Part IVA checks in: Commissioner prevails in Hilton hotel sale

The Federal Court has dismissed the taxpayer’s appeal in Hilton International Australia Pty Ltd v Commissioner of Taxation (No 2) [2026] FCA 1325 (Hilton), upholding the Commissioner of Taxation’s (Commissioner) application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (Cth) to the sale of the Sydney Hilton Hotel.  The decision resulted in A$173.3 million being included in the assessable income of Hilton International Australia Pty Ltd (HIA) for the 2015 income year.

The decision is a significant win for the Commissioner, after the recent run of taxpayer success in Part IVA cases.  One could argue that Hilton has swung the pendulum back towards the Commissioner.  

Hilton deals in detail with the High Court’s guidance in Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 (PepsiCo) applying to Part IVA.  While the High Court’s reasoning in PepsiCo was endorsed in principle, Younan J found that the “critical facts, unique to those appeals” did not transpose to the facts in Hilton.  The decision, irrespective of any appeal, reinforces the importance of taxpayers documenting the non-tax reasons for structuring decisions, ideally at the time those decisions are made.

Key takeaways

• 'A' reasonable alternative, not 'the' reasonable alternative. The alternative postulate need not be the 'most' reasonable alternative, it need only be 'a' reasonable alternative under s 177CB(3). Younan J found that all three of the Commissioner's alternative postulates were reasonable alternatives to the scheme.  This approach is a significant evidentiary burden for taxpayers: a taxpayer must demonstrate that each of the Commissioner's alternatives is unreasonable and provide their own (non-Part IVA) reasonable alternative, failing which the analysis proceeds to the question of dominant purpose.
• An alternative postulate that is itself a Part IVA scheme cannot be used as a comparator. Her Honour rejected the taxpayer's own alternative postulate (AP3) on the basis that it was itself a Part IVA scheme with “the same tax avoidance hallmarks” as the actual sale. This narrows the range of postulates available to taxpayers and will possibly require taxpayers to prove that both the relevant scheme and their alternative postulates do not fall within the bounds of Part IVA.
• 'Transactional friction or paraphernalia'. Unexplained complexity in the structure of a transaction that is not adequately justified by commercial objectives may be a hallmark of tax avoidance purpose.  The Court found that the chosen sale structure (including an entity sale loaded with intercompany debt, departure from asset-sale market practice, purchaser concerns and use of a Luxembourg entity) created friction that was not explained by the stated commercial objectives.

Factual background

Hilton International Australia Pty Ltd (HIA) is a subsidiary of Hilton Worldwide Holdings, Inc., the US-listed parent company of the Hilton Group.  The Hilton Group has operated a 5-star hotel at 488 George Street, Sydney (the Hotel) since approximately 1974.  The freehold interest in the Hotel was acquired in 2000 and was held by three entities (the Admiral Entities), each owned by Admiral Investments Pty Ltd (AIPL).

In 2014, Hilton Group undertook a global restructure.  A new Australian entity, Admiral Holdings Australia Pty Ltd (AHA) was incorporated and AHA acquired all the shares in AIPL.  The Australian tax consolidated group was converted to a multiple entry consolidated (MEC) group under Part 3-90 of the Income Tax Assessment Act 1997 (Cth) and HIA was appointed as the provisional head company of the MEC group.

In November 2014, Bright Ruby Resources Pte Ltd (Bright Ruby) was identified as a potential purchaser.  In February 2015, the existing hotel management agreement was terminated and replaced with a new long-term (50-year) hotel management agreement designed to be “operator-friendly” for the Hilton Group.  A pre-sale restructure was also undertaken:

• Hotel business assets were transferred to the Admiral Entities.
• Hilton Worldwide International Luxembourg Holding S.à.r.l. (HWIH) was incorporated.
• AHA acquired the Hotel and business assets from the Admiral Entities, after which AHA sold its shareholding in AIPL to HIA for A$1.
• HWIH became the owner of AHA.

