Got questions? We have the answers!
This article appears in the May/June 2014 issue of Business Franchise Australia & New Zealand
Here at Business Franchise magazine we were excited to be given the opportunity from the Australian Tax Office to participate in a question and answer session with the Deputy Commissioner for Small Business/Individual Taxpayers, Steve Vesperman.
As this is a rare opportunity, rather than keep it to ourselves we offered this out to the wider community and publish a selection of questions and the corresponding answers, relevant to franchisees and franchisors, for you below.
@BFranchiseAusNZ follower, via Twitter:
Question: I’m looking into starting up a business for the first time. Does the ATO have any advice?
Answer: You’re certainly on the right track. Starting a business is a big decision, and needs careful research and planning well before you start trading.
The ATO will provide the necessary support to assist you to make your business a success and there are many ways you can access information to help you understand and comply with your tax and super obligations.
• Our website (ato.gov.au) is a valuable source of free information and tools you can access at any time to help you when starting a new business.
• Our new ATO App also contains information for small business that’s accessible using mobile devices at any time.
• The online Small Business Assist tool will also help you find answers to your tax and superannuation questions.
• Choose a business structure and develop an appropriate business plan.
• Make sure you understand your obligations under PAYG, GST, Fringe Benefits and Capital Gains taxes, so you’ll need to know about applying for an Australian Business Number (ABN), and which taxes you need to register for.
• Talk to people with similar businesses or industry bodies.
Running your business
• Take advantage of the record-keeping advice and tools on our website. Good record keeping is vital to meeting your tax and super obligations, managing cashflow and applying for credit and other assistance.
• Make sure the way you bill your clients and pay your own bills and other expenses complies with the law especially when it comes to GST.
• Make sure your business plan factors in growth or contraction in business revenue.
• There are a range of tax credits, offsets and deductions which can reduce your costs. You need to be registered for some such as the fuel tax credits scheme. A tax professional or the ATO website has the information you will need to take advantage of these schemes and, where necessary, how to register for them.
• You will need to fulfill reporting obligations including a regular Business Activity Statement (BAS) as well as Income, Fringe Benefits and Capital Gains tax where appropriate. A tax professional or information on the ATO website will assist ensure you meet these requirements.
• Whether your workforce is made up of employees or contractors, there are tax and super obligations that apply to them. The employee or contractor decision tool on our website (ato.gov.au/Calculatorsand-tools/Employee-or-contractor/) will help you to figure out if your workers are employees or contractors.
• Make sure you withhold the correct amount of tax for your employees or, where appropriate, contractors and, make sure you are across the superannuation obligations applying to them.
Wendy Atkinson, NSW, potential franchisee, via website:
Question: Are my obligations to the ATO different if I’m a franchisee, rather than an independent business owner?
Answer: Starting and running a franchise business is much like starting and running any other small business so, in general, the answer is no. There may however be some additional matters for you to consider if you’re a franchisee.
Franchising and tax
The right to use a business brand name or trademark and to produce or distribute products or services is granted by the franchisor to the franchisee who actually owns and/or runs the business.
Tax and superannuation law applying to franchisees is the same for any business owner/operator. You need an ABN to register for goods and services tax (GST) and other business tax and credits for which you may be eligible.
Your ABN is a single identifier for all business tax dealings with us and, often, for dealings with other businesses and government agencies.
In most cases, earnings and payments you receive will be assessable income, which, for tax purposes, you treat like any other business income. You may be able to claim as business expenses:
• franchise service fees or royalties
• advertising fees, and
• training fees (specific to the franchise)
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. Because 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 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.
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 – this is because they are regarded as a continuing expense in carrying on your business.
The payments you make to the franchisor will generally also include a goods and services tax (GST) component if the franchisor is registered for GST.
Jason Gehrke, Fran chise Advisory Centre:
Question: What is the ATO’s position on the amortisation of upfront franchisee fees paid by franchisees to franchisors?
Answer: The answer to this is a little technical, but essentially the upfront fee is only that part of the initial investment attributed by the franchisor as the cost to access their intellectual property, brand and systems. This does not include training, shop fit-out, equipment, initial stock, and the like, which would also comprise the initial investment made by franchisees upon joining a franchise.
Upfront fees, whether they are the initial franchise fee or transfer fee, paid to access the right to use systems and other intellectual property, would generally be of a capital nature. The upfront fee would form part of the cost base for your franchise business as a capital asset. Because the upfront fee is included in the cost base, it is not deductible expenditure or claimable as a depreciable asset.
Question: In last year’s Review into the Franchising Code of Conduct by Alan Wein, Recommendation 6b stated: “The Code be amended to ensure that franchisees can be made unsecured creditors of the franchisor by notionally apportioning the franchise fee across the term of the franchise agreement, so that any amount referrable to the unexpired portion of the franchise agreement would become a debt in the event the franchise agreement ended”. What is the ATO’s position on this?
Answer: Whether the upfront fee becomes a debt or not does not change the nature of the fee for tax purposes – the principles outlined in the answer to the first question above on the franchisee fee will generally apply.
Marwan Kojok, Baybridge Lawyers:
Question: Can a franchisor allocate the initial franchise fee as income over the term of the franchise? Or must it be accounted for as income at the date it was received, taking into account that the initial franchise fee is apportioned to the use of the brand, the system, and training in some cases?
Answer: Again, a good question, and the answer is technically based. It relates to the derivation of income by the franchisor. The normal derivation rules will apply to this situation and generally income is derived when it is earned. In general, business income is earned when a recoverable debt is created, as indicated in our official tax ruling TR 98/1, paragraphs 9, 10, and 11.
Editors question :
Question: What issues relevant to franchisees will the ATO focus on this year?
Answer: Our role is to assist businesses understand and comply with their tax and super obligations. To ensure that there is a level playing field for small businesses we also need to take action where we identify that businesses are not doing the right thing and not complying with their obligations. For small business, particularly those getting started, we focus on helping ensure you get it right the first time.
We understand getting on top of your tax obligations can be daunting. So, if you are unsure visit our website, use the ATO App or give us a call, and do it early. We’ll work with you to ensure you understand your obligations.
Take the time to get it right at the start. Make tax part of your initial business planning. Studies have linked business success with the ability to stay on top of your obligations – so give yourself the best chance.
The free information we provide for business owners to help them do the right thing is available online so you can access it any time.
The support and assistance we provide for small business includes:
• YouTube videos on a wide range of small business topics including tips on GST. Go to the YouTube icon on our website.
• the ‘ATO App’– it has been downloaded by over 100,000 people already, and includes tax tools, videos and frequently asked questions.
• specific material on our website at ato.gov.au/franchise.
• an after-hours call-back service available by phoning 13 28 66 and we’ll phone back at a time convenient to you.
• assistance visits where we come to your premises and provide advice specific to your needs, and
• the interactive Small Business Assist tool on our website. Type in a question and it searches all the information in the website to give you an answer.
ATO franchisee help & assistance
Small business assist (ato.gov.au/sba)
• Register for ABN, GST
• Understand tax and super
• Get BAS right
To arrange ring 13 28 66 during office hours.
• record keeping
• managing cash flow and debt
• BAS obligations
• Fuel tax credits
After -hours call back
• Information, help and assistance by phone after hours – to arrange, ring 13 28 66 during office hours
You can keep up to date with your tax obligations at: