Qld real estate group misses out on millions in ‘service fee’ deductions

The case centred around the Coronis real estate group, which included father-son duo Theo and Andrew Coronis, who directed various companies within the group. The first respondent, SNA Group, was a real estate management business directed by Andrew.

In 2005, the Coronis real estate group restructured for asset protection purposes, separating its operating companies from trusts that held the group’s assets, including trademarks, its rent roll, and key staff members.

Written agreements stipulated that the taxpayers had to pay the trustees' fees, calculated in accordance with their use of the trust assets. In 2015, these agreements expired, but the business group continued to operate as usual.

Because of this, the Commissioner of Taxation argued that the 'service fees' the taxpayers claimed for the income years ending June 2016 to 2019 were not allowable deductions.

Forensic accountant Mr Graham, who was tasked with investigating the group’s financial affairs, found that SNA Group had claimed approximately $2.5 million in service fees each year from 2015 to 2019.

Tax lawyer Arda Ahmed told Accountants Daily this case served as a warning to family businesses with informal agreements and reminded them that handshakes did not amount to legally binding contracts in tax disputes.

He added that the case had highlighted four “fatal deficiencies” in the real estate group’s case.

First, there was no direct evidence that the directors had communicated an accepted obligation for the companies to pay a fair fee to the trusts.

“Andrew Coronis gave evidence about discussions at the 'Chinese restaurant' where the accountant would present figures, but he could not identify specific meetings, dates, or what was said at any of them,” Ahmed said.

Second, the taxpayers gave contradictory evidence about a supposed 8 per cent return benchmark agreed upon under the informal service fee arrangement. While Theo Coronis said the 8 per cent benchmark was in place to cover unit holders’ interest costs, Andrew Coronis said it was 8 per cent of the value of the business.

The actual intra-group payments bore no consistent relationship with either of these explanations, Ahmed noted. The court added that the uncommunicated subjective thoughts of Theo and Andrew Coronis regarding the 8 per cent rate of return provided no foundation to infer the existence of a contract between the taxpayers and trustees.

Thirdly, the group’s accountant, Mr Bryant, gave evidence that he was still checking the service fees against the 2005 agreements, which the taxpayers conceded had expired in 2015. He added that the directors had not expected him to advise them on what constituted a reasonable amount for service fees, because he was a tax agent, not an adviser.

Last, the actual pattern of payments did not appear to align with any coherent fee arrangement, Ahmed said.

“The bookkeeper, Ms Hanlon, gave evidence that she was instructed to transfer 'excess funds' from the operating companies to the trusts and code them as 'service fees'.”

“The so-called service fees in fact included unit holder distributions, salary reimbursements, bank loan repayments, and surplus cash transfers.”

The forensic accountant, Mr Graham, found that between $636,000 to $1.3 million in payments between the group had been miscoded as service fees annually between 2016 and 2019.

Furthermore, while GST was ‘charged’ on amounts coded as ‘service fees’ in SNA Group’s books, no tax invoices were issued between the entities. The court said the absence of tax invoices was “inconsistent” with any contractual liability to pay for a fee or service.

Reflecting on the case and what it meant for small businesses, Ahmed said the court’s decision to accept the Commissioner’s appeal aligned with the letter of the law, but was removed from the reality of how family businesses operated.

“These are groups where the same people sit on both sides of every transaction. They do not send each other formal offers and acceptances. They do not minute every decision. They discuss things over dinner and trust their accountant to get the numbers right,” he noted.

However, he acknowledged that the taxpayer’s evidentiary problems had made the court’s decision difficult to criticise on its facts.

“The accountant was still working off agreements that everyone agreed had expired. Payments that were really just surplus cash were being shovelled between entities and labelled 'service fees',” Ahmed said. 

“The father said the eight per cent was about interest costs, and the son said it was about business value. And there was over a million dollars a year in miscoded payments that could not possibly be described as fees for services.”

He added that if the family had renewed their written agreements in 2015, even with a simple one-page letter, this tax outcome may have been avoided.

“Advisers should treat this case as an urgent prompt to review intragroup arrangements. The court said that payments falling within an arm’s-length range are not evidence of a contract. That is a confronting statement for anyone advising a family group,” Ahmed said.

“It means the ATO can accept that your fees are commercially reasonable, accept that services were genuinely provided, and still deny the deduction because you cannot prove the contractual obligation existed.”