[Case Study] Hilton Australia vs ATO
The ATO has released an interim decision impact statement outlining its response to Hilton International Australia Pty Ltd v Commissioner of Taxation (No 2) [2026] FCA 1325, in which the Federal Court held that the Commissioner did not err in applying Pt IVA of ITAA 1936 to cancel a tax benefit obtained by a Hilton Group subsidiary company in the course of the sale of the sole share in a related company that owned a 5-star hotel in Sydney.
In that case, the court found that the sale comprised a scheme, that the taxpayer obtained a tax benefit by virtue of not including $173,300,032 in its assessable income in the relevant income year, and that the dominant purpose of entering into, or carrying out, the scheme was to obtain a tax benefit in connection with the scheme.
The taxpayer has appealed to the Full Federal Court of Australia.
Summary of decision
The case concerned the application of Part IVA of the Income Tax Assessment Act 1936 to a scheme consisting of a pre-sale restructure within the Hilton Group immediately before a sale of shares in an eligible tier-1 (ET-1) company that owned the Hilton Hotel Sydney. The scheme was of the kind described by Taxpayer Alert TA 2019/1 Multiple entry consolidated (MEC) groups avoiding CGT through intra-group debt. The scheme had the result that the hotel, which had greatly appreciated in value, was effectively sold to an unrelated third party on commercial terms; however, Hilton only returned a small net capital gain of approximately $21 million on that sale.
The Court upheld the Commissioner's Part IVA determination and accordingly dismissed Hilton International Australia Pty Ltd's (HIA) appeal against the objection decision. It held that the taxpayer obtained a tax benefit, as the Commissioner's 3 alternative postulates, each of which resulted in the obtaining of a tax benefit of the same amount, were all reasonable alternatives to the scheme. The Court also found that the taxpayer's submitted alternative was not a reasonable alternative, and if that were wrong and the taxpayer's submitted alternative were a reasonable alternative, it would not be the preferred alternative. It also held that the Hilton Group entered into or carried out a scheme for the dominant purpose of enabling HIA to obtain a tax benefit in connection with the scheme. Consequently, Part IVA applied to the scheme.
Overview of facts
HIA was the provisional head company of a multiple entry consolidated group (HIA MEC Group) during the year of income ending 31 December 2015. The foreign top company was Hilton Worldwide International Luxembourg Holding S.a.r.l (HWIH). HWIH was the sole owner of the single share in Admiral Holdings Australia Pty Ltd (AHA), as well as the sole owner of HIA. Both AHA and HIA were ET-1 companies.
Prior to the sale of the Hilton Hotel Sydney, a complex group restructure was undertaken which included steps to transfer all the sale assets into one entity (AHA) with significant intragroup debt. The value of the sale assets was approximately $449 million. It was the steps of this pre-sale restructure that comprised the scheme, for the purposes of Part IVA.
When HWIH sold its share in AHA to the third-party purchaser, Glory Property III Investment Pty Ltd (Glory), the consideration for that sale was approximately $29 million cash and the agreement that Glory would repay a $420 million intercompany loan note owing by AHA to HIA.
The debt loading and the ET-1 status of AHA were 2 factors of the scheme which, when combined, resulted in a depressed net capital gain being returned of approximately $21 million on what was in substance a sale of assets worth approximately $449 million.
The Commissioner submitted that there were 3 alternative postulates to the scheme (AP1, AP2 and AP4). AP1 involved a direct asset sale (instead of an entity sale). AP2 and AP4 involved entity sales. Under AP2, the sale would be achieved using an existing entity, Admiral Investments Pty Ltd (AIPL). Under AP4, the sale would be achieved using a newly created clean skin entity, NewCo. All 3 of the Commissioner's alternative postulates identified that the net capital gain on the sale should have been approximately $179 million and accordingly resulted in the same tax benefit amount. Under the Commissioner's alternatives it would be HIA (as the provisional head company of the Hilton MEC Group) that should have returned the net capital gain.
HIA submitted its own alternative postulate (AP3). It contemplated a share sale of AHA and removed the intragroup debt from AHA prior to sale. AP3 resulted in a higher net capital gain to HWIH than what had been returned in 2015.
The Commissioner made a determination under paragraph 177F(1)(a) of Part IVA to cancel the tax benefit and issued an amended assessment to HIA to reflect this. HIA objected to the amended assessment and the Commissioner disallowed this objection. HIA appealed that decision to the Federal Court of Australia.
Issues decided by the Court
The Court considered whether HIA obtained a tax benefit and whether the Hilton Group's dominant purpose in carrying out the scheme was to obtain the tax benefit.[1]
Did Hilton International Australia Pty Ltd obtain a tax benefit?
The Court determined that all 3 of the Commissioner's alternative postulates (AP1, AP2 and AP4) were reasonable alternatives, within the meaning of subsection 177CB(3).[2] The Court also determined that HIA's alternative postulate (AP3) was itself a Part IVA scheme, and therefore not a reasonable alternative.
Dominant purpose
The Court concluded that, although the scheme was consistent with the pursuit of a commercial gain, the dominant purpose of the scheme was to enable HIA to obtain a tax benefit because the objective evidence showed that the chosen structure was not explained by the commercial objectives but was instead a tax-driven arrangement.[18] The manner in which the scheme was carried out, as well as the disparity between the form and substance indicate that the dominant purpose was not the commercial advantages secured by the actual sale.[19]
ATO view of decision
The decision provides significant guidance on the analysis required by section 177CB as to the identification of reasonable alternatives to a scheme, for the purposes of establishing a tax benefit.
Disclaimer: This article is intended to provide general information only and does not constitute professional advice for specific circumstances. It should not be relied upon as a substitute for tailored advice.
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