The decision by the full Federal Court makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. This case has particular significance to taxpayers who enter related party transactions with specific relevance to family groups that may currently lack the requisite written documentation. This case also has potential ramifications for corporate groups that are not consolidated for income tax purposes and cross border related party transactions.

The background

Two companies in the S.N.A Group entered into agreements with two asset-owning trusts for the use of rent rolls, trademarks, and associated assets in 2005. The agreements covered the period from 2005 until 2015, at which point they lapsed and were not renewed. Despite this, the operating companies continued to use the assets and continued to make payments after the agreements had lapsed, claiming the payments as deductible service fees.

The primary judge found in favor of the taxpayer, concluding that the taxpayers were subject to a presently existing liability and that the fees were therefore deductible under section 8-1. The primary judge held that, although there was no longer a written contract, the terms could be inferred from the parties’ conduct. The primary judge was particularly sympathetic to the commercial practice of small businesses, where related-party transactions are not always documented.

However, the Full Federal Court held that, there was no objective evidence after 2015 of communications between the parties, their bookkeeper, or their external tax accountant indicating that the companies were subject to a liability for the use of the assets. Nor were any tax invoices issued by the trusts. Furthermore, the method for calculating the payments for the use of the assets, which was based on the unitholders of the trusts receiving a specified percentage return, was inconsistent with the fees ultimately paid.

The making of payments and recording those payments in the books of related parties is not sufficient to infer a request for the provision of services or assets. Taxpayers must be able to objectively support a liability when charging fees for services and the use of assets by related entities. They should ensure that agreements between related parties are properly documented and kept up to date so as to cover the relevant period for which deductions are claimed.

Practical implications

Taxpayers who do not have written agreements, or who are unable to objectively demonstrate the existence of a contract are at risk of having deductions denied for transactions with related entities.

Contemporaneous documentation for related-party transactions should be prepared and regularly reviewed so that it covers the relevant period of any deductions and clearly details the method of calculation. Where documentation is not available, taxpayers should identify and retain other evidence to support the existence of a contract, including emails, minutes, invoices, or workpapers.

How SW can help

The decision in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. Groups with inter-entity dealings should take this opportunity to review whether their agreements are properly documented and supported by objective evidence.

SW can assist by reviewing your existing related-party arrangements, assessing the robustness of your charging methodology, identifying gaps in contemporaneous documentation, and helping you update or formalise agreements to ensure they withstand scrutiny. Taking proactive steps now can significantly reduce the risk of deductions being denied in the future.

Contributors

Stephen Peries

Richard Osborn

The post Full Federal Court denies deductions for transactions between related parties appeared first on SW Accountants & Advisors.

On 25 September, the ATO released Taxation Determination TD 2024/7 in relation to the deductibility of financial advice fees incurred by individuals who are not carrying on an investment business. TD 2024/7 does not reflect a change in the Commissioner’s view on the deductibility of financial advice fees as previously set out in Taxation Determination TD 95/60. Instead, it was published following regulatory reforms to the financial services industry. The Commissioner has maintained his view that fees prior to acquisition of assets are incurred ‘too soon’ and therefore capital in nature, and household budgeting advice are private or domestic expenses. Fees for financial advice relating to income products with sufficient connection to assessable income (i.e. income protection) are deductible.

General deductions

This determination addresses the application of section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to fees for financial advice, highlighting the importance that the fees are incurred in gaining or producing assessable income. Broadly, a deduction for any loss is not available under section 8-1 to the extent that:

• it is an outgoing of capital or of capital nature,
• it is an outgoing of a private or domestic nature,
• it is incurred in gaining or producing a taxpayer’s exempt or non-assessable, non-exempt income, or
• a provision of the Act prevents it from being deducted

Gaining or producing assessable income

To be incurred in gaining or producing assessable income, a sufficient connection must exist between the expense and the particular activities through which the assessable income is gained or produced.

An expense can still be deducted even where the assessable income is:

• not gained or produced in the year during which the expense is incurred, or
• expected to be earned but is not actually earned.

Whether or not a sufficient connection exists between expenditure and what produces the assessable income is a question of fact so that the Commissioner must have regard to all the circumstances in each case. In particular, the Commissioner will consider:

• whether the expense was entirely preliminary to the gaining or producing of assessable income, and
• whether there is a lapse of time between incurring the expense and the commencement of the income-producing activity (a significant time delay may indicate that the expense was incurred for a different purpose).

