The Australian Competition & Consumer Commission (ACCC) is the government body responsible for enforcing the Franchising Code of Conduct, and if you or someone you know are considering entering into a franchise arrangement, this will probably be a good starting point to get an idea of what to expect.
The code imposes strict obligations on franchisors to
make sure that franchise agreements are fair (you can
use the search tool on the ACCC’s website to find it).
It is a requirement that both franchisees and franchisors
act in good faith in all their dealings with one another.
Another significant point that should be kept in mind is
that penalties for failure to comply can be significant.
However, if you’ve got a plan and are determined to
forge ahead, it is also good to know that from a tax
point of view, starting and running a franchise business
is broadly the same as starting and running most other
small businesses.
There are additional considerations however, in that
there are different tax treatments for franchise-specific
payments and transactions between franchisee and
franchisor. (The person who grants the right to use a
business under some brand name or trade mark, and
the right to manufacture and distribute their products or
services, is known as the franchisor. The person who
receives these rights is known as the franchisee.) The
franchisor and each franchisee need to have separate
Australian business numbers (ABNs).
Franchise fee deductions
The initial franchise fee or transfer fee that is paid to the franchisor forms part of the cost base for your franchise business as a capital asset. As these fees are capitally invested in the business, you as the franchisee do not deduct the fee as a business expense from your annual income tax. Depending on the circumstances, franchise renewal fees may form part of a franchisee’s cost base. Any franchise renewal fees not included in the cost base may be deductible as a business expense and subject to the prepayment rules (more below). Generally you can deduct the fees paid to the franchisor for ongoing training as a business expense. The prepayment rules cover expenses incurred in a current income year under an agreement for something to be done, in whole or in part, in a later income year. This alters the timing of a deduction for certain prepaid expenses that would ordinarily be immediately deductible in full in the year they are incurred. The subsequent timing of such a deduction can generally be made over an “eligible service period”, which in most cases means when the agreement is in force.
Goods and services tax
Payments made to the franchisor will generally also
include a goods and services tax (GST) component, as
in most cases the franchisor will be GST registered. If
you as the franchisee are also GST registered, you will
be able to claim a GST credit from the ATO for the GST
amount included in:
- initial franchise fees
- franchise renewal fees
- franchise service fees or royalties
- advertising fees
- transfer fees, and
- training fees.
Royalties or interest payments
An agreement to purchase a franchise often includes ongoing payments of royalties, interest payments or levies to the franchisor. These payments typically cover head office expenses, such as administration, advertising and technical support. Unlike the initial up-front fee, when you work out your annual income tax liability you are generally able to deduct payments of royalties, interest payments and levies in the year these are incurred, as they are and will be a continuing expense in carrying on the business.
Non-resident franchisors
You may, depending on the original franchisor business
that takes you on as a franchisee, find that you are
required to make royalty or interest payments to nonresident
franchisors that are based in another country.
The ATO generally requires that franchisees withhold
a flat rate of 30% from the gross amount of a royalty
payment and 10% from the gross amount of an interest
payment. However, a double tax agreement with the
non-resident franchisor’s country of residence may
reduce this rate. Check with us if this is an issue.
You will need to pay the ATO the amounts withheld
from royalty and interest payments, and have us report
these amounts in your activity statement for the relevant
reporting period. We will later need to report the total
annual amount of royalty and interest payments and
amounts withheld to the ATO.
A franchisee can only deduct the royalty payment to a
non-resident franchisor as a business expense if you
have withheld tax from the royalty payment and the
amount has been paid to the ATO.
Ending a franchise agreement
If you either transfer a franchise to another party or
terminate your franchise agreement, you may need to
alert us in case there are both capital gains tax (CGT)
and GST consequences.
When you transfer or terminate a franchise, the initial
franchise fee or transfer fee that is included in the
business’s cost base may be relevant in working out the
net capital gain (if any) to include in a subsequent tax
return.
Tax Store Accountants Melbourne.
Our Management Credentials