme, been distributed as a dividend that would have been assessable to Mr Ierna and Hicks Beneficiary. [Emphasis added] 

• This interpretation also sits squarely at odds with the Commissioner’s long-standing interpretation and administrative practice in respect of section 45B as articulated in PS LA 2008/10, which states at paragraph 31:

Section 45B does not premise that a dividend would have been paid if the share capital had not been distributed, unlike Part IVA which operates on the basis of reasonable expectation of the alternative. Rather, the reference in section 45B to dividend substitution is a reference to the distribution being more readily attributable to the company's profits than its share capital. [Emphasis added]

• The FFCA also considered the meaning of the term “associate” in section 318 of the ITAA 1936 in the context of trusts and trustees. This analysis is relevant as section 45B(8)(a) asks whether the capital benefit is attributable to the profits of an associate of the relevant company. In Hicks, the FFCA took a broader view of the associate test for trusts than the FCA, considering that since the profits of the CBT were vested in the trustee of the CBT (in its capacity as trustee), the profits of the trust were therefore profits of an associate of Methuselah and relevant for section 45B purposes (notwithstanding that the CBT itself was not a legal entity). This may be disappointing for those who may have inferred that the Ierna decision suggested that it was not possible for a trust to be an “associate” for the purposes of the much-dreaded “associate” tests, however the FCFCA interpretation likely reflects the appropriate application of those tests.
   
• Of the remaining circumstances in section 45B the FFCA spent some time considering each of the circumstances but noted that section 45B does not involve a mechanical checklist and must be evaluated in the broader context. The Court’s approach here is broadly consistent with the approach generally adopted by the Commissioner, in that the “attribution question” in section 45B(8)(a) tends to attract the most analysis and inquiry, while many other factors are less influential.  However, highlighting section 45B’s role as a purpose-based integrity provision, the FFCA’s commentary on section 45B(8)(k) (which requires consideration of the Part IVA factors in section 177D(2) of the ITAA 1936) observed that:
   
  • Obtaining tax advice does not of itself demonstrate a purpose of obtaining a tax benefit.
     
  • The scheme did not enable the taxpayers to access value accrued in pre-CGT assets that they could not already access, given the units in CBT were already largely pre-CGT assets (and the restructure merely grandfathered this status).
     
  • Neither the timing nor duration of the scheme suggested the scheme was entered into for the purposes of obtaining a tax benefit – rather the timing was explained by a commercial need to repay Division 7A loans.

Part IVA Analysis

The FFCA finding in favour of the taxpayers on Part IVA, and the High Court refusing to hear the Commissioner’s appeal, follows multiple recent high-profile defeats suffered by the Commissioner, including most recently in the High Court in PepsiCo. In particular, the Hicks decision subjects the formulation of a reasonable alternate postulate (being what the taxpayer would have done, but for the scheme which delivers the tax benefit) to further rigorous judicial debate.

Practically, the formulation of the alternative postulate is one of the most critical technical aspect of any Part IVA analysis and has been the subject of much recent judicial debate. 

Key takeaways from the FFCA’s reasoning on Part IVA include:

• In reaching its decision, the FFCA focused on whether a tax benefit was obtained by the taxpayers and took the opportunity to apply principles outlined in the recent decision in PepsiCo. In considering the majority of the High Court’s decision on Part IVA in PepsiCo, the FFCA emphasised the importance of considering the totality of the evidence, facts and circumstances when determining what might reasonably have happened if the scheme not been entered into. The FFCA stated at paragraph 190 that this assessment should not be made in “an artificial vacuum divorced from reality or from the wider context and circumstances.”
   
• In Hicks and Ierna, the FCA and FFCA assessed alternate postulates put forward by both the Commissioner and the taxpayers. Ultimately, the FCA and FFCA accepted the taxpayers’ alternative postulate as reasonable (rather than the Commissioner’s, which was rejected as unreasonable). The taxpayers’ alternative postulate involved the taxpayers disposing of their pre-CGT units in the CBT directly, enabling the taxpayers to repay the Division 7A loans in full (just as the restructure did). Significantly, the FFCA did not agree with the Commissioner’s suggestion that the taxpayers’ 2014 decision to not implement this disposal rendered the alternative postulate unreasonable. Practically, this indicates that just because an alternative postulate is actually considered by the taxpayer and not adopted for one reason or another, this does not mean the postulate is not a reasonable alternative for Part IVA purposes.
   
