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In the world of Small to Medium Enterprise (SME) groups, operational convenience often trumps legal formality. It is common to see intra-group charges, management fees, and asset-use payments handled via simple journal entries or ‘handshake’ agreements. However, the recent decision in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 serves as a stark warning: the Australian Taxation Office (ATO) and the courts are increasingly intolerant of informal arrangements.
If your group relies on inferred agreements or ‘the way we’ve always done it’, this case suggests you are sitting on a significant tax risk.
A Brief Overview: The Case of S.N.A Group
The case centred on two entities within a corporate group that underwent a restructure. Initially, these taxpayers operated under formal, written agreements to pay service fees to related trusts for the use of specific business assets.
The trouble began when those formal agreements expired.
Despite the paperwork ending, the taxpayers continued to use the trust assets and continued to make substantial payments to the trustees, categorising them as deductible service fees. The taxpayers argued that even without a current written contract, there was an ‘inferred’ agreement - a mutual understanding that they would continue to pay a fair and reasonable fee for the ongoing use of the assets.
The Verdict: No Paperwork, No Deduction
The Full Federal Court ultimately sided with the Commissioner of Taxation. The Court held that there was insufficient evidence of an ‘objective manifestation of mutual assent’. In simpler terms, the parties couldn’t prove they had entered a legally binding contract simply because money had changed hands.
Because the taxpayers could not prove a legal obligation to pay those specific amounts, the ‘service fees’ were deemed non-deductible. The court emphasised that for a deduction to be valid under section 8-1 of the Income Tax Assessment Act 1997, there generally needs to be a clear nexus between the outgoing and the production of assessable income - a nexus that is difficult to prove when the legal basis for the payment is a ‘vague understanding’.
Key Takeaways for SMEs
The S.N.A Group decision highlights several critical lessons for business owners and their advisors:
1. Inferred Agreements are High-Risk
You cannot rely on the ‘conduct of the parties’ to prove a contract exists for tax purposes. While a court might occasionally infer a contract in a commercial dispute, the evidentiary burden in a tax audit is much higher. If the ATO challenges a deduction, the onus is on the taxpayer to prove the liability existed.
2. The Expiry Date Matters
The taxpayers in this case had a written agreement at one point. The failure was not updating or renewing that documentation once it lapsed. SME groups must proactively review the ‘sunset clauses’ in their intra-group Service Fee Agreements (‘SFA’s’).
3. Contemporaneous Documentation is Non-Negotiable
The Court looked for evidence created at the time the fees were decided. Retrospective explanations or ‘reconstructions’ of what the parties intended are rarely successful. Documentation must be contemporaneous i.e. it is created at the time the transaction or agreement occurs.
4. "Fair and Reasonable" is Not a Contractual Term
The taxpayers argued they intended to pay a ‘fair and reasonable’ fee. The Court found this too vague to constitute an enforceable obligation. A robust SFA should clearly outline the scope of services, the specific assets involved, and the precise methodology for calculating the fee (e.g., cost-plus or market rate).
A Timely Reminder: Act Before Year-End
As we approach the end of the financial year, the S.N.A Group case is a timely reminder for SME group members and advisors to review their related-party arrangements.
Steps to take now:
- Review Intra-group Charges: Identify all management fees, service fees, or rent being paid within the group.
- Check the Paperwork: Ensure there is a current, signed Service Fee Agreement or Lease for every payment.
- Verify Terms: Ensure the payments being made actually match the terms written in the agreement.
- Minute Everything: Document board resolutions that approve the payment of these fees, referencing the commercial benefit to the paying entity.
Conclusion
The S.N.A Group decision confirms that the ‘SME tax shield’ - the idea that informal group dealings are beneath the ATO’s notice, is a myth. In the current compliance environment, a lack of formal documentation is an open invitation for the ATO to disallow deductions and apply penalties.
Don't leave your group’s tax position to inference. Putting clear, written agreements in place today is the only way to ensure your deductions stand up to scrutiny tomorrow.
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