If you run a successful company that offers valuable products or services to consumers, you might want to open other locations to reach a larger audience. Not only will you earn a higher profit, you’ll also help countless new customers while you build your brand from a distance.
Instead of owning and operating all the locations yourself, you can offer your business model as a franchise opportunity, and allow other hardworking entrepreneurs to run each establishment under your brand name. Here are four expert tips for turning your startup into a 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. As 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 also 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.
Royalties or Interest Payments
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, as they are a continuing expense in carrying on your business.
Royalty and interest payments to non-residents
As a franchisee, you may make royalty or interest payments to non-resident franchisors. Generally, you are required to withhold a flat rate of 30% from the gross amount of a royalty payment and 10% from the gross amount of an interest payment. However, a double tax agreement with the non-resident’s country of residence may reduce this rate.
You pay to us the Australian Taxation Office the amounts you withhold from royalty and interest payments, and report the amount in your activity statement for the relevant reporting period. You later report the total annual amount of royalty and interest payments and amounts withheld using the form – PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.
You can only deduct the royalty payment to a non-resident as a business expense if you have withheld tax from the royalty payment and the amount is paid to us the Australian Taxation Office.
If you need expert advice for franchising, contact us today. Our team of Melbourne accountants will be happy to assist you.