Commissioner of Taxation successful in the Federal Court of Australia in long-awaited Hilton Part IVA Decision

5 Minute read 09.09.2026 Carmen McElwain, Jeremy Geale, Stephen Chen, Silvino Gomes, James Aridas, Matthew Lagamba, Alan Coorey

A significant Part IVA ruling for M&A transactions, with the Federal Court confirming that multiple reasonable alternative postulates can establish a tax benefit.

Key takeouts

MinterEllison's Tax Controversy Team acted for the Commissioner of Taxation at the hearing in a Federal Court proceeding dismissing the taxpayer's appeal against the Commissioner's application of Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) to cancel a tax benefit, resulting in a $173.3 million capital gain, arising from the sale of a Sydney hotel. The decision provides significant guidance on the operation of the "reasonable alternative postulate" test in s 177CB and the treatment of postulates that are themselves potential Part IVA schemes.

The impact in brief

The Court found Hilton obtained a tax benefit because at least three alternative sale structures were "reasonable alternative postulates" under s 177CB(3), each of which would have resulted in the same capital gain being included in Hilton's assessable income, and separately found that the dominant purpose of the scheme was to obtain that tax benefit.
The Court confirmed that more than one reasonable alternative postulate may exist, and clarified that a postulate cannot be relied upon as a comparator if it is itself a scheme to which Part IVA would apply.
The decision illustrates the weight the Court will give to a disconnect between a transaction's chosen legal form and its commercial substance, including where contemporaneous documents describe a structure as chosen "for tax reasons".

Background

The case concerned the 2015 sale of a five-star Sydney hotel by an entity in the Hilton group.

Through a series of pre-sale restructuring steps, the hotel and its business assets were consolidated into a single subsidiary, Admiral Holdings Australia Pty Ltd (AHA), which sat within a multiple entry consolidated (MEC) tax group. The provisional head company of the MEC group and the entity assessed by the ATO in this case was Hilton International Australia Pty Ltd (HIA).

Rather than selling the hotel assets directly to an unrelated third-party purchaser, the sole share in AHA was sold (following the pre-sale restructure) to the purchaser for a total deal value of approximately AUD 442 million.

The sale was structured so that most of the purchase price (around AUD 420 million) was paid directly to HIA to discharge an intercompany debt owed by AHA, while the share itself was sold by AHA's Luxembourg parent, Hilton Worldwide International Luxembourg Holding S.à.r.l. (HWIH), for only around AUD 29 million.

The effect was that, absent Part IVA:

HWIH returned a net capital gain of approximately AUD 21 million (being the AUD 29 million capital proceeds from the sale of the share in AHA minus HWIH's cost base of the share in AHA); and
HIA made no taxable gain from the transaction

The Commissioner determined that a capital gain of AUD 173.3m should be included in HIA's assessable income under Part IVA and issued an amended assessment accordingly.

The decision

Justice Younan addressed the three statutory preconditions to the Commissioner's power under s 177F of the ITAA 1936: the existence of a scheme, the obtaining of a tax benefit in connection with the scheme, and entry into, or carrying out, the scheme for the dominant purpose of obtaining that tax benefit.

Scheme

There was no dispute that the transactions comprising the sale constituted a "scheme" within the broad definition in s 177A(1) of the ITAA 1936.

Tax benefit — the reasonable alternative postulate test

To determine whether HIA obtained a tax benefit, the Court applied the "reconstruction approach" under s 177CB(3) and considered four alternative postulates. That is, four alternative ways the transaction could reasonably have been carried out, each of which was then compared against the actual scheme. These were: an asset sale to the purchaser (AP1); a share sale of the company holding the hotel and its business assets(AP2); a share sale of AHA structured so it was "debt-free" at the point of sale (AP3, advanced by HIA); and a share sale through a newly incorporated company holding the hotel and its business assets (AP4).

The Court rejected HIA's submission that only a single "most reasonable" alternative postulate could be identified, holding that the correct question is whether there is a reasonable alternative postulate (or postulates) under which the taxpayer's assessable income would have been higher, and that the highest resulting figure marks the extent of the tax benefit. Arguably the Court's conclusion on this point goes beyond what the High Court said in PepsiCo (which MinterEllison also acted in) regarding the operation of s177CB and will also need to be considered in light of the Full Federal Court decision Hicks.

The Court found that AP1, AP2 and AP4 were each reasonable alternative postulates that would have produced the same net capital gain of AUD 173.3m in HIA's assessable income.

However, the Court accepted the Commissioner's submission that AP3 — the postulate on which HIA's case principally relied — could not be used as a comparator because it was itself a scheme with "the same tax avoidance hallmarks" as the actual transaction, noting that using a Part IVA scheme as the counterfactual would be circular and would undermine the purpose of the tax benefit inquiry.

On this basis, the Court found that HIA obtained a tax benefit within the meaning of s 177C(1)(a).

Dominant purpose

Applying the eight factors in s 177D(2), the Court reiterated that the inquiry into purpose is objective, is not a "but for" test, and does not involve inquiry into subjective motive.

The Court found a disparity between the form of the scheme (using a debt-laden entity as the sale vehicle, generating a modest cash sale price and a large separate debt repayment) and its commercial substance (the external sale of the hotel while retaining a long-term management agreement), and treated this as pointing towards a tax-avoidance purpose.

The Court was not satisfied that the commercial advantages HIA claimed for the chosen structure could only have been achieved by that structure, or were in fact caused by it, rather than by Hilton Group's strong bargaining position as seller of a "trophy asset" in a seller's market.

The Court gave weight to contemporaneous internal documents, including an Investment Committee memorandum stating that the transaction was structured "for tax reasons" and that the structuring "provides for minimal tax leakage", while noting that a stated tax purpose is not itself determinative of the objective inquiry.

Weighing the eight factors, the Court concluded that the dominant purpose of entering into and carrying out the scheme was to enable HIA to obtain the tax benefit, and dismissed the appeal with costs.

Practical implications

This decision is relevant to any group undertaking, or reviewing the tax risk of, a divestment implemented through an intra-group restructure prior to an external sale, particularly where the sale vehicle carries debt that changes the tax outcome. Key implications include:

Multiple reasonable alternatives can defeat a taxpayer's case: the Commissioner does not need to identify the single most likely counterfactual. If any one of several reasonable alternative postulates would have produced a higher assessable income, a tax benefit is established by reference to the highest such postulate.
A postulate cannot itself be a Part IVA scheme: taxpayers cannot rely on an alternative postulate that would independently attract Part IVA (assessed by comparison against the other proposed postulates) as their answer to the tax benefit inquiry.
Form versus substance remains central: a mismatch between the legal structure chosen for a transaction and its commercial or economic substance continues to be treated as a strong indicator of a tax-avoidance purpose.
Contemporaneous documentation matters: internal records referring to tax-driven structuring (such as investment committee papers) can be used against a taxpayer, even though a stated tax purpose is not, by itself, conclusive of the s 177D inquiry.
The absence of contemporaneous commercial rationale is telling: where a taxpayer's litigation case emphasises commercial objectives not clearly reflected in contemporaneous documents created at the time of the transaction, the Court may give that stated rationale limited weight.