Real estate group wins appeal in dispute over service fee deductions

A privately owned group that carried on a business offering real estate services has won an appeal in the Federal Court against an objection by the Commissioner of Taxation.

The Commissioner had sought to deny deductions for service fees charged between entities within the group, Coronis Group, which were paid for the use of intellectual property, rent rolls and human capital.

The taxpayers argued that these service fees were incurred in the ordinary course of business, reflected genuine commercial arrangements, and were supported by longstanding professional advice. The Commissioner challenged this, questioning whether the fees were genuinely incurred and of a reasonable rate.

Despite the substantial growth and evolution of the business over the years, the court said Coronis Group had retained some of the informality of its small business origins. This meant there was a degree of informality surrounding the agreements and record-keeping of the service fees.

However, Justice Logan stated that the informality of relationships between entities within Coronis Group was hardly unique and that "perfection in documentation did not dictate eligibility to a deduction under s 8-1 of the Income Tax Assessment Act.

"The disparity in financial resources and a related ability to conduct taxation appeal proceedings either in this Court or in the Administrative Review Tribunal between many in small business and the Commissioner is great," Justice Logan said.

"Of course, the informality of inter-entity relationships within the Coronis Group made for challenges in discharging an onus of proof. But 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."

Justice Logan said it was obvious that the object of incurring the service fees was that two of the entities in the group needed to pay for the assets and expertise which were essential for their gaining or producing assessable income or in carrying on a business for that purpose.

The court allowed the appeal and ruled that the objection decision in respect of the amended tax assessments be set aside.

Dentons, which acted for the successful taxpayer in the case, S.N.A Group, said the ruling was significant in that it underscores the court’s recognition of the difficulties faced by small to medium businesses when they outgrow their resources, particularly regarding the realities of informal record keeping and accounting practices.

Damien Bourke, corporate tax partner at Dentons, said it was a win not just for the firm's clients but for small businesses across the nation.

"It's a reminder of the unrealistic expectations and immense burden for the keeping of records by taxpayers," Bourke said.