Part IVA applied to the sale of a prominent Sydney Hotel

On 9 September 2026, the Federal Court of Australia handed down its decision in Hilton International Australia Pty Ltd v Commissioner of Taxation (No 2) [2026] FCA 1325, dismissing the taxpayer's appeal and confirming that the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applied to the disposal of a Sydney five-star hotel. The Court upheld the Commissioner's determination to include AUD173.3 million in the assessable income of Hilton International Australia Pty Ltd (HIA), the Australian head company of the group's multiple entry consolidated (MEC) group, for the year ended 31 December 2015.

The hotel was sold to a third party for approximately AUD442 million. The wider transaction involved 2014 and 2015 pre-sale restructuring steps that consolidated the property and business assets into a single Australian company, AHA, along with an intercompany note, and then the sale of the sole share in AHA from a newly incorporated Luxembourg entity. The purchaser paid around AUD29 million for the share and paid AUD420 million directly to HIA to enable it to repay the intercompany note. The Australian group returned a net capital gain of AUD21 million.

Three aspects of the decision are of wide interest. First, the Court held that section 177CB(3) permits more than one reasonable alternative postulate, and commented in obiter dictum that if the taxpayer's income would have been higher under more than one alternative, the highest point indicates the extent of the tax benefit. Second, the Court held that a postulate which is itself a Part IVA scheme cannot be used as the counterfactual. Third, the Court confirmed that a transaction may be a rational commercial decision and still fail the dominant purpose test where the chosen form is not explained by the commercial outcome achieved. 

The transaction

The hotel had been held since 2001 by three Australian companies within the group, sitting beneath a chain of 13 United States holding companies that had been interposed for historic financing reasons. The group had considered a disposal as early as 2012 and had taken external advice on both an asset sale and an entity sale. As part of a global group restructure in 2014 the Australian tax consolidated group was converted into a MEC group, and a new company was incorporated which acquired the entities that owned the hotel for consideration satisfied by promissory notes. That consideration was revised upwards twice, ultimately to AUD602 million. The global restructure also resulted in certain assets associated with the operation of the hotel (PP&E, contracts) sitting beneath a different eligible tier-1 (ET-1) chain within the MEC group.

Once a purchaser had been identified and had bid AUD441 million in mid-February 2015, the group implemented the Actual Sale which included a further pre-sale restructure from 25 February 2015. A new Luxembourg company was incorporated and became the holder of the share in the sale vehicle. The hotel freehold and the associated business assets were transferred into the sale vehicle for AUD425 million, satisfied by a loan note, and a new 50-year hotel management agreement was novated to it so that the group retained long-term management rights. On completion in July 2015, the Luxembourg company received approximately AUD29 million for the share and returned a capital gain of approximately AUD21 million, while the purchaser paid approximately AUD420 million directly to the Australian head company to discharge the intra-group note. The purchaser transferred the hotel out of the sale vehicle to its own trust within four weeks and wound the vehicle up.

An internal investment committee paper recorded that the sale was "structured as the sale of shares in a Hilton subsidiary" and involved a repayment of an intercompany note, described as a non-taxable event, with an estimated total tax impact of AUD8 million. The Commissioner later determined that a tax benefit of AUD173 million had been obtained and issued an amended assessment, which was the subject of the appeal. Penalties and shortfall interest are the subject of a separate proceeding and were therefore not considered by the Court.

Identifying the tax benefit: more than one counterfactual is permitted

It was common ground that the transaction was a "scheme" and that the reconstruction approach in section 177CB(3) applied, because the scheme was part of a broader commercial transaction with real non-tax consequences that achieved the commercial aims of the Hilton Group. The Commissioner advanced three alternative postulates: a straight asset sale (AP1), the sale of the established holding company (AP2), and the sale of a new special purpose company (AP4).

The taxpayer advanced an alternative postulate (AP3) which comprised a share sale of AHA on a debt free basis. The taxpayer also challenged the reasonableness of the Commissioner’s alternative postulates on the basis that they each would have introduced additional complexity, and in some cases did not allow for the existing intra-group management agreement to remain in place. The taxpayer argued that the Court's task was to identify a single, commercially preferable alternative that would have occurred. The Court rejected that construction. The reference in section 177CB(3) to "a reasonable alternative" indicates that the Court should consider each postulate advanced, ask whether one or more of them is reasonable, and then ask whether the taxpayer's assessable income would have been higher under any of those alternatives. In accepting the Commissioner’s submissions, the Court took the view that an alternative to the Actual Sale should be addressed by reference to the following: “is there a reasonable alternative postulate in which a taxpayer’s assessable income would have been higher?”.

