ATO increases audit scrutiny of related-party payments in Australia.
A recent Australian court decision has reinforced the importance of clear contractual arrangements when claiming tax deductions for related-party payments. The ruling highlights the evidentiary risks associated with informal or undocumented arrangements and signals the level of scrutiny revenue authorities may apply when reviewing deductions.
The S.N.A Group case
In Commissioner of Taxation v S.N.A Group Pty Ltd (2026) FCAFC 10, the Full Federal Court of Australia allowed the Commissioner’s appeal in a case concerning the deductibility of related-party service fees.
The dispute involved two Queensland real estate companies within the Coronis Group that had claimed deductions exceeding AUD 19 million for service fees paid to related trusts for the use of assets and staff. These payments were initially governed by formal written agreements, which expired in 2015. Payments continued after the agreements lapsed and were treated as deductible service fees in subsequent income years. The Commissioner of Taxation argued that the deductions should be denied because there was no legally binding obligation requiring payment of the fees during the relevant income years. Without such an obligation, the amounts could not be considered “incurred” for income tax deduction purposes.
At first instance, the Court accepted that a contract could be inferred from the parties’ conduct despite the absence of current written agreements. However, on appeal the Full Federal Court reached a different conclusion. The Court found that there was insufficient objective evidence demonstrating mutual assent or clearly defined contractual terms requiring payment once the written agreements had expired. As a result, the Court determined that the taxpayers had not established a presently existing legal liability to pay the fees, and the claimed deductions were denied.
Implications for related-party arrangements
The decision reinforces a key principle in Australian tax law. For an outgoing to be deductible, a taxpayer must demonstrate that a presently existing legal liability has been incurred. A consistent history of payments alone may not be sufficient if there is no clear and enforceable contractual basis supporting those payments. This is particularly relevant for related-party arrangements where documentation may be less formal or regularly updated.
Revenue authorities examining related-party deductions may therefore focus closely on whether there is objective evidence of a binding obligation to pay the amounts claimed as deductions.
Practical considerations for businesses
Businesses operating with related-party service arrangements should review whether their documentation clearly establishes the legal basis for payments. Properly drafted and contemporaneous agreements remain critical in supporting deductions. It is important that documentation is updated to reflect the current terms as agreements could lapse or evolve over time.
The case also serves as a reminder that taxpayers need to be able to demonstrate a presently existing legal liability for an outgoing to be considered incurred for deduction purposes. A history of payments alone may not establish deductibility if there is no clear contractual foundation, and informal or undocumented related-party arrangements may present significant evidentiary risk under revenue authority scrutiny.
In some circumstances, groups may also consider whether forming a consolidated tax group for income tax purposes or a GST group for goods and services tax purposes could reduce the risks associated with intercompany charges.