On 29 April 2015, HWIH entered into a Share Sale Agreement with GP III (a subsidiary of Bright Ruby).  At completion on 1 July 2015:

• HWIH transferred its one share in AHA to GP III for approximately A$29 million;
• GP III paid A$420 million directly to HIA to discharge the intercompany note AHA owed to HIA.

The parties agreed that, leaving aside Part IVA, HIA made no taxable gain.  HWIH returned a net capital gain of approximately A$21 million.

The Commissioner determined that A$173,300,032 was to be included in HIA's assessable income and issued an amended assessment.  HIA appealed.

Hilton was heard from 12 to 15 May 2025, and the decision was handed down on 9 September 2026.  In the intervening period, the High Court handed down its decision in PepsiCo and the Full Federal Court handed down its decision in Commissioner of Taxation v Hicks [2025] FCAFC 171 (Hicks).  Supplementary submissions on PepsiCo in Hilton were invited and filed in October 2025.  No further submissions were received in relation to Hicks nor is any reference made to that decision in Hilton.

This is notable given that Hicks also applied Part IVA in the post-PepsiCo landscape and addressed several of the same legal questions, particularly the role of the taxpayer’s alternative postulate in the application of s 177CB, and the relevance of contemporaneous evidence (including that which acknowledges tax considerations) to the dominant purpose enquiry.

Identification of a Scheme

Both parties accepted that the transactions constituting the pre-sale restructure and the sale (Actual Sale or the Scheme) satisfied the broad definition of “scheme” in s 177A(1).

Younan J accepted events prior to and after the Scheme (particularly the prior allocation of debt and subsequent novation of contracts) as relevant to both assessing the Scheme relative to the alternative postulates and to ascertaining its purpose (at [72]).

Tax benefit and alternative postulates

Her Honour applied the reconstruction approach under s 177CB(3), rather than the annihilation approach under s 177CB(2), because the Scheme occurred within and facilitated a broader transaction that achieved substantive non-tax consequences and commercial aims (at [87]).

Younan J identified the substance of the Scheme as “the sale of the Hotel real property and all accompanying business assets in the context of a strongly performing real estate market to a third party within a short timeframe and with limited risk or transactional expenses, in exchange for substantial value, achieving the repayment of intercompany loans, allowing the corporate group of the taxpayer HIA to repay external debts, and retaining within the corporate group long term management rights over the Hotel” (at [132]).

Younan J rejected HIA’s submission that the form of the sale — by way of share sale — was a necessary part of the substance of the Scheme.  Rather, the chosen form of transaction is relevant to the purpose underlying the Scheme (at [133]).

Assessment of the alternative postulates

The following table summarises the four alternative postulates considered by the Court.  Based on her Honour’s conclusions as to those alternative postulates, HIA obtained a tax benefit of A$173.3 million.

Her Honour’s approach to tax benefit invites the following two questions in light of PepsiCo and Hicks, considered below.

• First, can there be multiple correct alternative postulates, provided each meets the threshold of being reasonable (and, if so, what does this mean for the taxpayer’s onus)?
• Secondly, can an alternative postulate itself be a Part IVA scheme? If not, what must a taxpayer do to ensure the Court does not conclude that it is a Part IVA scheme?

Can there be multiple correct alternative postulates, provided each meets the threshold of being reasonable?

In Hilton, Younan J found that the question to be answered is whether one or more of the alternative postulates meets the statutory criterion of being “reasonable” under s 177CB(3).  The reference to “a” reasonable alternative (rather than “the” reasonable alternative) supports this reading, as do comments made in obiter in PepsiCo.  Her Honour further held that “it is not necessary that the alternative postulate be the (most) reasonable alternative” (at [161]).  That is, “the Court is to look at all of the alternative postulates proposed by parties and ask whether one or more is “reasonable” (at [104]).

