We have said it before and it bears saying again – documentation is important.
It is common practice for corporate groups including family businesses, professional firms, and medical practices to provide different services to each other to allow the overall group to carry on its operations. For example, a dedicated manufacturing entity might sell its goods to the group’s retail entity, or a medical practice may hire its staff and lease its equipment from related service trusts. It is critical, to avoid extra taxation in the group, that the retail entity or medical practice be able to claim a deduction for the goods and services that it is receiving.
Income Tax Assessment Act 1997 (Cth) makes clear that deductions are only allowed when the expense is incurred in gaining or producing the income. In other words, there must be a clear connection with the outgoing and the entity gaining its income.
Generally, groups will enter into ‘inter-entity service agreements’ to evidence the clear link between the goods and services that are being supplied between the entities and the payments that are also flowing through the group.
However, the Courts have recently clarified the extent to which you have to prove that the inter-entity service agreements are connected to the flow of money and goods/services. Particularly, the recent Full Federal Court decision in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 has drawn the line clearly for business groups operating through related entities that tax deductions cannot be claimed where you cannot establish the link between the outgoing and the receipt of income.
The facts
As a brief background:
- The Taxpayers were two companies that formed part of a Queensland family-owned real estate group called the Coronis Group, which had been structured into several companies and trusts performing different roles.
- The Taxpayers conducted the day-to-day trading activities of the real estate business (dealing with clients, selling property, managing rental portfolios). However, they did not own many of the key assets needed to operate the business. Important business assets were deliberately held by separate related trusts within the group.
- Both Taxpayers made tax deduction claims under section 8-1 of the Income Tax Assessment Act 1997 (Cth) for annual ‘service fees’ paid to related entities for the use of certain assets and the provision of ‘expertise’.
- Written agreements did exist to govern this relationship, but the agreements had long since expired. However, the Taxpayers continued to make payments and claim deductions for the service fees on what they considered a ‘fair and reasonable basis’ in each year, despite the expired contracts.
- At first the Court accepted the service fees could be deductible, despite the imperfect documentation and expired agreements – the contractual liabilities could be inferred through the parties’ conduct.
- Now on appeal, the Full Federal Court have since sided with the Commissioner of Taxation and overturned the original decision.
Do the Taxpayers feel familiar to you? This is a common scenario for many small and family businesses. Inter-entity service agreements are considered set and forget, and as far as everyone’s conduct goes, business is still running as usual.
The Full Federal Court’s findings: no contract, no deductions
Ultimately, the Court found that that they were unable to find a clear link between the payments that were being made by the Taxpayers and the provision of goods and services by the related entities.
The expired documentation meant that the previous contractual arrangements had come to an end, and the Group had to prove that that there was an implied contract for the provision of goods and services and that they had made the payments for those goods and services.
Ultimately, the Court reached the view that there was no implied contract for the following reasons:
- Documentation and evidence about how the payment was connected to the supply of goods/services was imperfect, there were no “outward manifestation by the common directors of the existence of agreements” which established the Taxpayers requested services or agreed to pay the service fee.
- Consistency was lacking in amount and timing of payments, which meant no annual contractual obligation to pay ‘service fees’ was established.
- Continuing to supply the goods/services will not be sufficient to infer a binding contract in and of itself. There must be “mutual assent to contract on clear identifiable terms”.
What you need to do from here
This decision matters because the structure used in the case is extremely common in Australian private groups. The case highlights the legal and evidentiary risks if those arrangements are not properly documented.
This raises important questions for groups. When was the last time your business group reviewed your inter-entity service agreements? Have you been documenting any of your service fees? Are you claiming tax deductions on these service fees? If your answer is “I’m not sure” then it might be about time to have a look.
There is a fair chance that those agreements have expired, or the arrangements have changed significantly since they were entered.
You will need to:
- Review your existing agreements and make sure they clearly prove mutual obligations;
- Regularly conduct these reviews to make sure you are still complying with the terms of the contract; and
- Update the agreements where they are expired or inconsistent with practical arrangements.
Getting this wrong can mean losing your deductions and doubling up on the amount of tax paid in the group, along with hefty penalties and interest.
If you are now realising it has been years since the service agreements have been looked at, we are here to help guide you through the next steps. Be warned, just having one party ‘minute’ the transaction does not create a ‘legal agreement’ between the entities that will be accepted by the Tax Man and other third parties. All the entities need to be formally involved. These transactions can be recorded quite easily, but you need to ensure the relevant terms are included to anticipate things that may eventuate down the track.
With the end of the financial year approaching, you can give us a call at 1300 654 590 or email us to talk about your options.
The information contained in this post is current at the date of editing – 16 March 2026.
