Where service fee arrangements can go wrong: The $19m tax lesson

For many closely held business groups, it’s common for fees to be charged between related entities for the provision of services – use of intellectual property, centralised systems, etc. It’s also common for these arrangements to be based on a shared understanding over time rather than by defined formal agreements.

For one real estate group, the lack of legally enforceable contractual obligations has led to an unhappy outcome with $19m in tax deductions denied. The case serves as a warning that for tax purposes, just because an intergroup payment was made, doesn’t mean you can claim it as a tax deduction.

Background

The Coronis Group is a well-known Queensland real estate business, comprised of a traditional real estate agent sales business ATPR Pty Ltd (ATPR), and SNA Group Pty Ltd (SNA), operating the real estate management business.

In 2005 the group restructured, creating two unit trusts with corporate trustees to hold the group’s key assets – one held the intellectual property and the Coronis brand, the other the group's rent roll with a substantial value.

Under formal written agreements dated 1 July 2005, the operating companies were obliged to pay fees to the trustee companies for the use of the Coronis assets . The original agreements expired in 2015 but the payment continued under the contract “on an annual basis as agreed”. In dispute was the tax deductibility of service fees paid by ATPR and SNA to the corporate trustee companies for the period from 2015 to 2019.

The fee transfers were variously coded as ‘service fees’, ‘group franchise fees’, ‘finance charges reimbursed’ and similar labels in the MYOB accounting system. While the fee amount paid to ATPR and SNA was not excessive and commercially reasonable, there was a lack of clarity about what the fees actually covered. Some payments labelled as service fees, were found to be non-deductible cash transfers and loans, reimbursements for the bank loan financing costs, reimbursements for wages, etc. How the service fee was formulated and its representation in the financial statements and tax return also did not match the amounts paid and there were no invoices raised by the corporate trustees.

The overall picture was not of a coherent annual fee charged for the use of identifiable trust assets.

In November 2021, the Commissioner issued amended assessments to SNR and ATPR for the 2015 to 2019 income years, denying deductions for close to $19 million in service fees paid. The taxpayer objected and the case went to the Federal Court in 2025. The court found in favour of the taxpayer on the basis that “perfection in documentation does not dictate eligibility to a deduction” and the existence of a contract was “inferred” from the conduct of the parties involved.

The Tax Commissioner however was not satisfied and appealed. In February 2026, the Full Federal Court allowed the Tax Commissioner’s appeal finding:

• There was no objective communication of mutual assent to create a binding obligation to pay service fees after the written agreements ended i.e., no documentation to support SNA’s and ATPR’s service fee obligation or their acceptance of it.
• There was no direct evidence of communications (including between common directors) establishing agreed terms for the payment of service fees each year.
• There was no coherence or consistency to the payments made – the fact that payments were within an arm’s length range was not sufficient evidence of the existence of a contract.
• There was no evidence that a contractual liability to pay service fees existed.

As a result, because there was no evidence of a contractual obligation for SNA and ATPR to pay a service fee - they were not liable - the fee was not “incurred” and therefore not deductible for tax purposes.

What needs to be in place for a service fee to be deductible?

For an expense to be tax deductible a liability must exist for it to be incurred. The court emphasised that informal arrangements, even if commercially valid, cannot substitute for objective mutual consent and contractual obligations.

The decision highlights a significant compliance risk for many closely held and family business groups that have informal intragroup service arrangements. For example, the same “directing mind”, e.g., same directors for the group as a whole make decisions for the group without proper documentation of the contractual obligations on each entity involved, or the group continues to rely on written agreements that have expired and have not been replaced or extended by clear, enforceable arrangements.

There will be a high risk that payments made without documentary evidence of a legally binding obligation will not be deductible, even where:

• services were actually provided and received;
• the amount paid was commercially reasonable or benchmarked; and
• the arrangement had genuine commercial substance.

The decision reinforces that mutual consent must be objectively evidenced by documentation. Without current evidence of mutual assent to create binding obligations, intragroup payments will not be deductible for tax purposes.

What to do next

The ATO is likely to rely on this court decision for compliance activity involving intragroup service fees, in particular, within closely held and private business groups where practice governance and documentation might be loose. The ATO can deny deductions simply because no binding contractual liability existed in the relevant income year, even if the fees charged were commercially reasonable.

Here’s what to review:

• Review intragroup arrangements - Identify arrangement under which one entity charges another - service fees, IP licences, management charges, etc.
• Confirm agreements in place and current - Confirm whether a current agreement is in place that creates a liability for fees i.e., documentation should exist during the relevant income year (not retrospectively), including service contracts, written correspondence (emails, signed minutes etc.,) confirming the terms of the arrangements. Replace or update any expired agreements.
• Arrangements need to be by agreement of the parties - All parties to the agreement need to show that they are bound by the arrangement (i.e., not a direction from the same “directing mind”).
• Administration and consistency of intragroup payments – Ensure the calculation of the fees is in line with the agreement and the accounting treatment is consistent with contractual terms – accounting records should reflect not substitute legal obligations. This includes ensuring invoices are issued for fees and charges. Significant variations of service charges from year to year without a clear commercial rationale will increase the ATO scrutiny.

Need more?

Reach out to Hayes Knight’s team to review your intragroup arrangements, intragroup charge policy setting, or practice governance.

t +61 2 9221 6666
e linda.jing@hayesknight.com.au

Reference:

• Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 – Feb 2026
• S.N.A Group Pty Ltd v Commissioner of Taxation [2025] FCA 240 – March 2025