On onus, citing PepsiCo at [205], her Honour stated that the taxpayer “bears the onus of proving that it did not obtain a tax benefit in connection with the scheme” and therefore bears the onus of “satisfying the Court of what might reasonably be expected to have occurred in the absence of the scheme.”  That onus will not be discharged by simply showing that the Commissioner’s alternative postulates are unreasonable (at [81]).

In Hilton, Younan J accepted AP2 — the sale of AIPL, a 14-year-old entity with interposed US LLCs, legacy liabilities and potential tax sharing exposure — as a reasonable alternative, despite the Commissioner's own expert giving evidence that he would have advised Hilton Group against using AIPL as a sale vehicle (at [172], [178]).  HIA's expert went further, opining that a sale of AIPL would not have been acceptable to "any reasonable commercial party" regardless of the trophy status of the Hotel or the state of the market (at [171]).  Younan J dismissed this on the ground that AP2 need only be "a" reasonable alternative, not the most reasonable one.  But there is a question of whether a postulate that both experts considered inferior to or unacceptable as a sale vehicle can truly be said to "generally accord with" the commercial and economic essence of the scheme, as PepsiCo requires.  If a postulate would have been rejected by the parties as commercially unacceptable, it is arguable that Hilton applied a standard for "reasonable" that is lower than the one mandated by PepsiCo.  In other words, why would it be reasonable in the absence of the scheme to adopt AP2 when it had shortcomings which could be overcome by AP4?

The Full Federal Court in Hicks emphasised that "it is the Court's task to find what might reasonably be expected to have happened if the scheme had not been entered into or carried out, based on the facts, circumstances and totality of the evidence" and that the "Commissioner's contention that he can constrain the scope of the Court's examination of the circumstances by the manner in which he particularises the scheme is not accepted" (at [189]).  Hicks confirmed that the Court, not the Commissioner, determines what might reasonably be expected to have occurred and must do so on the totality of the evidence, not merely by assessing whether the Commissioner's postulates clear a threshold of "reasonableness.”  In Hilton, Younan J adopted a different approach.  Her Honour accepted at [104] the Commissioner's construction that the question posed by ss 177C(1)(a) and 177CB is: "is there a reasonable alternative postulate in which a taxpayer's assessable income would have been higher?"

Under this formulation, the Court need only find that at least one of the Commissioner's postulates is "reasonable" and produces a higher assessable income.  This effectively converts the alternative postulate inquiry into a hurdle that the Commissioner can clear by proposing any commercially possible alternative, rather than the objective, evidence-based prediction that PepsiCo at [204] and Hicks at [189] favour.

In Hicks, the taxpayer’s alternative postulate was found to be reasonable because it had the same economic substance as the scheme and achieved the same non-tax results (at [194], [201]–[202]).  The Full Court found this alternative had been positively demonstrated on the evidence, and therefore any consideration of the Commissioner's postulate was unnecessary (at [204]).  In Hicks, the fact that the taxpayer could point to a reasonable alternative that produced no tax benefit was sufficient to discharge the onus.  By contrast, in Hilton, HIA's postulate (AP3) was rejected on the ground that the postulate was itself a Part IVA scheme (discussed in section 4.3 below).  Once AP3 was excluded, HIA was left with no alternative that produced a lower tax outcome, and the Commissioner's three postulates, each producing a tax benefit of $A173.3 million, stood unopposed.

Hilton supports the view that the taxpayer must not only establish the reasonableness of its own alternative postulate but also disprove the reasonableness of each of the Commissioner’s.  The alternative postulate analysis adopted in Hilton, if not refined on appeal, has substantially increased the burden for the taxpayer.

Can an alternative postulate itself be a part IVA scheme?

The Commissioner argued that AP3 should be rejected because it was itself a Part IVA scheme.  HIA contended that s 177CB(4)(b), which provides that the tax consequences of any postulate are to be disregarded in determining whether it is a reasonable alternative under the reconstruction approach, meant that a postulate could not be rejected simply because Part IVA might apply to it.

