Franchise businesses - death, tax and compliance

Benjamin Franklin said it perfectly,
"In this world nothing can be said to be certain, except death and taxes."

While buying or operating a franchise can bring a new lease of life to your business activities, the taxes and compliance are unavoidable.

So, if you are a budding Australian franchisee or franchisor, there are a few things you need to know. Starting or running a franchise business is much like starting and running any other small business. However, there are some additional things to consider for the transactions between franchisors and franchisees, and good record keeping is essential. Get advice early on and ensure you set up the appropriate billing, payment and record-keeping systems.

It's essential you find out what your compliance, tax and superannuation obligations are going to be and whether or not you need to register your business, and what it needs to be registered for. Head to the ATO website for lots of useful information. In its bid to simplify business, the ATO app was updated on 31 March 2015 with more tools to help you manage tax and super.

Delving deeper than that, remember that each State or Territory has some different variations on the rules - this information can be accessed here.

Running any business requires you to wear and understand the many hats, and the changes on 1 January 2015 to the Franchising Code of Conduct add yet another level of intricacy. Every franchisor and franchise owner is required by Australian law to comply with the mandatory industry code. The new amendments apply to all franchise agreements entered into, renewed, extended or transferred on or after 1 October 1998 except for a small number of Code provisions.

The 2015 changes to the franchising code include:

+ a requirement for both parties to act in good faith when dealing with each other
+ introduction of new fines and penalties for serious breaches of the Code
+ improved transparency of marketing and advertising budgets
+ a requirement for franchisors to provide an information sheet to prospective franchisees that outlines the risks and rewards of franchising
+ simplified disclosure requirements about selling online.

More information on the Code can be found here.

Your franchisee tax obligations

Essentially franchise businesses operate under the same structures that exist for any business, for example a partnership or company. Like any business, your structure, earnings and assets will determine your tax obligations.

Ongoing franchise fees are often deductible in the year you pay them. You might be able to deduct other payments including training fees and loan interest from your taxable income. When you buy, sell, transfer or terminate a franchise there may be taxes applicable, including Capital Gains Tax (CGT) and Goods and Services Tax (GST).

Your franchisor tax obligations

As a franchisor, you need to understand your tax obligations and how franchising fees are treated for tax purposes. It's also important to review your income tax and GST reporting requirements. In most cases, all payments you receive from a franchisee will be assessable income. They will also involve invariably include GST.

In most cases, payments to you, as the franchisor, received from the franchisee will be your assessable income (net of any GST component) for income tax purposes.

Payments from the franchisee generally include:
+ initial franchise fee
+ franchise renewal fees
+ franchise service fees or royalties
+ advertising fees
+ transfer fees
+ training fees.

You treat these payments like any other business income.

As with any business, taxation and compliance requirements will be determined by your business structure, assets and income. It is essential to seek professional advice to ensure you don't get on the wrong side of the ATO or any other governing body.

By Richard O'Brien - aubizbuysell
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