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Franchising and tax

Tax treatments for franchise-specific payments and transactions between franchisors and franchisees.

Last updated 7 November 2022

Starting a franchise

With franchisingExternal Link, the:

  • franchisor grants the right to the franchisee to
    • use a business brand name or trademark
    • produce or distribute their product or service
     
  • franchisor and each franchisee have their own Australian business number (ABN).

The franchisee will incur franchise-specific payments to their franchisor in addition to other general business expenses. Some of these payments will be deductible and others are capital in nature and not deductible.

Common franchise fees

Franchise establishment fees

The franchise establishment fee or transfer fee forms part of the cost base for your franchise licence, which is a capital asset. Because these fees are a capital investment in your business, they are not tax deductible.

Franchise renewal fees

If your franchise renewal fees form part of your cost base, they will not be deductible. Any franchise renewal fees not included in your cost base may be deductible as a business expense and subject to the prepayment rules.

An example of where you would not include a franchise renewal fee in your cost base is where it is for a relatively short period of time (for example, 5 years), and you would be left with no franchise if you did not pay the renewal fee.

Royalties, interest and other payments to the franchisor

An agreement to buy a franchise often includes ongoing royalty payments, interest payments or levies to the franchisor.

These payments typically cover head office expenses, such as administration, advertising and technical support.

Royalty payments, interest payments and levies to the franchisor can be claimed as an expense on your annual tax return. This is because they are an ongoing expense in running your business.

Royalty and interest payments to non-residents

  • Generally, when you make royalty and interest payments to non-resident franchisors, you are required to withhold a flat rate of:
  • 30% from the gross amount of a royalty payment
  • 10% from the gross amount of an interest payment.

However, where there is a tax treaty agreement with the non-resident's country of residence, you apply the withholding rate in the tax treaty.

You pay and report the amounts you withhold from interest and royalty payments in your business activity statement (BAS) for the relevant reporting period.

You report the total annual amount of royalty and interest payments, and amounts withheld, in the PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.

If you are required to withhold tax from a royalty or interest payment to a non-resident, you can only claim a deduction for it if:

  • you have withheld tax from the payment and paid the withheld amount to us, or
  • the withholding tax is paid.

Training fees

You can claim a tax deduction for fees you pay to the franchisor for ongoing training for employees in their roles. For more information refer to Income and deductions for business.

GST

If the franchisor is registered for goods and services tax (GST), payments you make to the franchisor may include a GST component.

If you are registered for GST you may be able to claim a GST credit in your BAS for the GST amount included in:

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

Transferring or terminating a franchise

If you transfer a franchise to another party or end your franchise agreement, there may be capital gains tax (CGT) and GST consequences.

When you transfer or end your franchise agreement you will need to calculate your CGT and include that in your annual tax return.

The sale of an existing franchise by a franchisee may qualify as a GST-free sale of a going concern.

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