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The Federal Court’s decision provides critical judicial guidance on the deductibility of inter-entity service fees, especially within commonly controlled businesses.
The dispute arose from a Queensland-based family real estate business – known as the Coronis Group – operated by a father and son team. Over time, the group evolved into a network of companies and trusts, each with distinct functions. Between 2015 and 2019, the operating entities in the group paid substantial service fees to the asset-holding entities for access to rent rolls, branding, and human capital. One of the main issues in this case were that the fees were not well documented. The taxpayer claimed the fees as general deductions under s 8-1 ITAA 1997.
The Commissioner disallowed the deductions, asserting that the recharge lacked sufficient documentation to prove that the expenses were “incurred”, that the arrangement lacked commercial justification, and that the arrangements were designed to shift profits within the group.
Logan J ruled in favour of S.N.A Group, setting aside the Commissioner’s arguments and confirming that the recharge expenses were deductible under s 8-1. Relevantly, the Court found that perfection in documentation does not dictate eligibility to a deduction under s8-1 of the ITAA 1997. In other words, the lack of formal documentation did not negate the existence of genuine services rendered between the Coronis entities that could be recharged and, ultimately, the recharge expenses deductible to the recipient of the services.
Additionally, Logan J – quoting the decision in Chiodo v Silk Contract Logistics [2023] FCA 1047, at [8]-[9] – states that where there is no written contract, and no evidence of a particular conversation in which a contract was formed orally, evidence of the parties’ conduct must necessarily be considered in order to draw inferences as to whether the meeting of minds necessary to create a contract has occurred and what obligations have thereby been undertaken. This supports a substance over form approach. In this case, the testimony of the relevant parties, accounting records, and other peripheral documentation demonstrated the existence of a contract or agreement between the relevant entities in the group.
Finally, Logan J – in obiter – reinforced the need for the Commissioner to approach audits with a commercial understanding of the business (i.e. in this context, as a Small or Medium Enterprise (“SME”)).
This case has significant implications for taxpayers with inter-group recharges that are not formally documented, including:
1. Documentation still matters – but substance is key: While formal agreements are helpful (and still recommended as best practice), courts may accept informal arrangements if supported by consistent conduct and commercial rationale.
2. ATO expectations v legal standards: The decision suggests that the ATO’s expectations around documentation and benchmarking may exceed what is legally required to claim a deduction under s8-1.
3. Review of existing structures is recommended: Taxpayers should review existing inter-group arrangements to ensure they reflect genuine commercial activity and are supported by operational evidence.
4. Risk of audit remains: Despite the favourable ruling, taxpayers should expect continued scrutiny from the ATO, particularly where large inter-entity fees are involved.
The Court placed significant weight on the fact that the Coronis Group operated as a family-run SME, with the owners having a longstanding relationship with its tax adviser. In doing so, it acknowledged the practical realities faced by such businesses, including informal record-keeping and a reliance on professional advice. Nonetheless, we consider the legal reasoning adopted by the Court is not confined to SME contexts and may have broader application to larger or more complex corporate structures, provided similar commercial realities are present.
S.N.A Group v Commissioner provides a timely reminder that tax law must be applied with commercial realism. For family groups and SMEs, the decision offers reassurance that genuine inter-entity arrangements can withstand scrutiny, even in the absence of perfect documentation.
We note that the ATO have appealed this decision – so keep a lookout for a follow-up article.
