If you are still looking for a suitable franchise system, it is important to gain as much knowledge as possible along the way. If you have already purchased your franchise, congratulations! You have made the brave decision to go into business for yourself and control your own future. Let’s focus on some of the financial, taxation and commercial issues you should consider as you begin this journey as a new business owner.
In line with the theme for this issue, let’s assume that you are planning to or are currently operating a mobile franchise, although much of what is said also applies to a franchise operating from a fixed location.
One of the most important items to attend to when you set up a new franchise business is to make sure you know what your income tax liability is going to be and to set aside money for that liability. I have seen franchisees struggle and even fail because they were unable to pay their income tax bills.
Most new mobile franchisees come from a background where they have been paid wages and had PAYG deducted. They then go into a new structure (be it a sole trader, trust, or company) where PAYG is not deducted or required to be deducted. So – quite legitimately – no income tax is paid for a long period, but when returns are lodged there is a large amount of tax to be paid.
As an example, assume you are a salary earner until June 2012 and you then resign and buy a mobile franchise in July 2012. You operate as a sole trader and therefore the franchise profits are included in your personal income tax return.
You will earn income and make a profit each month – hopefully! No PAYG will be deducted, as a sole trader cannot pay a salary to himself or herself. So at this stage no tax is being paid on the income.
Your 2013 income tax return – covering the first twelve month period of the business from 1 July 2012 to 30 June 2013 – will include the franchise profits for that period. If your tax return for the 2013 return is lodged by a tax agent, it can be lodged as late as May 2014, and tax will then be payable in June 2014 on the income you started earning in July 2012.
Think about that for a moment!! You are in June 2014 paying tax on income you started earning almost 24 months ago!!
As you have lodged your 2013 income tax return, you now get caught up in the instalment system. As a consequence, you will receive an instalment notice in relation to your 2014 tax requiring you to pay in July 2014 – one month after you have paid the 2013 tax. This is an instalment of tax for 2014 which will be about the same amount as you have just paid for your 2013 tax.
DON’T GET CAUGHT OUT!
I have gone in to some detail above because the issue is so important to many new franchisees. The example may be a little confusing but what it amounts to is this – you might find yourself in a situation where you pay no tax for two years, but then you pay two years tax in one month.
And then, to top it off, you will (in about three months) be required to pay another instalment of tax of about one quarter of your annual tax bill. It is obvious that the consequences of not understanding how much tax is payable and when it is payable can be horrendous, including possible collapse of your franchise.
The solution is fairly simple. You should accurately estimate your tax liability – seek help from your accountant if necessary – and then set aside, in a separate bank account, the money you need to pay in tax. Do not withdraw money from that account except to pay your tax.
GOODS AND SERVICES TAX
Your mobile franchise will need to be registered for GST unless your turnover is less than $75,000 (registration is optional if your turnover is less than $75,000).
It is not possible to fall as far behind with GST as it is with income tax for the simple reason that GST is payable either quarterly or monthly, depending on what option you chose when you registered for GST.
However, the amount of even one quarter’s GST can be substantial and pose a cash flow problem for a franchise. Some franchisees therefore open a separate bank account for their GST liability, put money aside in the account each month and only withdraw money from the account to pay GST.
If you have one or more employees and are paying wages, there will be a number of statutory payments you will have to make. These will include:
• Workers Compensation payments. The payments could be monthly, quarterly or annual depending on the State in which you carry on business and the amount you have to pay.
• Pay As You Go Withholding (PAYG – W). This is for amounts withheld from salaries. These payments will be either monthly or quarterly, depending on the amount that you are withholding from employees.
• Superannuation Guarantee Charge payments. These payments – currently nine per cent of wages but going up – have to be made not later than 28 days after the end of the quarter to which the payments relate.
It is important to understand that, if you have set up your franchise as a trust or company and you are paying yourself a wage, you have to make these statutory payments in relation to the wage you pay yourself.
Some franchisees are under the impression that if they own their business through a trust or company then the amounts they pay themselves cannot be wages. This is not correct. The amounts may be wages and if they are, then the statutory payments must be made.
You will be entitled to deduct motor vehicle expenses for a vehicle used in your mobile franchise – to the extent that the vehicle is used for business purposes. Generally, you will need to prove your business usage by means of a log book. The logbook requirement does not apply to vehicles designed to carry a load of more than one tonne. Generally, it applies to all other vehicles.
