Wipeout: the Merchant case – a watershed moment

A recent legal event has been shown to be a classic example of how SMSF compliance issues can arise from what on the surface would appear to be a legitimate fund transaction. selfmanagedsuper senior journalist Jason Spits assesses the Merchant case and the lessons it presents for practitioners and trustees.

It is said there are two ways to learn from experience – by looking at your own or by looking at that of someone else. The latter is often quicker and cheaper and the events involved in the case of Gordon Merchant versus the ATO certainly offer a salutary lesson for SMSF practitioners and trustees when it comes to transactions with related parties.

Given the events behind it took place more than a decade ago and the legal action related to them has stretched over the past four years, the facts of the case may be familiar (see: The Merchant case below), including the fact Merchant was disqualified for breaching the Superannuation Industry (Supervision) (SIS) Act and that action was later overturned.

While an examination of the parts of the issue is worthwhile – the breaches regarding the sole purpose test, provision of financial assistance and investment strategy all offer their own lessons – it is also important to note the wider takeaway messages for SMSF practitioners and trustees.

What’s the big deal?

At the centre of the legal action is a relatedparty acquisition of $5.8 million of shares in surf-wear company Billabong by Merchant’s SMSF, the Gordon Merchant Super Fund (GMSF), from the Merchant Family Trust (MFT).

It is a sizeable transaction for a singlemember fund, but perhaps not that large in the context of an SMSF, and it was unlikely to have been an issue for the ATO, according to Cooper Grace Ward partner Scott Hay-Bartlem.

“The size of the transaction was a tax matter, but its scale would not have been an issue for the ATO when considering the role of the SMSF. They looked at superannuation law, not tax law, and it was about the principles that applied,” Hay-Bartlem explains.

It is a view shared by Sladen Legal principal Phil Broderick, who recognises the transaction between the MFT and GMSF was about an attempt to trade off capital losses and gains.

“There is clear evidence there was advice to crystallise those losses and gains and if the transaction was smaller and with similar evidence, we can assume the ATO would have taken a similar approach,” Broderick notes.

Cooper Partners director and head of SMSF and succession Jemma Sanderson points out that while Part IVA has been a key issue in the case, and an appeal against that finding was rejected in April this year, the regulator took a wider view when it came to the role of Merchant and his SMSF in the transaction.

“The ATO wanted some accountability from those involved, including those who provided advice, and a key takeaway from this case is the need for documentation and evidence around the connections an SMSF may have in a group structure,” Sanderson states.

The parts of the sum

As mentioned, the other part of the transaction included a family unit trust and DBA Lawyers special counsel Bryce Figot summarises the events as being a “classic wash sale” where the same entity sells and buys a stock, and, in this case, used the SMSF as a clearing house.

“This was a wash sale because there was no change in the ownership and it became a superannuation compliance problem because it used an SMSF, which is a highly regulated vehicle,” Figot says.

Broderick adds that Merchant argued the shares purchased had been undervalued by the market and he could see them gaining value in the future, but the ATO and the Administrative Appeals Tribunal (AAT) rejected that view because the transaction did not fit the sole purpose test.

“With Merchant there is a potential argument that there was an objective purpose, to acquire the shares, and that had a subjective purpose, to gain a tax offset, which could be overlooked,” he explains.

“However, the AAT found the purpose was to crystallise a loss and there was no evidence to support Merchant’s thought process.

“The lesson here is if you have an objective purpose for an action within an SMSF, it must be done to provide retirement or death benefits to members and that must override any subjective motives, such as moving property or assets into the fund.”

Hay-Bartlem points out that where evidence was available it was not favourable to Merchant’s argument and proved the ATO’s point.

“His claim regarding compliance with the sole purpose test failed because there was no evidence it had been considered and the transaction was done for other purposes related to the MFT. If there had been notes or advice to the SMSF as to why this was a good move, it would have been a better argument,” he says.

“The lack of evidence went against him and showed the investment strategy was not aligned, nor reviewed and the transaction did not fit the sole purpose test and he was unable to explain why his SMSF took on the loss and depleted its funds to acquire the shares.

“The requirements under section 34 of the SIS Act are that an SMSF must have an investment strategy and regularly review it and provide reasons as to why it has chosen that approach and, in this case, it showed none of that so the AAT found the dominant purpose was centred around the capital gain and loss.”

By contrast, Sanderson notes the case of BPFN and Commissioner of Taxation [2023] AATA 2330 is a good comparison of how to document transactions and relationships between SMSFs and other entities.

In that case, an SMSF made a series of loans via a wholly owned unit trust to two other related entities and then onto an unrelated third party for the purpose of property development, leading the ATO to claim it breached the non-arm’s-length income provisions. This view was not sustained by the AAT as the SMSF trustee had set up each entity at arm’s length and fully documented the transactions.

“The BPFN case had the documents to prove the relationships were in place before the execution of the transactions, while Merchant seems to have overlooked the SMSF, highlighting that it’s better to get advice in advance, rather than backfill, and to document everything because it can be hard to remember,” Sanderson advises.

She suggests given the ATO was able to argue the transaction at the centre of the case was not compliant with the sole purpose test and investment strategy of the SMSF, the breach of section 65 of the SIS Act regarding financial assistance to members was always going to be on the table.

“Financial assistance via loans or illegal early release is an area of high scrutiny for the ATO when looking at the actions of trustees and auditors,” she explains.

“This is not just an issue in the Merchant case because of the large figures involved, but because it is a big issue for the regulator. We did not see a breach of the in-house asset rules, which often goes with a section 65 breach, but there was a tax benefit to a member.”

