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  • Franchising and tax

    Starting and running a franchise business is much like starting and running any other small business. However there are some additional things to consider.

    You need to understand the different tax treatments for franchise-specific payments and transactions and how these transactions work between franchisors and franchisees, including:

    The franchisor and each franchisee need to have separate Australian business number's (ABN).

    A franchisor grants the right to use a business brand name or trademark and the right to produce or distribute their product or service.

    A franchisee, receives the right to use a business brand name or trademark and the right to produce or distribute the franchisors product or service.

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    Franchise fees

    The initial franchise fee or transfer fee you pay to the franchisor forms part of the cost base for your franchise business as your capital asset. As these fees are capitally invested in your business, you do not deduct them as business expenses from your annual income tax.

    Depending on the circumstances your franchise renewal fees may also form part of your cost base. Any franchise renewal fees not included in your cost base may be deductible as a business expense and subject to the prepayment rules.

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    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 can deduct payments of royalties, interest payments and levies in the year you incur them, as they are a continuing expense in carrying on your business.

    Royalty and interest payments to non-residents

    As a franchisee, you may make royalty or interest payments to non-resident franchisors. Generally, you are required to 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's country of residence may reduce this rate.

    You pay to us the amounts you withhold from royalty and interest payments, and report the amount in your activity statement for the relevant reporting period. You later report the total annual amount of royalty and interest payments and amounts withheld using the form – PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.

    You can only deduct the royalty payment to a non-resident as a business expense if you have withheld tax from the royalty payment and the amount is paid to us.

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    Training fees

    Generally, you can deduct the fees you pay to the franchisor for ongoing training as a business expense.

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    The payments you make to the franchisor will generally also include a goods and services tax (GST) component if the franchisor is GST registered. If you are GST registered you will generally be able to claim a GST credit from us for the GST amount included in:

    • initial franchise fee
    • franchise renewal fees
    • franchise service fees or royalties
    • advertising fees
    • transfer fees
    • training fees.

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    Transferring or terminating a franchise

    If you either transfer a franchise to another party or terminate a franchise, you need to consider both capital gains tax (CGT) and GST consequences.

    When you transfer or terminate your franchise, the initial franchise fee or transfer fee that is included in your cost base may be relevant in working out your net capital gain (if any) to include in your annual tax return.

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      Last modified: 10 Nov 2016QC 27152