S.N.A Group Pty Ltd and ATPR Pty Ltd are Australian operating companies within the Coronis real estate group. The group had undertaken a restructuring in 2005 by which the operating entities were separated from asset-owning entities — CLAARS Pty Ltd as trustee of the Henry Trust (which held intellectual property including the “Coronis” trademark and employed key personnel) and P.A.C. Realty Pty Ltd as trustee of the Emily Trust (which held a rent roll). Between 2005 and 2015 the taxpayers had written agreements with the trustees under which they paid fees for use of the trust assets. Those written agreements came to an end in 2015, but the taxpayers continued using the trust assets during the income years ended 30 June 2016 to 30 June 2019 and made payments to the trustees which they claimed as deductible “service fees” under section 8-1 of the Income Tax Assessment Act 1997.
The Commissioner of Taxation disallowed the deductions, concluding that the payments were not losses or outgoings incurred in gaining or producing assessable income. The taxpayers objected and appealed to the Federal Court. At first instance the taxpayers asserted the payments were made pursuant to licence agreements renewed annually, formed partly in writing and partly by conduct — specifically through the actions of Mr Andrew Coronis as the common directing mind and will of the taxpayer companies and the trustee companies. The primary judge rejected the taxpayers’ asserted contracts but nonetheless inferred from the surrounding circumstances that in each relevant year the taxpayers were subject to a contractual liability to pay service fees, and allowed the deductions.
The Commissioner appealed to the Full Federal Court, challenging the primary judge’s finding that an inferred contract existed between the taxpayers and the trustees.
Judgment
The Full Federal Court allowed the Commissioner’s appeal. The court held that the primary judge erred in inferring the existence of contracts from the circumstances. Applying the objective theory of contract, the court emphasised that a contract — whether formed by words or inferred from conduct — requires an outward manifestation of mutual assent to contract on particular terms, communicated between the parties. Private subjective intentions of common directors are not relevant. The court found that the evidence relied upon — the continued use of trust assets, the recording of service fees in financial statements, monthly payments, and directions given by Mr Andrew Coronis — did not objectively demonstrate mutual assent between the taxpayer companies and the trustee companies to be bound by contractual terms. The financial statements and payments were equally consistent with the absence of a binding agreement. The court concluded there was insufficient evidence of any objective communication between the companies, treated as separate legal persons, manifesting agreement on identifiable contract terms. Accordingly, the taxpayers failed to discharge the burden of proving that the Commissioner’s assessments were excessive. The appeal was allowed and the taxpayers’ taxation appeals were dismissed.