Franchising and tax - tax facts for new small businesses

Income tax

See the income tax for business page Tax basics for small business, what is assessable income, allowable deductions and other income tax matters You may wish to download or order the publication Income and deductions for small business (NAT 10710).

Royalties or levies

An agreement to purchase a franchise often includes ongoing payments of royalties 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 can deduct payments of royalties and levies in the year you incur them, as they are a continuing expense in carrying on your business.

However, if you pay the royalty to a non-resident you are usually required to withhold tax from the royalty payments you make to them. You cannot deduct the royalty payment as a business expense if you have not:

• complied with a requirement to withhold tax from royalty payments to non-residents, and
• paid the amount to us.

For more information, see PAYG withholding from interest, dividends and royalties paid to non-residents.

Training fees

You can generally deduct the fees you pay to the franchisor for ongoing training as a business expense against your annual income tax.

See Business deductions essentials.

Loan interest

You may also be able to deduct interest payments on loans you use to pay the franchise fee or buy equipment as a business expense against your annual income tax. You can also deduct the fees you pay to establish the loan, over the shorter of either the length of the loan, or five years.

However, if you pay the interest to a non-resident you are usually required to withhold tax from the interest payments you make to them. You cannot deduct the interest payment as a business expense if you have not:

• complied with a requirement to withhold tax from interest payments to non-residents, and
• paid the amount to us.

For more information, see PAYG withholding from interest, dividends and royalties paid to non-residents.

Depreciating assets

You can claim deductions for depreciating assets such as equipment and machinery used in your business. Generally, you write off over a number of years the cost of these assets in your annual income tax returns.

If you incur costs to incorporate a company, create a trust or form a partnership through which you carry on your business, you may be entitled to claim an income tax deduction over five years for those costs. However, this capital allowance five year write-off provision does not apply to franchise fees.

For more information about capital allowances and deductions for depreciating assets, see Capital allowances. You may wish to download, or order, the publication Guide to depreciating assets.

Losses

If your franchise business produces a loss in any income year, you may, under certain circumstances, claim that loss against income you earn from other sources in that year. Non-commercial losses tax laws may apply, which may defer the loss to a future income year, unless you meet these certain tests.

For more information, see Non-commercial losses essentials.

Sections within Franchisee

• Concessions for small business entities
• Income tax
• Capital gains tax
• Australian business number
• Activity statement
• Goods and services tax
• Pay as you go withholding
• Superannuation