Tax Implications For Franchisees

In Short

• Initial franchise fees are generally not tax-deductible, but ongoing fees like royalties and marketing levies are.
• Assets and equipment may be eligible for depreciation deductions over time, while consumables like office supplies are typically deductible.
• GST can be claimed on franchise-related payments, and royalty payments to non-resident franchisors require specific tax reporting.

Tips for Businesses

Franchisees should ensure they understand the tax treatments for different franchise-related expenses. Initial franchise fees are capitalised, but ongoing costs like royalties, marketing, and training fees are usually deductible. Keep track of your equipment and assets for depreciation, and be mindful of GST credits. If dealing with non-resident franchisors, consult a tax professional for proper reporting and deductions.

Summarise with: ChatGPT Claude Perplexity Microsoft Copilot

---

Table of Contents

• Franchise Fees
• Asset Purchase and Setup
• Royalty and Marketing Fees
• Training Fees
• Goods and Services Tax
• Termination of a Franchising Agreement 
• Non-Residents
• Key Takeaways
• Frequently Asked Questions

Franchising is a business model where the franchisor grants a franchisee a licence to use their business name, procedures, and IP. This ready-to-go model brings unique tax implications. This article explains the tax obligations for franchisees and outlines which franchise-related payments are tax deductible as business expenses.

Franchise Fees

The Australian Tax Office (ATO) states that the initial franchise fee is generally not deductible as a business expense. This fee is considered part of your capital asset. Franchise renewal fees may also form part of your cost base and are not deductible. However, they may be deductible as a business expense if they do not form part of your cost base.

Fees paid to professional advisers, such as lawyers, accountants, or business advisers, are generally deductible. These fees are not related to the business’s value.

Asset Purchase and Setup

If you purchase equipment or assets, these may be deductible or capital assets depending on their nature, cost, expected lifespan and intended use.

Generally, the equipment you invest in to operate the business and any additional income will depreciate over time. These write-offs are periodic tax deductions. As such, you will still get a tax deduction, just not initially.

Consumable items or miscellaneous business expenses involved in the day-to-day operations of the business may be more likely to be tax deductible. This could include:

• third-party software;
• initial supplies; or 
• consumable stationery.

If you purchase assets from an existing business, you should check the:

• current value;
• expected depreciation; and 
• any financing or security attached to the asset.

This way, you can ensure your financial records are accurate.

Royalty and Marketing Fees

Ongoing use of a franchisor’s business model, systems, operations and IP often involves payment of ongoing fees. These fees include:

• royalties; 
• interest payments; or 
• levies for advertising and marketing.

Royalty payments and marketing levies are typically based on the revenue of your franchise, although they may sometimes be fixed or conditional. Regardless, these payments are deductible as a business expense. Unlike the initial upfront fee, they are a continuing expense of your business that covers expenses relating to: 

• administration; 
• services from the franchisor; 
• advertising; and 
• other types of support. 

Training Fees

Training fees are charged to the franchisee to provide training in running the business. This training ensures that the managers and employees of a franchise remain up to date with business procedures. Training fees may be included in the initial franchise fee. Alternatively, you may charge this fee separately upfront or expense it on an ongoing basis. This is dependent on the franchisor. 

Suppose the initial training is charged separately and in exchange for tangible services (particularly for third-party providers). In that case, they may be deductible and considered separate from the business’s cost base. After all, the knowledge gained from training is retained by the individual employees. 

Ongoing training fees can more readily be claimed as a business expense. This might mean that paying training fees separately and over time is a more financially viable option for franchisees. 

Goods and Services Tax

Your ongoing payments to the franchisor usually include a goods and services tax (GST) component. If you are registered to pay, you will generally be able to claim a GST credit for the amounts relating to the payment of:

• initial franchise fee and ongoing fees (such as royalties);
• franchise renewal fees;
• advertising fees;
• transfer fees; and
• training fees.

Franchisor Financial Disclosure Factsheet

This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.

Download Now

Termination of a Franchising Agreement 

You must consider both GST consequences if you transfer a franchise to someone else or terminate a franchise agreement. In addition, you will also need to consider capital gains tax. 

When you transfer or terminate your franchise, the initial fee in your cost base may be relevant in working out your net capital gain (if any). Therefore, this should be accounted for in your annual tax return.

Non-Residents

You may make ongoing royalty payments to a non-resident franchisor as a franchisee. In these circumstances, tax rates paid to the ATO might be lower. This is because there may be a double-tax agreement with the franchiser’s country of residence. This would, therefore, reduce the standard amount of tax withheld, typically 30% from the gross royalty payment amount.

You must pay the ATO the amounts you withhold from royalty and interest payments and report the amount in these circumstances. Moreover, you should later report the total annual royalty, interest payments, and amounts withheld.

Also, remember that you can only deduct the royalty payment to a non-resident as a business expense if you withhold tax from the royalty payment. Therefore, if you are paying a non-resident franchisor, you must seek financial assistance. Again, you should consult a legal or accounting professional for assistance with this. 

Key Takeaways

There are unique tax implications associated with operating as a franchisee. Speaking to a legal or financial advisor about your tax obligations can help you maximise your franchise. However, some key things to note include the following:

• the initial franchise fee you pay to the franchisor is not deductible as a business expense from your annual income tax;
• assets and equipment can have different tax treatments;
• royalty payments, advertising expenses and training fees are usually tax-deductible; and
• there are different tax obligations associated with non-resident franchisors.

If you need assistance understanding your tax obligations as a franchisee, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions