The Federal Court judgment in Hilton International Australia Pty Ltd (HIA) v Commissioner of Taxation (No 2) [2026] FCA 1325 has wide-ranging implications for multinationals operating in Australia.
In this article, we examine Justice Younan’s decision to dismiss HIA’s appeal against the Commissioner’s determination made under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). We explore the key findings of the Court, the implications for multinational groups and the broader context of the ATO’s compliance activities.
The decision represents judicial endorsement for the concerns raised by the Commissioner in Taxpayer Alerts 2019/1 and 2020/4 regarding multiple entry consolidated (MEC) group restructures undertaken in anticipation of disposals and the use of intercompany debt.
Beyond MEC group restructures and more broadly for the application of Part IVA, the decision supports the Commissioner’s expanded approach to the consideration of reasonable alternatives and tax benefit – confirming that multiple alternatives can be considered, and arguably increasing the onus to be met by taxpayers facing allegations that Part IVA applies to their circumstances.
The case involved the 2015 sale of a 5-star hotel located at 488 George Street, Sydney (Hotel), valued at approximately A$422 million. HIA, an Australian subsidiary of Hilton Worldwide Holdings, Inc, undertook a pre-sale corporate restructure that, on the Commissioner’s case, had the dominant purpose of obtaining a tax benefit in that it minimised the amount of Australian capital gains tax that would otherwise apply.
The Commissioner was successful, meaning a A$173 million amount assessed by the Commissioner to HIA in respect of the income year ended 31 December 2015 stands (subject to any appeal).
Restructure and sale
The Hotel had been owned and operated by the Hilton Group for a number of years. To simplify the transaction considerably (the judgment spans 87 pages), it broadly involved:
- March and June 2014: incorporating various entities, including Admiral Holdings Australia Pty Ltd (AHA) whose shares were held by Hilton International Holding Corporation (HIHC).
- June 2014: changing the Australian tax consolidated group to a MEC group in Australia (with AHA as an ET-1 company).
- July 2014: AHA, in exchange for market value consideration (to be satisfied by promissory notes), purchasing the shares in Admiral Investments Pty Ltd (AIPL), which indirectly held the shares in the “Admiral Entities”. The Admiral Entities held the underlying freehold interest in the Hotel.
- November 2014: identifying a potential purchaser, Bright Ruby Resources Pte Ltd (Bright Ruby).
- February 2015: updating the existing hotel management agreement (HMA), designed to put in place a long-term hotel management agreement that the Hilton Group believed was favourable and “operator-friendly” prior to the sale of the Hotel.
- February 2015: incorporating a new Luxembourg entity, Hilton Worldwide Luxembourg Holding S.a.r.l. (HWIH), and HIHC transferring its AHA shares to HWIH.
- February and March 2015: transferring Hotel and related Hotel Assets to AHA.
- April 2015: HWIH selling the AHA equity to Glory Property III Investment Pty Ltd (GP III, a subsidiary of Bright Ruby). In consideration for the sale, HWIH received approximately A$29 million, and declared a capital gain of approximately A$21 million. The Share Sale agreement provided that GP III would repay the debt owed by AHA to HIA worth approximately A$420 million (achieved through a GP III equity subscription to AHA on completion on 1 July 2015).
In 2022, the Hotel was on-sold to another third party by way of an asset sale.
The facts in this case bear similarities to those outlined by the Commissioner in Taxpayer Alert 2020/4. There, the ATO alerted taxpayers its review activity concerning the use of MEC groups to avoid Australian tax through the transfer of assets to an Eligible Tier-1 company prior to disposal. Here, while Australian tax was paid on the sale, assets were transferred within the MEC to achieve a result on external sale.
Tax consequences arising from the sale
The tax effect of this sale structure was that – in the absence of Part IVA applying – a significant portion of the purchase proceeds are allocated to repay the debt, with a smaller portion allocated to the exiting equity.
Materially, the pre-sale transfers of the Hotel interest to AHA occurred while AHA was part of the MEC group. Accordingly, these steps – including the market value consideration – were ignored from an income tax perspective.
Application of Part IVA
There are three conditions that must be satisfied for Part IVA to apply to a scheme. If Part IVA applies, the Commissioner can determine under the power in s 177F(1) to cancel tax benefits arising under the scheme.
The conditions are:
- the identification of a “scheme” (s 177A)
- that a taxpayer has obtained a “tax benefit” in connection with the scheme (ss 177C, 177CB, 177D(3)); and
- the dominant purpose of the person, or one of the persons, who entered into or carried out the scheme was to enable the taxpayer to obtain a tax benefit (s 177D(1) read with s 177A(5)), having regard to the eight factors set out in s 177D(2).
(a) Scheme
What constitutes a “scheme” is broadly defined under the legislation, and consequently the existence of a scheme is often readily accepted by the parties, albeit what falls in and out of the scheme is often contentious.
In this case, the parties accepted the actual sale steps constituted the scheme. The steps were those occurring immediately prior to the sale to Bright Ruby.
Relevantly, forming the MEC group and transferring the freehold interest in the Hotel to AHA on 1 July 2014 was not expressly included in the scheme, however Justice Younan “accept[ed] that events that occurred prior to (and after) the scheme, in particular the prior allocation of debt and the subsequent novation of contracts, may be relevant to an assessment of the Scheme relative to the alternative postulates and to ascertain purpose”.
(b) Tax benefit
The critical battleground in this case was whether AHA had obtained a “tax benefit” in connection with the scheme, and if so, its quantum. This turned on the construction and application of s 177C and s 177CB.
To determine whether the taxpayer obtained a tax benefit, it is necessary to compare the scheme with reasonable counterfactuals, or alternative postulates, and consider the expected tax outcome had the scheme not been carried out.
Multiple counterfactuals?
Perhaps the most interesting aspect of the decision is Justice Younan’s acceptance of the Commissioner’s contention that more than one reasonable alternative may exist under s 177CB(3). The taxpayer had contended that the Court was required to identify a single, commercially preferable alternative to the scheme as the most “probable” sequence of events. In rejecting this argument, Justice Younan said that nothing in the legislative text mandates probability, and found support in the High Court’s reasoning in Commissioner of Taxation v PepsiCo Inc [2025] HCA 30- specifically to the majority’s reference at [207] to ‘’a postulate or postulates that is or are ‘reasonable”, and the minority’s acknowledgment at [96] of a “range of potential reasonable alternative postulates”.
Further, Her Honour said at [104] (emphasis added):
“The Commissioner submits that the question posed by ss 177C(1)(a) and 177CB is as follows: “is there a reasonable alternative postulate in which a taxpayer’s assessable income would have been higher?”. This construction is supported by the reference in s 177CB(3) to “a reasonable alternative”, rather than “the reasonable alternative”. On this construction, which I consider to be correct, the Court is to look at all of the alternative postulates proposed by parties and ask whether one or more is “reasonable”. Of the alternatives determined to be “reasonable”, the Court then considers whether the taxpayer’s income would have been higher under each alternative. If the taxpayer’s income would have been higher under more than one alternative, then the highest point indicates the extent of the disparity between the scheme and “a reasonable alternative”, and therefore the extent of the tax benefit in relation to the scheme.”
We summarise in the table below the counterfactuals put forward (including the relevant party and the tax effect), facts for/against those counterfactuals being reasonable, and the conclusion ultimately reached by Justice Younan.
In summary, Justice Younan found that AP1, AP2 and AP4 were reasonable alternative postulates to the scheme. This was because, in accepting Mr Harper’s evidence, they would all have concluded in a successful sale, with no adverse impact on the terms agreed in the actual sale, given the market and the desirability of the hotel.
As these counterfactuals involved paying significantly more tax relative to the scheme (AP1, AP2 and AP4 gave rise to a A$173 million capital gain), a tax benefit arose. That is, had the scheme not been entered into or carried out, HIA as provisional head company of the MEC group might reasonably be expected to have recorded the net capital gain the parties agreed would result from each of AP1, AP2 or AP4.
AP3 was found to itself be a Part IVA scheme and therefore was not considered a reasonable counterfactual (as explained below).
| Alternative Postulate | Was it a reasonable counterfactual? | Conclusion by Justice Younan | |
| Arguments for | Arguments against | ||
AP1: Asset sale to GP III Raised by the Commissioner $173m capital gain for HIA |
|
| AP1 was a reasonable counterfactual as:
|
AP2: Share sale of AIPL (the entity holding the Hotel freehold since 2001) Raised by the Commissioner $173m capital gain for HIA |
|
| AP2 was a reasonable counterfactual. Again, given the status of the Hotel as a trophy asset in a seller’s market, Justice Younan considered AP2 could have achieved the same commercial outcomes as the Scheme. While this alternative would not have been the preferred option (noting greater complexity and transactional risk), it was nevertheless a reasonable counterfactual. |
AP3: Share sale of AHA on a debt-free basis Raised by the taxpayer $113m capital gain to HWIH (increasing from $21m on the actual sale) |
|
| AP3 was not a reasonable counterfactual because it was in and of itself a Part IVA scheme. In agreeing with the Commissioner, Justice Younan found this counterfactual had “the same tax avoidance hallmarks” (as the scheme). The selection of AHA, an ET-1 company as the sale vehicle was critical to AP3 (and the scheme). Notably, this was the only counterfactual advanced by the taxpayer, and it involved an increase in Australian tax payable by a foreign entity (not Australian). |
AP4: Share sale through a newly incorporated entity (SaleCo) Raised by the Commissioner $173m capital gain for HIA |
|
| AP4 was a reasonable counterfactual, and while not necessary for Justice Younan to decide (on her reasons), was the most reasonable alternative in view of its relative simplicity. |
(c) Dominant purpose
Having identified a tax benefit, the final question for the Federal Court was whether, having regard to the matters in s 177D, the Scheme (or any part of it) was entered into or carried out for the dominant purpose of obtaining a tax benefit.
The Court conducted an objective assessment of the dominant purpose, with some of the factors having more bearing on the analysis than others (namely manner, form and substance and the change in financial position).
Broadly, Justice Younan determined that HIA had not demonstrated that the stated commercial objectives could only be secured by the scheme (as distinct from the reasonable alternatives), or that they were in fact secured by reason of the structure of the scheme, and the complexity of the scheme belied its stated purpose.
In arriving at that conclusion, some of the key considerations noted by the Court included:
Manner (s 177D(2)(a)):
- the complexity of the restructure and sale steps pointed towards the requisite purpose. In particular, Her Honour noted the following: the restructure steps occurring in 2014 and 2015, the selection of an ET-1 company as the sale vehicle by HWIH (a Luxembourg company) with a legacy of inter-company debt, the resulting inclusion of additional warranties in the sale agreement.
- the taxpayer did not demonstrate that the ultimate outcome or commercial end sought (in terms of a quick sale on favourable terms, with long term hotel management rights) ensued as a result of the manner in which the scheme was entered into or carried out.
Form and Substance (s 177D(2)(b)):
- there was a divergence between the legal form (a share sale by a Luxembourg entity with a gain of approximately A$29 million) and the economic substance (disposal of an asset, the Hotel, valued at approximately A$442 million).
- it was deemed significant that Bright Ruby had raised concerns about the intragroup debt prior to the sale. This indicated AHA was not the obvious sale vehicle from a commercial perspective. Bright Ruby informed Hilton Group prior to the sale structure being approved that it would not retain AHA and would transfer the Hotel assets to a trust structure after the sale, and then did so. These facts did not involve the seller but were considered to be relevant to Justice Younan in determining the objective purpose of the scheme.
Change in financial position (s 177D(2)(e) and s 177D(2)(f)):
- evidence that it was the strategy to embed the HMA as an executed contract in order to avoid or reduce negotiation was deemed to be subjective and not probative to the Part IVA inquiry (requiring the determination of objective purpose). The evidence did not make it clear that the terms of the sale (or of the HMA more specifically) would have been materially less favourable had it been conducted through AP1, AP2 or AP4 – the complexity of the scheme, given this, was found to weigh towards a dominant tax avoidance purpose.
Evidence
The taxpayer led lay evidence from Mr Enayetullah (the person responsible for the recommendation to the Investment Committee to sell the Hotel) and expert evidence from Mr Dean Dransfield (hotel consultant), while the Commissioner led expert evidence from Mr David Harper (a chartered surveyor).
Expert evidence centred on how sales of a hotel to international buyers would generally be structured in Australia, as well as the structuring of sale and manage-back transactions.
In collecting and preparing evidence, the decision reiterates that:
- the Part IVA inquiry for purpose is objective purpose and not subjective purpose. Lay witness evidence of how things were done and why is likely to constitute opinion evidence which, while eligible for admission into evidence, will be admitted as an expression of the witness’s belief only. Contemporaneous documents will be more probative than recollections. Contemporaneous internal analysis of alternative transaction structures was probative in RCI Pty Ltd v Commissioner of Taxation [2011] FCAFC 104; and
- experts should be properly briefed with sufficient materials to underpin their view. Here, it transpired the taxpayer’s expert was not fully briefed with materials in respect of AHA’s history and debt, leading the Court to prefer evidence from the Commissioner’s expert.
Takeaways
For multinational groups with Australian operations and assets, this case presents some important lessons:
- MEC group restructures will face intense scrutiny. Given the ATO’s focus on MEC groups, including those arrangements which are similar to those outlined in TA 2019/1 and 2020/4, any significant disposals involving pre-sale restructures, MEC groups, ET-1 companies, intra-group asset transfers, and the interposition of foreign entities should be assumed to be on the ATO’s radar. It is recommended that any historical transactions with these features should be re-examined in light of the Court’s findings in Hilton. It would be prudent to, in relation to any prospective transactions, conduct a rigorous Part IVA risk assessment at the outset.
- Multiple counterfactuals may need to be considered and dealt with. Given the Commissioner’s interpretative approach to the requirements of s 177CB(4) and the findings of the Court in Hilton, taxpayers faced with a challenge on the basis of Part IVA may need to consider a range of defensive arguments beyond simply contending that their chosen structure was the most commercially preferable option. The Hilton decision demonstrates that a Court will consider all possible reasonable alternative postulates, and that tax benefit will be measured by reference to the alternative that produces the highest tax outcome.
- Genuine commercial substance remains key. Contrasting the outcome in Hilton, to other recent cases such as Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253 (Mylan) (where the taxpayer prevailed), the distinguishing factor appears to be whether the restructure steps are responsive to an objectively inferred commercial rationale, that is independent of the tax benefit. Where the steps have genuine commercial substance, such as the funding structure in Mylan, Part IVA will not apply.
The JWS Tax team assists taxpayers with supporting and defending their tax positions, including in respect of the application of Part IVA and other integrity measures.
The JWS Tax team has had recent success in multiple cases in defending successfully (without adjustment) allegations that Part IVA applies to restructures prior to sale, including choice of level issues within MEC Groups.
Please reach out if you have any questions in respect of this decision and your transactions.