A recent decision of the Full Federal Court provides an important reminder for corporate groups and closely-held businesses that where related-party payments are made, the underlying legal arrangements should be clearly documented.
In Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10, the Court allowed the Commissioner’s appeal and disallowed more than $19 million in claimed service-fee deductions.
What happened?
S.N.A Group Pty Ltd and ATPR Pty Ltd operated real estate businesses within a broader corporate structure.
Historically, formal service agreements had existed between the operating entities and related trusts that provided staff and other resources. After those agreements expired, the parties continued operating in much the same way. Payments continued to be made to the trusts for the use of staff and assets, and those payments were claimed as deductions under section 8-1 of the Income Tax Assessment Act 1997.
The Commissioner challenged those deductions on the basis that the payments had not been “incurred” in the relevant legal sense, arguing there was no enforceable contractual obligation requiring the operating entities to make those payments.
At first instance, the Federal Court accepted that a contractual arrangement could be inferred from the conduct of the parties. However, the Full Federal Court took a different view. It held that the available evidence did not demonstrate the objective mutual agreement required to establish a binding contract after the original agreements had expired. As a result, the deductions were denied.
Why does this matter for business owners and corporate groups?
The decision does not suggest that related-party service arrangements are problematic in themselves. In many corporate groups they are entirely legitimate and commercially sensible. What the decision does emphasise, however, is the importance of ensuring those arrangements are properly documented and legally enforceable. Where that foundation is absent, the tax treatment of the payments may be open to challenge.
Several practical points emerge from the decision.
- Payments alone may not establish a deductible obligation
For an expense to be deductible under section 8-1, it must be “incurred” in the relevant income year. In legal terms, this generally requires the taxpayer to be under a presently existing legal obligation to pay the amount. While payments may have been made in practice, the Court indicated that this alone may not be sufficient to demonstrate that such an obligation existed. - Informal internal arrangements can create risk
Many privately owned groups operate with shared staff, intellectual property, office space or management services between related entities. These arrangements often evolve organically as the business grows. However, without clear documentation setting out the terms of the arrangement, courts may be reluctant to infer the existence of a binding contract. The decision illustrates how the absence of formal documentation can create uncertainty where the tax treatment of those arrangements is later scrutinised. - Expired agreements can easily be overlooked
A key feature of the case was that written agreements had previously existed but had expired without being renewed.
The parties continued operating as they had before, but the Court ultimately found that this continuation did not, in itself, establish a legally enforceable arrangement. For many businesses, this scenario is not unusual. Agreements entered into during earlier stages of a business may quietly lapse as operations expand or change. - Objective evidence remains critical
The Court also emphasised that the existence of a contract must be assessed objectively. Even where directors or advisers believed an arrangement was in place, the Court will look for external evidence demonstrating agreement on the relevant terms.
Examples of this may include written agreements, board minutes, correspondence confirming terms, or clear evidence of how fees are calculated and agreed.
Practical considerations for businesses
For businesses operating within group structures, the decision offers a useful prompt to review internal arrangements.
In particular, it may be worthwhile to:
- Review existing service, management and licence agreements between related entities
- Confirm that any agreements remain current and reflect how the group actually operates
- Ensure key terms, including services provided and fee calculation methods are clearly documented
- Consider whether internal arrangements are supported by appropriate governance records
Taking these steps can help ensure that commercial arrangements within a group are supported by an appropriate legal framework.
Final thoughts
The S.N.A Group decision ultimately reinforces a familiar principle that commercial arrangements and legal documentation should move together. Where related-party payments form part of a group’s structure, ensuring that those arrangements are properly documented can provide greater certainty, both from a legal perspective and in relation to their tax treatment.
If you would like guidance on reviewing or formalising intercompany arrangements within your group, our team at Hitch would be happy to assist.