In July 2025, we wrote about the Federal Court’s decision in S.N.A Group Pty Ltd v Commissioner of Taxation [2025] FCA 240, which was widely seen as a ‘commercial reality’ endorsement for inter‑entity service fee arrangements in closely‑held groups – where documentation is known to be imperfect.
The Full Federal Court (the Court) has now allowed the Commissioner’s appeal, overturning the Primary Judge’s decision and emphasising that arm’s length pricing and accounting entries did not prove a pre-existing contractual liability.
Background
The matter involved two corporate taxpayers operating within the Coronis Group, a privately‑owned business that evolved into a network of companies and trusts with different roles (operating entities and asset‑holding/trust entities).
Across earlier years, written agreements existed in respect of fees and/or access to assets/services. The dispute before the courts concerned the taxpayers’ claims for deductions for service fees paid after the written agreements had expired, which the Commissioner disallowed.
Primary decision: taxpayer succeeds
At first instance, Logan J found for the taxpayers, accepting that the service fees could be deductible under s 8‑1 of Income Tax Assessment Act 1997 (Cth) notwithstanding that the documentation was not ‘perfect’.
As we explained in our earlier alert, the Court was prepared to infer contractual arrangements from the commercial realities and parties’ conduct and confirmed that a lack of formal documentation does not automatically prevent a deduction where the outgoings are genuinely incurred in producing assessable income.
Full Federal Court decision: Commissioner succeeds on appeal
On Appeal, the Full Federal Court found in favour of the Commissioner, holding that Logan J’s inference of a contract could not be sustained.
Critically, the Court found there were no outward communications or ‘objective manifestation of mutual assent’ that the taxpayers requested services or agreed to pay the fees.
The Court also noted the payments lacked consistency, which made it difficult to infer an annual contractual obligation to pay ‘service fees’ as such.
In its reasons for judgment, the Full Federal Court stated: “The circumstances in which a contract will be inferred by conduct are rare. That is not a statement of a legal principle, but a reflection of the difficulty, in the absence of a communication of offer and acceptance, of demonstrating to the satisfaction of a court that reasonable people in the position of the parties would understand from their conduct that there was mutual assent to contract on clear identifiable terms.”
Put simply, the Full Court’s approach draws a sharper line than the primary judge regarding the objective evidence that, at the time of payment, there was a legal liability to pay, relevant to whether the outgoing was ‘incurred’ for s 8‑1.
Practical implications for private groups and SMEs
While the primary decision was welcomed for its ‘substance over form’ approach, the appeal outcome suggests that substance still needs to be supported by objective evidence – that is, conduct and circumstances that demonstrate mutual assent to reasonable persons in the parties’ position.
Next steps
If your group uses inter‑entity service fees, management fees, IP licence fees, rent‑roll fees, labour recharges or similar arrangements, we recommend a ‘health check’ focused on evidence of obligation and appropriateness of service fees, etc charged. For example, we can assist with:
- Reviewing your existing agreements to verify that they cover the relevant periods and the charging methodology (including renewals/variations when structures change).
- Reviewing contemporaneous materials showing requests/approvals, scope of services, calculation mechanics and timing (not just journals).
- Examining amounts charged for service fees, etc under the above arrangements and forming a view whether they reflect a market value for the services or other benefits provided. For instance, where the amount charged exceeds a fair market value, the excess may be non-deductible, but will still be assessable income to the charging entity.
- Ensure payments and ledger labels align with the agreement and with what occurred.
- Where documentation is imperfect, identify and preserve alternative objective evidence (emails, board minutes, invoices, benchmarking instructions, contemporaneous calculations) that demonstrates mutual assent, or alternatively fill any documentary gaps (as is best practice).
- Make any other recommendations to better manage the risk of services fees, etc being denied a full or partial deduction.
If you would like to discuss how we can help you manage these risks, please reach out to one of our experts today.
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