The Court opined that where more than one reasonable alternative would produce a higher assessable income, the highest amount indicates the extent of the tax benefit. However, as the Court ultimately accepted that there were three reasonable alternative postulates that had the same tax benefit, this quantification point was not explicitly determined in the judgment. The Court’s finding implies that the Commissioner would succeed on the tax benefit limb as long as one of the reasonable alternative postulates would have produced a higher assessable income for the taxpayer – even if the taxpayer has also identified a more, or even the most, reasonable postulate. This may be at odds with the decision in FCT v Hicks [2025] FCAFC 171, which the Full Court handed down on 3 December 2025 (after the hearing in Hilton in May 2025). That decision explained that where the taxpayer had positively demonstrated what might reasonably be expected to have happened then it was unnecessary to consider whether the Commissioner’s alternative was also reasonable.

Applying that approach, and having particular regard to the commercial and economic substance of the scheme rather than its legal form, the Court accepted that each of the alternative postulates other than AP3 were reasonable alternatives. The Court rejected AP3 on the basis that it was itself a Part IVA scheme which, on the facts, was characterised as "two sides of the same coin" with the actual transaction: replacing the debt with share capital shortly before the sale simply moved the benefit of the intra-group debt from the capital proceeds to the cost base, and the gain would still have arisen in the foreign entity rather than in Australia.

Expert evidence that asset sales were the predominant market practice for Australian hotels, that the asset was a trophy property being sold in a seller's market, and that a comparable Sydney hotel had recently been sold by way of an asset sale with a long-term management agreement, was influential. The Court placed weight on the transactional friction created by the complexity of the sale structure. It treated the buyer’s prompt post-completion transfer of the hotel assets to a trust and winding-up of the acquisition vehicle as reinforcing the limited commercial significance of that structure. The Court found that the group's bargaining strength and strong market conditions, rather than the chosen structure, was what secured the price and the favourable ongoing management terms.

A counterfactual cannot itself be a Part IVA scheme

The taxpayer's own postulate was rejected on a distinct basis. The Court held that a postulate which itself answers the description of a Part IVA scheme cannot be used as the comparator, because the comparison required by section 177C(1)(a) cannot be undertaken where the foil reflects the scheme, including its purpose. To do otherwise would lead to a potentially interminable inquiry in which the tax effect of one scheme is measured against another.

The Court accepted that the taxpayer's preferred alternative to the Actual Sale is reasonable insofar that it is the only sufficiently reliable prediction of what might reasonably be expected to have happened in the absence of the Actual sale. However, the Commissioner, and the Court agreed, that where the alternative itself is deemed to be a purported Part IVA scheme it cannot be reasonably considered as a reliable alternative.

The Court did not accept that section 177CB(4)(b), which requires results under the ITAA 1936 to be disregarded when testing reasonableness, produces a different outcome. That provision is directed at preventing a postulate being rejected merely because it carries a high tax cost, including the very tax the taxpayer sought to avoid. It does not require a tax avoidance purpose underlying a postulate to be ignored.

The Court commented that if the taxpayer’s alternative is not considered a Part IVA scheme, it could be a reasonable alternative to the Actual Sale but not the single preferred alternative which the Court held that, on its case, is the necessary standard. 

Dominant purpose

Turning to section 177D, the Court weighed the eight statutory factors and concluded that the dominant purpose of entering into and carrying out the scheme was to obtain a tax benefit. The manner in which the scheme was carried out and the disparity between its form and its substance were the most significant factors. The form comprised the selection of an eligible tier-1 company carrying substantial intra-group debt, a cash payment of AUD29 million and the repayment of AUD420 million of debt, whereas the substance was a fast sale of the hotel (a ‘trophy asset’) at a good price with long-term management rights retained, in a seller’s market.

Several findings drove that conclusion. The Court was not satisfied that the taxpayer had shown that the stated commercial objectives could only be achieved through the chosen structure, or were in fact achieved because of it. The purchaser had queried the recently introduced debt, had signalled before completion that it would not retain the sale vehicle, and then removed the hotel and wound the vehicle up. The pre-sale restructure created additional due diligence and what the Court described as "transactional friction", including additional warranties and a seller's guarantor made necessary by the use of a Luxembourg vendor. The contemporaneous record did not bear out the importance the taxpayer later placed on embedding the management agreement in the sale. In addition, a recent market transaction (the sale of Sheraton on the Park) had been an asset sale.

Consistent with earlier authority, the Court accepted that the transaction was structured to achieve the most desirable tax result and that this alone does not trigger the application of Part IVA and it gave little independent weight to the size of the tax benefit. Equally, the presence of genuine commercial advantages did not displace the conclusion, because the complexity of the scheme was not explained by those advantages. The Court also confirmed that events outside the scheme, including the 2014 allocation of debt, may be considered where they are inextricably linked to the scheme and shed light on its purpose.

The decision also contains a useful reminder on evidence. Parts of a senior executive's affidavit were not accepted as expert evidence and were admitted only as evidence of his belief, because the opinions expressed were not shown to be based on his specialised knowledge and the reasoning connecting his experience to his conclusions was not set out. The taxpayer's expert was given less weight than the Commissioner's expert for reasons which included that a substantial part of the transaction data room had not been provided to him in the course of the briefing process.