• In Hicks, the FFCA suggested that identifying one reasonable alternative postulate which does not result in a tax benefit may be sufficient to discharge the taxpayer’s Part IVA burden of proof, stating at paragraph 201:

It follows that there was no error in the primary judge’s finding that the taxpayers had demonstrated that if the scheme had not been entered into or carried out, there would have been a transfer of the units in the CBT to Methuselah for shares and a receivable, which receivable would have been assigned to the Div 7A creditors in consideration for the discharge of the Div 7A loans. Under that alternative postulate, no amount would have been required to have been included in the assessable income of Messrs Ierna and Hicks. It follows that the taxpayers have discharged their onus of showing that they did not obtain a tax benefit in connection with the scheme. [Emphasis added]

• This is practically a very significant suggestion which could significantly impact the complexity and burden for taxpayers seeking to demonstrate that Part IVA does not apply. This is also arguably a distinct approach to that expressed by the majority of the PepsiCo decision, which raises the possibility that, in applying Part IVA, there can be more than one reasonable alternative postulate (at paragraph 207):

...reaching a decision that a "tax effect" in s 177C(1)(bc) might reasonably be expected to have occurred if the scheme had not been entered into or carried out "must" be based and only based on a postulate or postulates that is or are "reasonable". If none exist, no relevant "tax effect" can be demonstrated. [Emphasis added]

• As such, there is a potential tension between the approach taken by the FFCA in Hicks, where the Part IVA analysis clearly required the identification of a single reasonable alternative postulate, with the majority of the High Court’s decision in PepsiCo, which along with reviving the “do nothing” alternate postulate, suggested that the inquiry requires the consideration of multiple postulates (and whether each is reasonable and gives rise to a tax benefit). Although the majority’s suggestion in PepsiCo is not consistent with recent Part IVA cases (for example, Minerva and Mylan, which each focussed on identifying a singular and reasonable alternate postulate, but both of which considered the application of Part IVA prior to the 2013 amendments) practically speaking this “tension” will give the Commissioner ammunition to insist on the formulation and testing of multiple alternative postulates – particularly as this tension will remain unresolved following the High Court’s refusal to hear the Commissioner’s appeal in Hicks. 
   
• That the Commissioner intends to air this “tension” is evident in the Commissioner’s Decision Impact Statement (DIS) to PepsiCo, published 19 March 2026. In the DIS, the Commissioner identifies a tension between the PepsiCo and Hicks decisions relating to alternative postulate schemes:

It is our view that PepsiCo at [207] raises the possibility that there can be more than one alternative postulate that is reasonable, contrary to the position for Part IVA prior to the 2013 amendments. In our view, the analysis required by section 177CB as to the identification of 'reasonable postulates' can result in the identification of more than one such 'reasonable postulate'. The observation by the High Court in this case, as to it being possible that there could be multiple reasonable postulates, is in tension with the Full Federal Court's decision in Hicks. The decision in Hicks is currently the subject of a special leave application.

A question arises about whether the onus is discharged where there are 2 or more reasonable alternative postulates, where one or more results in the identification of a tax benefit and at least one does not. It is our view that, in such a scenario, a taxpayer does not discharge its onus merely by demonstrating that there is one reasonable alternative that does not result in the obtaining of a tax benefit. This too is a matter raised in the Hicks' special leave application. [Emphasis added]

• As noted above, the FFCA in Hicks also addressed the viability of the “do nothing” counterfactual, which was somewhat “re-enlivened” in PepsiCo with the majority accepting that the “do nothing” counterfactual remains available in limited cases, despite the Commissioner’s position that the 2013 amendments to Part IVA had effectively ruled it out. Observing at paragraph 203:

…In the case of related party transactions, it is very unlikely that a taxpayer will be able to demonstrate that there was no reasonable alternative to the scheme.

Wrapping up

The Ierna and Hicks litigation adds to the growing list of recent Part IVA decisions which have gone against the Commissioner (including Minerva, Mylan, and PepsiCo - see links to our analyses of those decisions) and raises important questions about the future of anti-avoidance provisions and the Commissioner’s ability to enforce them.

With several further Part IVA cases working their way through the Courts (including the pending Hilton decision in the FCA heard in May 2025 and expecting to be decided this year and the Merchant appeal to the High Court expected to be heard later this year) it remains to be seen whether this trend will continue and whether the Commissioner will be forced to pivot strategies in enforcing and litigating Part IVA.

On section 45B, the FFCA’s suggestion that section 45B requires a quasi-counterfactual (involving the company in question paying a dividend) represents a major departure from the Commissioner’s administrative practice on section 45B.  With the Commissioner’s special leave application denied, the FFCA’s decision in Hicks remains and therefore significantly widens the scope for a greater range of companies to pay respected capital returns especially those who face practical or legal difficulties in paying dividends. 

Finally, given the High Court’s statement that the Commissioner’s appeal grounds raised no “issues of principle”, Hicks should also rightly lead to revisions of the Commissioner’s administrative practice and public guidance, to correct the significant divergences between the FFCA’s judgment in Hicks and the Commissioner longstanding administrative practice in PS LA 2008/10 and class and private rulings.

With the Commissioner’s public consultation on the approach to capital management transactions stalling following the Ierna defeat in June 2024, and Ierna and Hicks providing an emphatic statement from the Courts on the scope of section 45B, now seems like a ripe moment for the Commissioner to provide clarity and a more commercial, practical approach to capital returns and capital management transactions.

[1] See for example, the proposed acquisition of Perpetual Limited’s wealth and corporate trust business by Kohlberg Kravis Roberts & Co L.P, to which the Commissioner sought to apply section 4B - 06cg7k4pyrdm61.pdf