Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011618011923

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST and Franchise Fees

Issue

Question

Are franchise fees, charged by you to the Franchisee, subject to goods and services tax (GST)?

Advice/Answers

Yes

Relevant facts

You are registered for GST.

You are the franchisor of a franchised based entity.

In order to become a Franchisee the prospective Franchisee will purchase an existing territory by paying an amount of goodwill to the existing Franchisee and a fixed Franchise Fee to you for the right to operate under your banner.

The Franchise Fee gives the Franchisee the right to operate under your name, use of intellectual property and to use your operating method and software system (which you have referred to as Goodwill).

The Franchisee's rights and obligations in connection with the use of the intellectual property is as follows:

The Franchisee must use the Business Name Logo on all stationary, advertising, uniforms

The Franchisee must use the approved software

The Franchisee must not copy, reverse engineer or compile or adapt the software, and

The Franchisee must comply with the Franchisor's confidential operations manual.

The supply of the franchise is not treated as part of a supply of a going concern for GST purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-10(2)(e).

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question

Are franchise fees, charged by you to the Franchisee, subject to GST?

Summary

Your Franchise fees will be subject to GST as all the requirements of a taxable supply are satisfied pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Furthermore, there are no provisions in the GST Act that would make your supply of franchise fees a GST-free or input taxed supply.

Detailed reasoning

Taxable Supply

Section 9-40 of GST Act provides that you are liable for GST on the taxable supplies that you make. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Under section 9-5 of the GST Act you make a taxable supply where:

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Asterisked terms are defined under section 195-1 of the GST Act.

To satisfy the first requirement in section 9-5, you must first make a supply for consideration. Section 9-10 of the GST Act discusses the meaning of the term supply.

Subsection 9-10(2) of the GST Act provides that a 'supply' includes any of the following:

to do anything;

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Paragraph 9-10(2)(e) of the GST Act provides that a supply includes a creation, grant, transfer, assignment or surrender of any right.

In this case, in order to become a Franchisee the prospective Franchisee will purchase an existing territory by paying an amount of goodwill to the existing Franchisee and a $20,000 Franchise Fee to you for the right to operate under your banner.

The franchise fee gives the new franchisee the right to operate under your name and to use your operating method and software system.

The provision of the use of your intellectual property (including the use of your operating method and software system), is a right and therefore, a supply for GST purposes.

The supply of this right is being made for consideration in the form of the franchise fee payment. In addition, the supply is being made in the course of your enterprise, the supply is connected with Australia as both entities are based in Australia and you are registered for GST. Therefore, your supply meets the initial requirements of section 9-5 of the GST Act. There are no provisions in the GST Act that would make your supply of franchise fees a GST-free or input taxed supply. Therefore, you are making a taxable supply, which is subject to GST.

I have also included a copy of the Fact sheet - "Franchising and tax - tax facts for new small business" for your perusal.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).