Informality of family & private group arrangements
It is very common for family and private groups to have informal intragroup arrangements – with related companies and trusts often providing services or licensing assets to each another – without written agreements that document the arrangements between them.
As will be explained in this Alert, owing to the recent decision in Cmmr of Taxation v. S.N.A. Group Pty Ltd (SNA Group),* family and private groups may be at risk of losing entitlement to tax deductions for intragroup payments, unless they formalise such arrangements.
Although binding contracts do not only arise as a result of formal “offer and acceptance” …
In determining whether a contract exists between related entities, Courts have long-accepted that legally binding contracts do not only arise as a result of formal “offer and acceptance” but also where related parties have conducted their activities in a way that demonstrates mutual assent. In such circumstances, a contract may be treated as being in place, even where documentation is incomplete (or non-existent).
… informality may have its limits
However, the recent decision in the SNA Group case confirms that informality has its limits.
In SNA Group, the Full Federal Court disallowed deductions – claimed by the taxpayer for fees paid to a related trust for the use of valuable assets – because a binding contract could not be inferred between the entities, based on their conduct. The Full Court therefore reversed the Primary Judge’s decision that a contract for the payment of service fees could be inferred from the parties’ conduct and surrounding circumstances of the case.
At its core, the appeal turned on the extent to which the Full Court could, and would, infer the existence of a contract.
The Primary Judge had emphasised the need to consider the “practical commercial reality” of the arrangements, noting:**
The cases I have cited above … about inferring the existence of contracts in circumstances of great informality in business show that the informality of relationships between entities … are hardly unique.
While accepting that “perfection in documentation does not dictate eligibility to a [tax] deduction”, the Primary Judge made clear:***
… great injustices can be visited upon those in small business or who have retained those habits, if the Commissioner does not bring to bear at the audit stage an understanding grounded in the realities of commerce.
Unfortunately, the Full Court placed greater weight on traditional contractual concepts, such as “offer and acceptance” and the need for real evidence of an intention to create legal obligations.
The Full Court therefore held that although service fees were paid, and services were provided, that was not enough to establish there was a legally enforceable agreement between the related parties for the payment of service fees and therefore that a deduction was allowable.
Call to action: Need to review arrangements and put written agreements into place
The SNA Group case has significant and potentially far-reaching implications for private groups that have relied on accounting entries to support deductions for payments to related companies or trusts or have operated on the basis of informal, unwritten agreements.
To reduce the risk of the ATO disallowing tax deductions claimed for related party payments, clients should take immediate steps to ensure intragroup arrangements are clearly documented – including clear terms governing the provision of services and the obligation to pay for those services.
This is particularly important where entities have the same “controlling mind”, as it appears the ATO now has authority to examine closely informal communications and conduct, in order to determine whether related parties have “genuine contractual intention”.
For a private and confidential discussion about your group’s specific circumstances – and to ensure you maximise the prospects of your companies and trusts getting tax deductions for intragroup payments – please do not hesitate to contact:
Michael Butler, Tax and Revenue Partner, Finlaysons
Briony Hutchens, Tax and Revenue Partner, Finlaysons
Bec Gibbons, Tax and Revenue Associate, Finlaysons
- * [2026] FCAFC 10 (17 February 2026).
- ** [2025] FCA 240, [115].
- *** [2025] FCA 240, [115]. The Primary Judge also considered that it was not:
- “… necessary, for a liability to be ‘incurred’ for the purposes of sec. 8-1 of the ITAA 1997, that there be a contractual obligation to incur that expenditure. An expenditure voluntarily incurred may be deductible under s 8-1 of the ITAA 1997: John Fairfax & Sons Pty Ltd v Cmmr of Taxation (Cth) [1959] HCA 4.
