The Full Court of the Federal Court of Australia has found that two taxpayer companies could not deduct intra-group payments purportedly paid as service fees for use of related-party trust assets. The deductions were disallowed because the taxpayers were unable to prove the existence of the inferred contracts under which those payments were allegedly made.
In the recent decision of Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 (SNA Group), the Full Court of the Federal Court of Australia rejected the argument that certain intra-group payments were deductible. This overturned an earlier decision of a single Federal Court judge. The Full Court held that, notwithstanding the directors’ subjective beliefs, the evidence did not establish an objective manifestation of mutual assent by the taxpayers and the related companies to contract on certain terms.
The Full Court’s judgment reaffirms the centrality of the objective theory of contract in Australian law. Subjective beliefs - even by individuals who control all parties to a purported contract - are insufficient to establish the existence and terms of that contract. For taxpayers operating with the informality often seen in private groups, periodic review of arrangements can help to ensure that those arrangements are and remain sufficiently documented.
Background to Commissioner of Taxation v SNA Group
The dispute in SNA Group arose out of arrangements between four entities: two taxpayer companies and two related-party trustee companies. Two individuals were directors of all four companies. The taxpayer companies were operating entities in the Coronis real estate group. As part of their businesses they used certain intellectual property and rent roll assets held on trust by the trustee companies.
Between 2005 and 2019, certain payments were made by the taxpayer companies to the trustees. From 2005 to 2015, there were written agreements in place between the entities, under which the taxpayers were required to pay the trustees certain fees for their use of the trust assets. The written agreements came to an end in mid-2015, but the taxpayers continued to use the trust assets and make payments to the trustees. Objective contemporaneous materials evidencing any post-2015 terms (e.g. board minutes, emails between directors and/or correspondence setting a fee methodology) became essential to establish the basis on which the payments were made.
The taxpayers claimed deductions for these payments on the basis that they were fees for the use of the trust assets. The Commissioner, however, disallowed the deductions for the payments made during the tax years ending 30 June 2016 to 30 June 2019, being the period after the written agreements had come to an end. The taxpayers appealed to the Federal Court.
Although the primary judge (Logan J) rejected the taxpayers’ asserted ‘partly written, partly by conduct’ agreements for the relevant period, his Honour found that there was, in the circumstances, an ‘inescapable’ inference that the taxpayers were contractually liable to pay a service fee for their use of the assets. The payments were found to have been made according to that liability, and so were allowable deductions.
Decision on appeal
The Commissioner appealed to the Full Court. He argued that his Honour erred in finding an inferred contractual liability to pay the trustees a service fee for use of the trust assets after the written agreements had come to an end. The Commissioner argued that even if there were such a liability, the payments by the taxpayers were not referrable to the inferred contracts. The onus rested on the taxpayers to adduce objective evidence of any post-2015 terms, a burden the Full Court ultimately found had not been discharged.
The Full Court (McElwaine, Feutrill and Wheatley JJ) undertook a real review of the facts found and inferences drawn. They examined whether the conduct of the entities objectively communicated mutual assent to identifiable terms, and was not merely consistent with the existence of such arrangements. Upon doing so, their Honours agreed with the Commissioner’s primary argument, holding that the evidence did not show that the companies assented to be bound on terms requiring the taxpayers to pay a fair and reasonable fee using the trust assets. In view of this conclusion, the alternative argument did not need to be resolved.
Their Honours stressed the importance of the objective theory of contract: the ‘formation of a contract and identification of its terms turns upon what the words and conduct of the putative contracting parties would be reasonably understood to have conveyed to a reasonably person in the position of those parties, not upon the actual subjective intention of those parties’.
While contracts may be inferred from acts and conduct, courts will rarely do so. This is because it is difficult to prove that a reasonable person in the position of the parties would understand from their conduct that there was a mutual assent to contract on clear, identifiable terms. It does not suffice that the conduct supposedly proving the existence of the contract is consistent with the existence and terms of the asserted agreement; the evidence must ‘positively indicate that both parties considered themselves bound by that agreement’.
