Federal Court rules against Gold Coast businessman for tax avoidance scheme involving EY advice

The Federal Court has made a significant ruling against prominent Gold Coast businessman Gordon Merchant, the founder of global surfwear brand Billabong. The court found that Merchant had used advice from EY to structure transactions between companies he controlled in order to offset an $85 million capital gain and reduce his tax bill through “dividend stripping.”

The Australian Tax Office (ATO) had conducted an audit of nine Merchant Group companies in 2017, leading to a disputed $45 million tax assessment. The ATO believed that Merchant had engaged in an asset “wash sale” by selling $5.8 million in Billabong shares to his SMSF to create a $56.6 million capital loss, which was then used to offset the capital gain from the sale of shares in Plantic Technologies.

Justice Tom Thawley found that Merchant had obtained a tax benefit through these schemes and that they were entered into for the dominant purpose of obtaining a tax benefit. The court ruled that the ATO had miscalculated capital proceeds from the Plantic shares sale but also found that the forgiveness of related party debts amounted to dividend stripping.

The structure of these transactions, including the Plantic sale, the sale of Billabong shares, and the forgiveness of related party debts, was reportedly suggested by EY, Merchant’s long-time accountants. A separate lawsuit against EY and former tax partner Ian Burgess is also ongoing, with Merchant alleging negligent advice and seeking around $58 million in damages.

Following the court’s ruling, Merchant and the ATO have been asked to confer and agree on orders to give effect to the judgment. This case highlights the complexities and consequences of tax planning strategies used by high-net-worth individuals and the scrutiny they face from tax authorities.