Is That Related Party Charge Really Tax Deductible? Reflections from SNA Group (Full Federal Court)

Service fees or other charges between fully-related or semi-related parties are not uncommon. It is also not uncommon for those arrangements to be not formally documented, and with charges to be worked out after the end of the income year.

In Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10, the Court overturned a first instance decision that had allowed substantial deductions for “service fees” said to arise under inferred agreements.

The Full Federal Court has delivered an important decision for business groups operating through related entities, reinforcing that a legal obligation must exist for a charge to be deductible, the strict evidentiary threshold required to establish a binding contract by conduct, and the danger in relying on informal arrangements to establish legal obligations.

Background

S.N.A Group Pty Ltd and ATPR Pty Ltd (Taxpayers) were members of a real estate group operating under the “Coronis” brand.

Historically, written agreements governed payments for the use of assets owned by related unit trusts, including the “Coronis” intellectual property and rent roll. Those agreements operated from 2005 until they expired in 2015.

After the agreements expired, the taxpayers continued to use the unit trust assets and made payments to the trustee companies during the income years ended 30 June 2016 to 30 June 2019. The Taxpayers claimed deductions for those payments as “service fees” under section 8-1 of the Income Tax Assessment Act 1997 (Cth).

The Commissioner disallowed the deductions and issued amended assessments and administrative penalties.

At first instance in the Federal Court, Logan J found that although no written contracts were in place after 2015, there was inferred contractual liabilities to pay “fair and reasonable” service fees in each year based on the parties conduct. Logan J treated the payments as “incurred” under enforceable obligations and allowed the deductions. The Commissioner appealed.

Key Issues

The appeal raised two questions:

1.     First, could the Court infer contracts from the related parties’ conduct after the written agreements ended in 2015, on terms that required the Taxpayers to pay a fair and reasonable fee each year for use of the trust assets?

2.     Second, if those contracts existed, did the payments made in the 2016 to 2019 income years relate to that liability?

Key Findings

The Full Federal Court allowed the Commissioner’s appeal.

For an amount to be deductible under section 8-1 during an income year, it is necessary that a loss or outgoing must be “incurred” during that income year. In general, for an amount to be incurred, the taxpayer must be “completely subjected” or “definitively committed” to the liability.

The Court held that the evidence did not support a finding that the Taxpayers and trustees had formed a binding contract in each relevant year that required the Taxpayers to pay a fair and reasonable fee each year for use of the trust assets. In other words, nothing was ‘incurred’ at the relevant times.

The Court held that there was no “outward manifestation by the common directors of the existence of agreements between the tax payers and the trustees.” The Court treated uncommunicated internal intentions of the common directors as irrelevant to contract formation.

The Court rejected reliance on continued use of the assets, continued payments, after year end accounting treatment, and directors approving financial statements that recorded the payments. Those matters did not establish a binding contract by conduct.

The Court also rejected reliance on arm’s length benchmarking. Evidence that the amounts fell within a range considered “fair and reasonable” might inform pricing, but it did not prove whether any contractual liability existed to pay those amounts.

Having found no express or inferred contract under the first issue, the Court did not need to decide whether the payments by the Taxpayers matched any alleged contractual liability under the second issue.

Accordingly, the Court disallowed the Taxpayers’ claimed deductions for those payments under section 8-1.

Takeaways

The Taxpayers common controlling directors the group’s informal practices did not substitute for clear, year-end documentation of mutual obligations.

If your business uses fully related party, semi-related party or intra group fee arrangements:

1.    Document the arrangement in writing before the end of the relevant income year;

2.    Review the arrangements periodically and renew or update for the end of the relevant income year;

3.    The written agreements do not necessarily need to be extensive or detailed, but must evidence mutual obligations;

4.    Do not rely on accounting labels or after yearend financial statements; and

5.    These rules apply to SMEs and private groups as much as they apply to corporate and public groups.

Furthermore, it is expected the ATO will rely on the Courts findings in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC10 in relation to its review of the tax affairs of other private groups (e.g. through the Top 500 private groups tax performance program.

Next 5,000 private groups tax performance program and medium and emerging private groups tax performance program).

To discuss your related party or intra group fee arrangements, or if you are subject to an ATO review on the issue, please contact Velocity Legal’s tax team.