Many business groups use a structure where valuable assets — business premises, intellectual property, a client or rent roll — sit in a separate "service entity," while the day-to-day trading business operates through another entity. The trading entity pays a service fee to the asset-owning entity for the use of those assets and any support services provided. It's a common and legitimate way to protect capital assets from the risks of trading.

A recent Full Federal Court decision is a reminder that this structure only works from a tax perspective if the service fee arrangement is real, current, and properly documented, not just a long standing habit.

The case

In FCT v S.N.A Group Pty Ltd [2026] FCAFC 10, two related operating companies in a real estate group made payments, described as"service fees", to two trusts that owned intellectual property (including brand names) and a rent roll used by the operating companies. Written licence agreements governing these payments existed between 2005 and 2015, but were never renewed after that. The companies kept paying the trusts and kept claiming the payments as tax deductions for the 2016 to 2019 income years, onthe basis that a licence or service arrangement was still in effect, just notin writing.

The ATO disallowed the deductions, arguing there was no longer any real, enforceable obligation to pay. At the Federal Court, the taxpayers succeeded, with the Court finding that a contract to pay the fees could be inferred from the conduct of the parties, even without a written agreement.

The Commissioner appealed, and the Full Federal Court overturned that decision. It found there was no binding contract, inferred or otherwise, obliging the companies to pay the fees. Without a legal obligationto pay, the amounts were never actually "incurred" in the tax sense, and so were not deductible.

Why the court reached that conclusion

The Full Federal Court pointed to a pattern of evidence that undermined the idea of a genuine, ongoing contractual arrangement, including

• No communication between the company directors and trustees confirming an accepted obligation to pay a fee

• Payments that were inconsistent and varied unpredictably year to year, rather than reflecting an agreed fee structureNo evidence that the bookkeeper or accountant had been told the companies were actually liable to pay for the use of the trust assets
• Journal entries that looked more like transfers of surplus cash than payments for a defined service, with amounts only being labelled "service fees" after the factNo tax invoices issued by the trusts for the services, despite GST apparently being charged on the payments

In short, the paperwork and behaviour of the parties told the story of internal cash movements dressed up as service fees, rather than a genuine commercial arrangement being honoured.

What this means for service trust and inter-entity arrangements

The ATO has signalled it will scrutinise deductions for service fees and inter-entity charges wherever the commercial and legal basis for the payments isn't clear, particularly within family or closely held groups. Based on this decision, a service fee arrangement is much more likely to withstand ATO challenge where all of the following are in place:

A genuine benefit

The arrangement needs to provide a real advantage to the operating business, asset protection is a legitimate example, not just move profit between related entities.

Commercial realism

The fee charged should reasonably reflect the value of what's actually provided. Fees that are excessive or disproportionate to the services and assets involved will attract attention.

Proper documentation

This includes a written service agreement, evidence of how the fee was calculated, tax invoices, and records showing the fee was actually paid, not just journalled between accounts.

Consistent follow-through

The parties need to actually operate in line with the agreement, year after year. A well-drafted agreement that isn't followed in practice won't be enough on its own.

The takeaway

If your business structure includes a service entity or you pay inter-entity charges between related entities, this decision is a timely prompt to check that the arrangement is still supported by a current, signed agreement, not one that quietly lapsed years ago, and that the fees chargedand paid are properly evidenced. Where written agreements have expired or were never put in place, now is the time to address it, well before the ATO does.

This article is general information only and does not constitute tax advice. Whether a service fee or inter-entity charge is deductible depends on the specific facts and documentation of your arrangement. Contact Causbrooks to review your service entity structure and supporting agreements.