Starting and running a franchise business is an attractive, simplified way for many people to start a small business.
There are several important things to know about the transactions that take place between franchisors and franchisees — plus some important considerations relating to taxation.
A franchisor is a person who gives someone else the right to start and operate a business under an existing brand and to sell products or services under that brand or trademark.
A franchisee is a person who receives the right to use a business brand name and who operates the business, usually paying fees, royalties and other monies to the franchisor in exchange for the rights to use the brand plus a range of possible support services and materials like signage, business plan and operational assistance, marketing and so on.
The ATO states:
“As a franchisor, you need an ABN to register for goods and services tax (GST) and other business tax registrations such as pay as you go (PAYG) withholding or the fuel tax credits scheme.
“In most cases, payments you, as the franchisor, receive from the franchisee will be your assessable income (net of any GST component) for income tax purposes. Payments from the franchisee generally include:
- initial franchise fee
- franchise renewal fees
- franchise service fees or royalties
- advertising fees
- transfer fees
- training fees.
“You treat these payments like any other business income.
“The payments will generally also include a GST component if the franchisor is registered for GST.”