According to Figot, the assistance may not be obvious on a strict reading of the law, but the ATO considered where the law applied.

“The SIS Act states a super fund can’t lend money or give financial assistance to a member of the fund or a relative of the member of the fund, so it’s a narrow provision,” he says.

“Here the assistance was given to the MFT so it flowed to a member or relative of the member. The ATO explained how this operates in SMSF Ruling 2008/1 where it gave an example of Les and Merle, which stated if a benefit is passed on, then it was an assistance issue.”

Hay-Bartlem adds: “Section 65 covers direct and indirect assistance and we have seen other cases where entities are involved. In Merchant there is a direct line of connections and trustees should avoid being ‘too cute’ about their links with other entities unless they can provide a legitimate purpose.”

The issues involving the sole purpose test, financial assistance and the investment strategy, and the paucity of documentation showing Merchant had not engaged in a transaction that breached those rules, made it unsurprising the ATO disqualified him from acting as the trustee of an SMSF.

Of importance though was how he went about having that decision overturned by arguing he was not a danger to his fund or the wider SMSF and super system, and providing documented reasons to support that view.

To do so, Merchant successfully put forward that the contraventions of the SIS Act only related to a single course of conduct and there was no evidence he had been advised the transactions would cause those breaches. Additionally, as he was the only director of the trustee of his SMSF, the public did not need protection from him and there was no useful purpose in disqualifying him, and he would have all future transactions reviewed and all documents available to the ATO on request.

Broderick recognises the ATO’s response to the AAT’s decision to overturn the disqualification was muted, but the latter was correct in its course of action.

“The ATO has to accept the AAT’s decision to overturn the disqualification for what it is. If this type of transaction had been done each year, then he should be banned permanently, but it was agreed this was a one-off event compared with most disqualifications that involve multiple and repeated offences,” he explains.

This has been further highlighted in more recent attempts to have a disqualification overturned, particularly in the matters of Coronica and Commissioner of Taxation (Taxation) [2024] AATA 2592 and Omibiyi and Commissioner of Taxation (Taxation and business) [2025] ARTA.

The trustees in these cases tried to claim they were similar to Merchant because they also had breaches of section 62 and 65 of the SIS Act, among a number of other problems, but the tribunal rejected that view due to the repeated and serious nature of the breaches.

The sum of the parts

While the Merchant case has plenty of moving parts, Figot says it raises the issue of what advisers are told and what they need to know.

“Clients can tell you true facts, but are there other facts, extra facts you should be told because what else do you need to know,” he says.

“So how deep do you dig? A good rule of thumb is how would the arrangement or transaction within an SMSF look to an unsympathetic ATO officer with full oversight who has the power to compel you to provide whatever information they require?

“A trustee or an adviser may take a sympathetic view, but how is it going to look to that ATO officer?”

Hay-Bartlem concurs this consideration is critical when those providing advice may also be on the hook for the failure of a trustee.

“There were a few cases where advisers got in trouble because they didn’t give advice, while in another disqualification case the trustee said they had asked their adviser first, but there was no evidence that was true or that the adviser was retained to give advice,” he states.

“If your client asks about certain things, you’re going to give a particular answer. When you change the scenario, they are likely to tell you something different, so you have to be careful and make sure you’ve asked enough questions such as: Why are you doing it? What are you trying to achieve and how’s it going to work?

“There have been so many times situations like Merchant could have been turned around if everything had been documented properly.

“Often I find, in SMSF world, people have the right things in their heads that they have never written down and one of the big lessons from the case is making sure all of the necessary documentation is under control.

“People also don’t realise the importance of doing it and don’t think about the fact they may be called on in court or called before the ATO to justify this decision, and that could be some years down the track, and where they will turn to refute a claim against them.”

*The Merchant case

When reference is made to the Merchant case, it’s worth asking: Which one? Like a number of landmark legal cases in the SMSF sector, the interaction between Gordon Merchant, the founder of the Billabong surf-wear group, and the ATO has not been a one-off, with the two parties heading to court on four occasions.

The first interaction was before the Administrative Appeals Tribunal (AAT) in April 2021 (Merchant and Commissioner of Taxation [2021] AATA 915), the second before the Federal Court in May 2024 (Merchant v Commissioner of Taxation [2024] FCA 498), the third, concurrent with the second but before the AAT again (Merchant and Commissioner of Taxation [2024] AATA 1102) and the fourth before the full bench of the Federal Court in April 2025 (Merchant v Commissioner of Taxation [2025] FCAFC 56).

With these ongoing legal proceedings it may be difficult to track what the relevant issues are and why the SMSF sector now has another case to serve as an exemplar of what not to do, but it is the third case, Merchant and Commissioner of Taxation that has gained most attention and where the lessons for SMSF advisers and trustees are being drawn from.

In short, Merchant entered into a transaction in 2014 where his SMSF bought $5.8 million worth of Billabong Limited shares, as the company was listed at the time, from his family trust at market value.

This stand-alone transaction complied with section 66(2) of the Superannuation Industry (Supervision) (SIS) Act, which allows SMSFs to acquire listed shares from a related party at market value.

The ATO, however, contended the transaction was part of a wider strategy to crystallise a capital loss in the trust of $56.5 million to offset a gain from the sale of an investment in biodegradable plastics manufacturer Plantic Technologies, while also retaining ownership of Billabong shares in the broader Merchant group.

While the cases in the Federal Court examined the issue of whether Part IVA of the Income Tax Assessment Act was relevant and ruled it was, the cases before the AAT saw the ATO successfully argue the transaction was carried out to benefit the family trust rather than the SMSF and there had been multiple breaches of the SIS Act.