Key takeaway
On February 16 2026, the Full Federal Court of Australia unanimously decided in Commissioner of Taxation v S.N.A Group (SNA) that certain intragroup service fees were not tax deductible on the basis that there was no binding contract under which the taxpayer was liable to pay the fees. Where parties seek to infer a contract in the absence of a written agreement, clear contemporaneous evidence must be provided to establish that the legal contract existed. Verbal evidence and accounting entries may not be sufficient to satisfy the courts that a legal contract exists.
The case highlights the importance of adequately documenting intragroup fee arrangements to support the deductibility of the fees, even if such fees are arm’s length and commercial in nature.
Facts
The Coronis Group operated a real estate business and consisted of several corporate entities and trusts. Intragroup “service fees” were charged to two operating corporate entities and those entities claimed a deduction for the fees paid.
Historically, written agreements supported the charging of the service fees to the two operating entities. Those agreements expired in 2015, but the operating entities continued making payments. These payments were recorded in the management accounts under various descriptions.
The commissioner disallowed the deductions claimed on those payments on the basis that the taxpayers had not established there was any contractual liability to pay such amounts once the historical written agreements had lapsed.
In the primary decision, Logan J accepted that contracts could be inferred from the taxpayer's conduct and allowed the deductions. On appeal, the Full Court unanimously overturned the primary decision. The key issue it considered was whether a contract could be inferred from the conduct of the parties, obliging the taxpayers to pay service fees on those terms.
The Full Court unanimously held that no enforceable contract could be inferred due to the lack of objective evidence.
Claiming deductions in the absence of a written contract
Under Section 8-1 of the Income Tax Assessment Act (Cth), a taxpayer may claim a deduction for a loss or outgoing that was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income.
In SNA, the key issue was whether the service fee payments were incurred pursuant to a present legal obligation to pay under inferred contracts between the parties (in the absence of a written agreement).
Under contract law principles, evidence of “objective manifestation of mutual assent” was required to infer the existence of a legal contract. This required objective evidence to be produced. The court emphasised that “[i]n the context of inferring a contract from conduct in the light of surrounding circumstances it is important to keep in mind that the ultimate question remains what would be objectively communicated to people in the position of the parties to the putative contract.”
Applying those principles, the court identified fundamental evidentiary deficiencies in the taxpayers’ submissions. Based on the evidence presented, the court held that no contract could be inferred as:
There was no evidence of communication by the relevant directors of each entity that there was any expectation or obligation to pay a fair and reasonable fee for the relevant services;
The calculation of the service fees was based on a benchmark that was not able to be clearly evidenced;
Accounting entries of themselves are not conclusive evidence that there was a legal obligation to make the relevant payments; and
No tax invoices were able to be produced as evidence, although goods and services tax amounts had been charged on the fees.
The failure to establish the existence of a contractual liability was fatal to the taxpayers’ deduction claims. Without sufficient evidence that the payments were incurred pursuant to a binding legal obligation, the taxpayers could not demonstrate that the outgoings were incurred in gaining or producing assessable income within the meaning of Section 8‑1.
Implications for related-party transactions
As best practice, taxpayers should ensure that all related-party transactions are clearly documented in writing before the payment has been made to evidence a contractual liability to pay. This does not necessarily require a long-form written contract that would be used between independent parties – a short-form contract or deed may be sufficient.
Where a written agreement is not practical, the parties must ensure that there is sufficient contemporaneous evidence for the parties to be legally bound by the arrangements and the liability to make any payments, noting that accounting entries of themselves may not be sufficient. Following the decision in SNA, it is even more important that such evidence be maintained for related-party transactions, otherwise there is a real risk that the fees paid under such arrangements may not be deductible.