Applying these principles to the arrangements of the Coronis entities, the Full Court found:
No outward communication: There was no objective communication indicating that the trustees expected to be paid a ‘fair and reasonable’ fee for the use of the trust assets, or that the taxpayers accepted any liability to pay such fee.
Silence with advisors: There was no evidence that the taxpayers’ and trustees’ directors had communicated with their internal bookkeeper or external accountant that the taxpayers were subject to any liability to pay a fee for using the trust assets or for any other services. That silence cut against the inference of binding terms.
No consistent methodology: The contemporaneous conduct of the putative parties was not consistent with payments made under a pre-existing agreement or understanding. The actual year-to-year payments were ‘incoherent’, ‘inconsistent’ and lacked any discernible calculation method.
Records built on a false premise: Ledger labels and financial statements did not provide evidence of any new or ongoing contract. Rather, they were prepared on the mistaken assumption that the 2005 agreements continued.
Taken together, a reasonable person in the position of the taxpayers and the trustee companies could not conclude that the taxpayers were subject to a contractual liability to pay a service fee for the use of the trust assets.
In the result, the appeal from the primary judge’s orders was allowed, and the taxpayers’ taxation appeals were dismissed. It is presently unknown whether the taxpayers will seek special leave to appeal to the High Court.
Key takeaways from Commissioner of Taxation v SNA Group
The Full Court’s decision did not turn on complex statutory interpretation or a new legal principle. Rather, it turned on the inferences properly open on the evidence before the Court. The outcome illustrates that, without a binding obligation supported by objective contemporaneous communications, a payment may not be ‘incurred’ for the purpose of Income Tax Assessment Act 1997 (Cth) s 8-1. Courts continue to prioritise objective communications, particularly in domestic related-party settings.
Taxpayers seeking to avoid similar findings should ensure that they can provide evidence of the sort that the taxpayers in SNA Group could not: contemporaneous evidence of the parties’ objective intentions. Written and properly executed contracts, while not strictly necessary, remain the surest way to establish such intention. In the (undesirable) event that such arrangements are to be proved by inference rather than expressly, taxpayers should ensure that they prepare and retain other forms of contemporaneous documentary evidence confirming the objective existence of contractual arrangements. This may include interparty correspondence, correspondence with advisers, and invoices. Keeping contemporaneous documentation of the substance of the arrangement is critical in any event, as both form and substance of an arrangement will attract scrutiny from a tax authority.
Consistency and clarity in contemporaneous materials and other record-keeping is also crucial. Just as issues may arise where the underlying substance of a transaction does not align with its purported form, it will be difficult to substantiate the existence of an inferred arrangement where the parties have failed to communicate a consistent understanding of its nature. For example, in respect of a loan agreement at a particular interest rate, the arrangement should be documented and consistently referred to by the parties as such in order to ensure that advances of principal can be readily identified, and future repayments can be objectively understood as containing ascertainable principal and interest components. The result in SNA Group may have been different if the taxpayers could have produced documents that evidenced an objective acceptance by the parties that the taxpayers were liable to pay the trustee companies a certain sum (or an amount calculated by a specific formula) for their use of the trust assets.
Moreover, SNA Group highlights the need for taxpayers to work with their advisers, not only to review their existing arrangements, but to monitor them routinely on a go-forward basis. When ongoing arrangements come to an end, it may be convenient for taxpayers - in particular, members of a private group interacting with other group members - to continue to act as though they remain on foot. Resorting to this sort of informality, however, risks exposure to findings of the sort made in SNA Group. Parties should be mindful of the Court’s insistence that their intentions be ascertained objectively, and document those intentions accordingly.
Intersection of tax law and general law
The Honourable William Gummow AC, former Justice of the High Court of Australia, has written of the ‘imperative need for tax lawyers… to maintain a well-grounded working knowledge of the general law as it applies from time to time and operates with tax law in its most specific sense’.1 The Full Court’s judgment in SNA Group, in which the availability of deductions was found to turn on an application of the objective theory of contract, is a powerful reminder that this advice remains relevant.
The strongest outcomes are achieved where rigorous tax analysis is paired with early, evidence-based scrutiny of the relevant general law issues, including contract formation, terms and objective manifestation, alongside coordinated input from specialist commercial litigators.