Importantly, there is a difference between fees for financial advice incurred on a recurrent basis for an existing or ongoing income producing-investment, and fees for financial advice on a proposed investment prior to the acquisition of an asset. The former is deductible on the basis that there is a sufficient connection between the fee for the ongoing advice and the investments that produce assessable income.  

As there is sufficient connection between an individual’s assessable income and premiums for income protection insurance which are deductible under section 8-1, financial advice relating to income protection products will be deductible.

Capital or capital in nature

Amounts relating to fees for advice on a proposed investment are considered to be incidental to the cost of acquiring the income-producing investment and are therefore capital in nature and are not deductible under section 8-1. Similarly, fees incurred for advice on putting an income-earning investment in place or in relation to an income-earning structure are not deductible since they are capital in nature.

The determination explains that in determining whether an expense is capital in nature, consideration will be given to (the capital vs revenue distinction):

• the advantage sought from incurring the expense,
• the way the advantage is to be used, and
• the means of its acquisition (i.e., whether it is a once-and-for-all expense for the acquisition of something or a periodical outlay for the use and enjoyment of something).

Tax-related expenses

Provided an individual can identify that an amount was incurred for advice to assist them in managing their tax affairs, they will likely be able to claim a deduction under section 25-5 of the Act.

Importantly, to access a deduction under section 25-5, the advice must be provided by a ‘recognised tax adviser’ including:

• a registered tax agent, or
• a registered BAS agent (within the meaning of the Tax Agent Services Act 2009), or
• a qualified tax relevant provider (within the meaning of the Corporations Act 2001) registered with ASIC, or
• a legal practitioner.

Additionally, not all advice provided will be deductible as tax (financial) advice. Where information is provided without application or interpretation of the taxation laws to the individual’s personal circumstances, it will not be for managing that individual’s tax affairs.

How SW can help

Contact your SW contact if you have any questions about the deductibility of expenses you have incurred in respect of financial advice.

SW will continue to monitor and provide commentaries to inform clients of developments as they occur.

Contributors

Antony Cheung

The post Deductibility of fees for financial advice | New ATO tax determination appeared first on SW Accountants & Advisors.

On 23 February 2022, the Commissioner released Draft Determination TD 2022/D2, addressing the deductibility of expenses incurred when establishing and administering an Employee Share Scheme (ESS).

The Commissioner has stated expenses incurred from the establishment and/or amendment of an Employee Share Scheme (ESS) are not deductible under section 8-1 of the ITAA 1997 as they are viewed as capital in nature. This may be seen as a departure from a general view that employee costs are more typically revenue in nature.

Expenses not deductible

Establishment fees can include:

• Legal fees incurred from establishing an Employee Share Trust (EST) or ESS plan rules
• Start-up costs, such as commencement charges for a trustee company, or
• Registration fees with authorities such as stamp duty or ASIC fees.

Amendment fees can include:

• Legal fees paid to amend either the EST or ESS plan rules, or
• Regulatory fees and stamp duty paid to authorities.

To the extent that the business is carried on for a taxable purpose, both establishment and amendment fees would be deductible to the employer company in equal proportions over 5 years under section 40-880 of the ITAA 1997.  

Section 40-880; commonly referred to as ‘black-hole expenditure’ provides a deduction for certain capital expenditure of a business on a straight-line basis over a 5-year period.  Section 40-880 only applies to capital costs incurred in relation to a past, present, or proposed business that is not otherwise dealt with under other income tax provisions. 

The Commissioner did confirm however, that the ongoing expenses associated with the administration of an ESS should be deductible under section 8-1 of the ITAA 1997.  

Deductible expenses

Ongoing expenses include:

• brokerage fees
• audit fees
• bank charges
• making new offers to employees under an existing ESS, or
• other ongoing administrative expenses.

Fees relating to annual ESS reporting should continue to be deductible, however questions must now be raised as to whether the ATO’s view will impact on broader issues such as the tax treatment of contributions to employee share trusts and expenses they incur. 

How SW can assist

Once TD 2022/D2 is finalised by the ATO, it is important to note the determination will apply both prospectively and retrospectively.

If you want to discuss any of the aspects of this draft determination or concerns regarding your existing or future ESS, please contact your SW advisor or one of our experts.

Contributors

Justin Batticciotto

E: jbatticciotto@sw-au.com

The post Employee Share Schemes: Deductibility of expenses appeared first on SW Accountants & Advisors.