There are a number of common misconceptions, including:
• 100 per cent of the expenses of the vehicle can be claimed if the vehicle is signwritten with a business name or has a business logo on the vehicle. NOT TRUE.
• Because the vehicle is used mainly for business purposes, there is an automatic claim for 100 per cent of the expenses. NOT TRUE.
• 100 per cent of the expenses of utilities and panel vans can be claimed. NOT TRUE.
These misconceptions can prove extremely expensive. Even if your business use is in reality close to 100 per cent, your deduction will be severely limited if you do not have logbook to prove your business use. The best deduction you are likely to get without a logbook is one-third of the vehicle costs. If you use more than one vehicle for business
purposes, you can claim a deduction for the costs of business use for each of those vehicles.
Expenses include not only the running costs, but also depreciation (if you own the vehicle or are purchasing it using hire purchase or a chattel mortgage) or leasing costs if the vehicle is leased.
If you are operating a mobile franchise then it is highly likely that your home is also your main place of business. This is a little different to the situation of somebody who has an office to go to and occasionally takes some work home at night. For those people, their home is a home office but not a place of business.
When your home is also your place of business, you will generally be entitled to claim expenses on the basis of the floor area of the room you use as your office, compared to the total floor area of your house. In other words, if the floor area of the office is 10 per cent of the house, then 10 per cent of expenses are claimable. The situation becomes more complicated if you do not have a separate office but perhaps use a living room or bedroom as your office.
Where your home is also your place of business, you are allowed to claim not only a percentage of gas and electricity, but also a percentage of expenses such as interest on your mortgage, water and council rates, etc. However, if you do claim these items then, when you sell your house, it will not qualify for the full main residence exemption.
Normally, the sale of your main residence is tax free, but if you claim, say, 10 per cent of expenses such as rates and mortgage interest as a deduction, then 10 per cent of your house will be treated as the sale of business premises, and have taxation consequences.
For this reason, most people limit their deductions to those that will not interfere with the main residence exemption.
If you are renting your property, you will be able to claim a percentage of the rent as long as that property is classified as a place of business.
It makes good sense to keep good accounting records for your franchise. It makes good sense because if you keep good records you are able to regularly monitor the progress of
your business, and if you know how you are performing it will probably help you to work out what you need to do to perform better.
It will certainly help you to work out what amounts you need to set aside for GST and
income tax. Further, the better the condition of the records you provide to your Accountant at the end of the tax year, the less you are going to be charged by your ccountant.
The accounting system you use is up to you
– the system that you are most comfortable with is the most appropriate system, be it a manual system, a spread sheet system sheet or a specialised accounting package. What is important is that you keep proper records. Whatever the system you use, it is important that you keep and file all the documents that support your accounting records. Your accountant probably won’t ask for these documents, but the tax office may.
This is an area often overlooked by new franchisees. There are a number of different types of insurance to consider. Questions you need to ask include:
• Is your life insurance adequate? This is a question that you probably have considered before you bought your franchise, but it needs to be re-considered after you have purchased your franchise.
• Do you need income protection insurance? As a wage earner you are covered (for work related accidents) by workers’ compensation. If you are now self employed and not paying yourself a wage, you are no longer covered by workers’ compensation. Income protection insurance will provide you with an income if you are incapacitated and unable to work. It will provide cover irrespective of whether your inability to work is due to a work-related accident or any other reason.
• What general business insurance do you need? Types of cover you may need will include vehicle insurance, insurance of other business assets, public liability insurance and possibly professional indemnity insurance.
To some franchisees these insurance matters may seem unimportant, and the cost of insurance can be considerable, but these costs need to be weighed against the cost if an event occurs and you do not have the appropriate insurance.
There is much to do and much to learn. Hopefully the matters raised in this article help you on your journey. Good luck!
Tim is a Director of the accounting division of Lanyon Partners and heads up their franchising section. Tim has provided advice to, and acted for, many franchisees and franchisors. He is particularly active in advising on the purchase and set-up of franchise businesses.
Lanyon Partners is a professional services firm that provides accounting, taxation, financial planning and insurance services.
Contact Tim at:
Phone: 03 9861 6140