The taxation commissioner sought to apply sections of the Income Tax Assessment Act 1936
Dentons has assisted Melville Hicks and Carmelo Ierna, who founded fashion retailer City Beach, to a win in Federal Court over a tax matter that ensued from City Beach group’s 2016 restructure.
In Commissioner of Taxation v Hicks [2025] FCAFC 171, the taxation commissioner sought to apply anti-avoidance provisions under section 45B and Part IVA of the Income Tax Assessment Act 1936 (Cth) to the restructure. The restructure involved interposing a new holding company over the City Beach Trust and implementing a selective share capital reduction of $52m, according to Dentons.
The reduction was used to discharge Division 7A loans owed by entities linked to the group’s principals. The commissioner claimed that the transactions were carried out to replace taxable dividends with tax-free capital returns.
The judge in Ierna v Commissioner of Taxation [2024] FCA 592 dismissed the commissioner’s argument. Subsequently, the commissioner filed an appeal.
The Full Federal Court unanimously shot down the commissioner’s appeal, determining that the capital return was not made to replace dividends. Moreover, the restructure’s main goal was to repay Division 7A loans while maintaining the pre-CGT status of specific assets. Thus, neither section 45B nor Part IVA of the Income Tax Assessment Act were not applicable, and the court ruled that the commissioner’s conclusions were invalid.
The court dismissed the appeals with cost.
“We’re very pleased that this is behind us. We’ve fought for nine years believing in the correctness of our position; in the advice of our legal team (at Dentons) and our counsel! Now we have been vindicated with four judges of the Federal Court of Australia also agreeing in that position”, Hicks said.
Dentons lead partner Damien Bourke said the court’s judgment confirmed that the restructure was “driven by sound commercial objectives”.
“This ruling provides clarity for businesses managing complex trust and corporate structures”, Bourke said.
Bourke worked alongside senior associates Paul Thompson and Natalie Wissa as well as associate Ryan Steele.