The Court in Hilton sided with the Commissioner, holding that:

• “It is difficult to see how a Pt IVA scheme (with a dominant tax-avoidance purpose) might be "a reasonable alternative to entering into or carrying out the scheme" for the purpose of identifying the tax effect that might reasonably be expected to have occurred in the absence of the scheme” (at [219]).
• “It is paradoxical to assume that the scheme had not been entered into or carried out (the premise of s 177C(1)(a)) on the basis that another scheme had been entered into or carried out” (at [220]).
• Using a Part IVA scheme as a comparator would lead to “a potentially interminable inquiry where the tax effect of one scheme is measured by reference to the tax effect of another scheme” (at [221]).
• Section 177CB(4)(b), which requires tax costs to be disregarded, was directed at preventing postulates from being found unreasonable merely because they would impose high tax costs - not at requiring the Court to ignore a tax-avoidance purpose underlying the postulate itself (at [214]–[216]).

Younan J held that an alternative postulate which is itself a Part IVA scheme cannot serve as a comparator under s 177CB(3).  Her Honour reasoned that it would be "paradoxical" to assume the scheme had not been carried out on the basis that another Part IVA scheme had been carried out (at [220]), and that it would lead to "a potentially interminable inquiry" (at [221]).  On s 177CB(4)(b), her Honour held the provision was directed at preventing postulates from being rejected merely because they would impose high tax costs, "not at requiring the Court to ignore a tax-avoidance purpose underlying the postulate itself" (at [214]–[216]).  The reasoning by her Honour in finding that AP3 was a Part IVA scheme was succinct, as it has the “same tax avoidance hallmarks” as the actual Scheme being examined.

The authorities relied on by the Commissioner in putting this position to her Honour were all pre-s 177CB authorities that HIA argued were superseded by s 177CB(4)(b).

The text of s 177CB(4)(b) itself instructs the Court to "disregard any result in relation to the operation of this Act that would be achieved by the postulate".  The application of Part IVA to a postulate is, by definition, a result in relation to the operation of the Act.  Younan J's distinction between "tax costs" and "tax-avoidance purpose" introduces a restriction that is not apparent on the face of the statute.  The Full Court in Hicks applied s 177CB(4)(b) broadly and without this restriction.  The Full Court held that "the concerns about the loss of pre-CGT status and the potential future CGT consequences are matters that must be disregarded" under s 177CB(4)(b) (at [199]).  It is difficult to reconcile the Hicks approach to the application of s 177CB(4)(b) in Hilton.

Regardless of whether this principle is upheld in any appellate review of Hilton, further explanation is required in terms of what taxpayers must establish in relation to the alternative postulates they put forward to the Commissioner and/or the Court. 

Dominant purpose

Having found that HIA obtained a tax benefit, her Honour turned to whether the dominant purpose of entering into or carrying out the Scheme was to obtain that tax benefit, assessed by reference to the eight factors in s 177D(2).

Assessment of dominant purpose

Having considered the eight identified matters in s 177D(2), her Honour was of the view that the dominant purpose of HIA in entering into and carrying out the Scheme was for HIA to obtain a tax benefit.  The Court concluded that “the manner in which the Scheme was carried out, as well as the disparity between the form and substance of the Scheme, in particular, indicate that the dominant purpose of entering into the Scheme was not ‘the commercial advantages secured by the Actual Sale’” (at [311]).  In particular, her Honour held that:

