TAX ISSUES IN FRANCHISING

Transcription

1 TAX ISSUES IN FRANCHISING Peter Murray (CTA), Partner Amanda Leong (FTI) Senior Associate Hall & Wilcox

2 Outline of session Introduction to franchising in Australia Income tax considerations capital/revenue distinction income and deductions capital gains international withholding tax (for cross-border arrangements) permanent establishments transfer pricing GST considerations Stamp duty considerations Payroll tax considerations

3 Franchising in Australia a method of building a business whereby a franchise owner (franchisee) is granted for a fee, the right to offer, sell or distribute goods or services under a business system determined by the business founder (franchisor). The franchisor supports that franchised business group by providing leadership, guidance, training and assistance, for which they receive ongoing service fees. Elements: parties (franchisor, master franchisee, franchisee) system (grant of rights to use) fees paid in exchange for the right to offer, sell or distribute goods and services

4 Franchise diagram Franchisor Entity holding IP OVERSEA S AUST Master Franchisee Franchisee (company owned) Franchisee (independent)

5 Rules and regulations Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (the Code) Key documents: franchise agreement disclosure documents information sheet other documents ACCC (fines, penalties for non-compliance) Franchise Council of Australia statistics

6 Types of fees payable Fee T ype Description Initial Franchise Fee one off payment for the granting of the franchise Franchise Renewal Fee one off payment for the renewal of term for the franchise at the expiry of the initial term Franchise Service Fees recurring fee (% of turnover) potentially for the provision of management assistance or for the right to use IP related to the system Advertising/ Marketing Fees recurring fee payable for advertising/marketing costs paid by the franchisor for all franchisees Training/Support Fees fee payable for the training of franchisee personnel by franchisor Lease Fees fees payable for use of land/site

7 Income tax considerations Revenue/capital distinction revenue outgoing relates to activity of producing/gaining income gross receipts/net profits included in assessable income payments made will give rise to deduction capital outgoing relates to profit yielding structure of the business income and payment will be relevant for purposes of calculating capital gain payments made form part of the cost base Which fees should be treated as revenue or capital?

8 Analysis of fees Fee T ype Franchisor* Franchisee* Initial Franchise Fee Revenue Capital Franchise Renewal Fee Revenue Capital or revenue** Transfer Fees Revenue Capital Franchise Service Fees Revenue Revenue Advertising/Marketing Fees Revenue Revenue Training/Support Fees Revenue Revenue Lease Fees Revenue Revenue * As a general guide only, tax treatment will depend on specific facts ** If fee is akin to a licence fee

9 Relevant case law Rolls Royce v Jeffrey (Inspector of Taxes) aero engine manufacturers payments for exploitation of know how in construction of engines assessable Consolidated Motels v IRC(NZ) right to use the name and system for operation of motels assessable Borg v FCT rights to use certain cleaning processes in exchange for payment assessable

10 Income tax considerations Acquisition of business assets depreciation (Div 40) depreciable asset, effective life borrowing costs (Div 25) costs of financing acquisition capital works (Div 43) decline in value of buildings Royalties (IT 2660) payment for the grant of the use of relevant IP assessable/deductible: consider when paid to residents v non residents Withholding tax (royalties, interest and dividends) payable to non-residents non DTA v DTA rates resident can only claim relevant deduction once WHT obligations met

11 Capital gains and losses Capital Gains Tax (CGT) general concepts CGT events (Disposal of asset - A1) CGT asset capital gain/(loss) = capital proceeds (reduced) cost base CGT on the sale of shares s108-5 CGT asset includes shares in a company A1 triggered on sale of shares CGT on the sale of business assets and equipment A1 triggered on sale/disposal balancing adjustments (40-285) net capital losses may be carried forward CGT concessions (active asset, holding >12 mths)

12 Trading stock and losses Sale of trading stock (Div 70) anything the business uses, produces, manufactures or acquires to manufacture, sell or exchange sale in ordinary course = revenue sale not in the ordinary course = revenue but consider appropriate valuation Availability and use of tax losses ability to use losses revenue can use to offset taxable income, carry forward capital - can use to offset capital gains continuity of ownership test (> 50% voting, dividend and capital rights owned by the same persons) same business test (company carries on the same business it did before COT failed)

13 Income tax - international Permanent establishments (s6(1), TR 2002/5) place through which carries on business/use or install substantial equipment or machinery where person has or habitually exercises a general authority to conclude contracts Transfer pricing (Div 815) prevent shifting of profits by multinationals to low tax jurisdictions cross border arrangements, arm s length reporting considerations (master file, local file, CbyC) Treatment of Goodwill customers, database, location/site goodwill

14 GST considerations Taxable supplies supply consideration course or furtherance of enterprise connected with indirect tax zone registered for GST Creditable acquisitions (s11-5) = ITC Supply of a going concern (s38-325) = GST free Registration agreement in writing transfer all things necessary for cont. operation of enterprise continue enterprise up until date of supply Non residents: if supplies connected with indirect tax zone >$75,000

15 Stamp duty considerations Transfer of dutiable property: (Duties Act 1997) NSW dutiable property dutiable value rate of duty Business Assets s11(g) = goodwill of business, IP or statutory licence to be abolished from 1 July 2016 Transfer of shares payable on the transfer of non listed shares in NSW company rate = 60c per $100 to be abolished from 1 July 2016

16 Payroll tax considerations Payroll Tax Act 2007 Grouping inter-use of employees (s 71) BOQ v CSR - agency single or separate business? format of business, shareholders/directors of franchise/capital, insurance, preparation of financial statements and tax returns level of control the franchisor exercises over franchises Discretion to Exclude (s79) if grouped, CSR has discretion to exclude (Ruling PTA031) factors sharing of resources, facilities, services, involvement in managerial decisions, financial interdependencies

17 Peter Murray / Amanda Leong, Hall & Wilcox 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.