Decision impact statement

Inglewood & Districts Community Enterprises Ltd and Commissioner of Taxation

Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/2462
Judge Name: SM O'Loughlin
Judgment date: 31 August 2011
Appeals on foot: No.
Decision Outcome: Partly Favourable

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Franchise Fees
Franchise Renewal Fees
Business Capital Expenditure
Cost base of an asset

Précis

Outlines the ATO's response to this case, which concerned whether a Franchise Establishment Fee and Franchise Renewal Fees in a Franchise Agreement were deductible under section 8-1 or 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant ATO precedential documents

None

Relevant Law Administration Practice Statements

None

Brief summary of facts

Bendigo Bank Ltd operates a 'Community Bank Model' which involves local communities establishing and operating their own Bendigo Bank Branch. Each branch operates as a corporate franchise of the bank, using the name, logo and various systems of the bank. A franchisee is appointed as an authorised representative of the bank and manages the branch on behalf of the bank in the local community. The bank still carries on the banking business.

A franchise agreement governs the management of the branch and the rights and obligations of the franchisee and the bank. A franchisee is entitled to certain fees and commissions and to a share of the profits from the operations of the branch, and must pay various fees for the right to use the bank's System and other intellectual property.

The applicant was incorporated on 15 February 2007 and entered into a franchise agreement with the bank during the 2008 income year to operate a branch in Inglewood.

The Commissioner made a private ruling that a Franchise Establishment Fee of $100,000 was not immediately deductible under section 8-1 of the ITAA 1997, nor was it deductible in accordance with section 40-880. The Commissioner also ruled that any Franchise Renewal Fees of $10,000 and $50,000 payable on renewal of the franchise agreement were not deductible under section 8-1 and, accordingly, were not deductible over the eligible service period under Subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936.

Issues decided by the Administrative Appeals Tribunal

There was no dispute before the Tribunal that the Franchise Establishment Fee was of a capital nature. The Tribunal found that the applicant paid the Fee to secure the right to use the bank's System and other intellectual property, and not for particular services rendered by the bank prior to the opening of the branch (paragraphs 14 to 17). The fee was excluded from deduction under section 40-880, because it was either paid in relation to legal or equitable rights conferred by the franchise agreement under paragraph 40-880(5)(d), or paid in respect of acquiring a CGT asset, and would be taken into account in working out a capital gain or loss under paragraph 40-880(5)(f) (paragraph 22).

In relation to the Renewal Fees, while the Tribunal accepted that the fees would be paid for the renewal of the structure of the applicant's business, it found that they would be on revenue account because the renewal term of 5 years is a relatively short period that would recur, and the applicant would be left with nothing if renewal did not occur (paragraph 31).

ATO view of Decision

The ATO accepts that it was reasonably open to the Tribunal to find that the Franchise Renewal Fees would be on revenue account, in the context of an expected long-term collaboration between the applicant and the bank in a small town.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None

Implications for Law Administration Practice Statements

None

Court citation:
[2011] AATA 607
2011 ATC 10-202
84 ATR 688

Legislative References:
Income Tax Assessment Act 1936
Subdivision H of Division 3 of Part III

Income Tax Assessment Act 1997
8-1
40-880
108-5(1)
110-25(2)

Case References:
BP Australia Ltd v FC of T
(1965) 112 CLR 386
44 ATC 312
[1965] TR 317

Case S24
(1995) 17 NZTC 7, 169
85 ATC 256

City Link Melbourne Ltd v FC of T
(2004) 141 FCR 69
2004 ATC 4945

Colonial Mutual Life Assurance Society Ltd v FC of T
(1953) 89 CLR 428
[1953] HCA 68

Fanmac Ltd v FC of T
(1991) 91 ATC 4703
22 ATR 413

FC of T v Chapman
(1989) 89 ATC 4246
20 ATR 438

FC of T v CityLink Melbourne Ltd
(2006) 228 CLR 1
2006 ATC 4404
62 ATR 648

FC of T v Duro Travel Goods Pty Ltd
(1953) 87 CLR 524
[1953] HCA 32

FC of T v Krakos Investments Pty Ltd
(1995) 61 FCR 489
32 ATR 7
96 ATC 4063

Hallstroms Pty Ltd v FC of T
(1946) 72 CLR 634
[1946] HCA 34

Labrilda Pty Ltd v DF C of T
(1996) 65 FCR 119
32 ATR 206
96 ATC 4303

Spriggs and Riddell v FC of T
(2009) 239 CLR 1
72 ATR 148
2009 ATC 20-109

Sun Newspapers Ltd v FC of T
(1938) 61 CLR 337