• HIA had not demonstrated that the stated commercial objectives and the ultimate outcome or commercial end sought could only be secured by the Actual Sale (as distinct from the reasonable alternatives), or that they were in fact secured by reason of the structure of the Scheme.
• “[a] review of the eight factors in s 177D(2) demonstrates a complexity to the Scheme that belies its stated purpose. This is, the complexity is not explained by reason of the commercial objectives that are said to justify the Scheme” (at [315]).
• The “winning formula” was the trophy asset in a seller's market, not the chosen structure. Expert evidence relied on by HIA “begs the question as to why, when the strength of Hilton Group's bargaining position suggests it had choices as to how to structure the transaction, it was considered necessary or desirable to proceed by way of the particular transactional vehicle of the Scheme” (at [318]).  Her Honour regarded post-Scheme events to be relevant in this respect: Bright Ruby's immediate transfer of Hotel assets to a trust and winding up of AHA demonstrated “it was not an attractive component of the transaction from the perspective of the buyer” (at [319]).  Importantly, Bright Ruby had informed Hilton Group before the sale that it would not retain AHA, would transfer the Hotel assets to a trust structure, and would wind up AHA, which it did immediately after the sale.  In 2022, Bright Ruby on-sold the Hotel to another third party by way of an asset sale.
• The Scheme was recommended to the Hilton Group’s investment committee as the chosen transactional form “[f]or tax reasons”, with the investment committee memorandum (IC memorandum) further describing the transaction as “an excellent opportunity to exit an owned asset in a tax-efficient manner” and noting “tax structuring provides for minimal tax leakage”. While her Honour noted that the statement of a tax purpose cannot be used in substitution for the objective inquiry into the requisite purpose, the absence of the professed commercial rationale for the structure of the Scheme from the contemporaneous documents, in particular the IC memorandum, undermined that rationale (at [321]–[325]).

Finding purpose after PepsiCo: comparing Hilton and Hicks

Central to the purpose finding is the reasoning that Hilton Group's strong bargaining position - not the chosen structure - drove the favourable outcome, so the structural choice must have been tax-driven.  PepsiCo at [204] (citing Commissioner of Taxation v Hart (2004) 217 CLR 216 (Hart) at [64]) cautioned that courts "must be careful to avoid the false dichotomy between a rational commercial decision and obtaining a tax benefit".  The "winning formula" analysis provides that the commercial outcome was achievable without the chosen structure, so it must be concluded that the choice must be attributable to tax.  Yet as Hart recognised, a taxpayer may choose between commercially rational alternatives for tax reasons without attracting Part IVA.  The question under s 177D is whether the dominant purpose was to obtain a tax benefit, not whether the same outcome could have been achieved differently.

The Full Court in Hicks stated that "the bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies" (at [217]), and that "the fact that a transaction is entered following the receipt of tax advice or the fact that the advice refers to 'no adverse tax consequences' does not of itself support" the dominant purpose conclusion (at [208]).

Further, the factual distinctions Younan J drew with PepsiCo (related-party steps, availability of alternatives) are features present in Hicks, where the Full Court confronted a related-party restructure among commonly controlled entities and an alternative capable of achieving the same result, yet found no dominant tax purpose.

The practical implication of the "winning formula" reasoning is that the stronger a taxpayer's commercial position, the harder it becomes to justify a particular structural choice.  In PepsiCo, a pre-existing commercial model weighed against the purpose finding (at [230]).  In Hicks, the taxpayers' lack of alternatives insulated them (at [234]).  In Hilton, having choices was treated as evidence of a tax purpose.  Does it now mean that a taxpayer with options is penalised for making a tax-efficient choice, while a taxpayer with no options escapes scrutiny?

What this means for taxpayers

Subject to the finding of a higher Court on appeal, the decision in Hilton has the following implications for taxpayers:

Conclusion

Hilton is a significant decision in the continuing development of Part IVA jurisprudence.  It is one of the first decisions to apply the PepsiCo framework in full, and it demonstrates that the post-PepsiCo landscape remains challenging for taxpayers involved in complex, multi-step transactions where the chosen structure generates 'transactional friction' that is not adequately explained by commercial objectives.

Given the significance of the issues – in particular, whether there can be multiple alternative postulates provided each meets the threshold of being ‘reasonable’ and the determination that an alternative postulate which is itself a Part IVA scheme cannot be used as a comparator - and the quantum of tax in dispute, we expect the decision to be appealed.