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New tax system could be good for franchises

DESPITE fears over the cost of compliance to small operators, the introduction of the GST will have minimal impact on the growth of the franchising industry.

Indeed, the new tax regime will only strengthen the case for franchising as a way of doing business.

This is the optimistic view of many industry leaders and watchers.

While the new tax is designed to foster small business, some leaders in the industry fear the cost of complying with both the GST and Code of Conduct may become a barrier to entry for prospective franchisees.

Jani King managing director Ben Stoltz said this would be a shame because the whole community benefitted from the jobs and services provided by small operators.

“However, the whole tax debate does highlight the advantages of the franchising system,” Mr Stoltz said.

“As the saying goes: franchisees are in business for themselves but not by themselves.

“By associating with the right franchisor who has the working capital, proven concepts and technical skills, franchisees will have a much higher rate of success in navigating the tax changes than independenent stand-alone operators,” he said.

The GST legislation which comes into effect on 1 July makes no special references to franchising.

However, because of the unique financial arrangements in franchising, there are GST implications which merit attention.

For example, if a franchisee purchases a greenfield franchise – a business which has not existed previously – the transaction will be subject to a GST as it is a ‘taxable supply’ by the franchisor.

If, on the other hand, a franchisee takes over an existing business, it will be exempt from the GST since it is the sale of an ongoing business.

Essentially, any transaction which involves ‘taxable supply’ will be subject to GST.

This includes but is not limited to, the initial franchise fee, ongoing royalties, establishment costs and supply of goods by the franchisor.

One franchise arrangement yet to be resolved is the issue of the marketing fee. If the fee is paid into a separate account, seemingly, it does not constitute taxable supply and will not attract GST.

The matter has yet to be resolved and the Australian Tax Office has been asked to provide a ruling.

Haines Norton Partner and tax specialist Wally Borovac said the GST is just the tip of the iceberg in the tax reform package.

“The new tax completely changes the way we look at capital gains, tax planning and business in general,” Mr Borovac said.

“Good record keeping, filing, administration and equipment are absolute musts if franchisers wish to avoid serious disruption to their businesses.”

Franchise Council of Australia Perth Chapter president John Groppoli said that, while there is concern for small operators on the margin, those franchisees that are well-administered and proven will succeed in the new environment.

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