NEW: Michael Sherlock
Monday, September 10, 2007/
There is more than one taxman – in fact, franchisors need to be wary of an army of people clipping their ticket.
An army of taxmen
If you’re thinking about buying a franchise, you need to know that your franchisor will not be the only one interested in getting a percentage of your turnover. There is an army of taxmen lining up to take a piece of the action.
First up there is the tax office. And GST, which is based on turnover, is the main tax franchise businesses have to think about.
When I was MD of Brumby’s, the general manager Steve Brown organised a co-operative agreement with the tax office to monitor retail turnover because the franchisor has the same interest in monitoring retail turnover as the tax office. And if the franchisor holds the franchisees to tight disciplines to accurately report all sales, compliance levels are high. In recognition of this the tax office gave Brumby’s franchisees a concession in auditing.
Every quarter, Brumby’s provided a list to the ATO of compliant franchisees who had their Brumby’s paperwork in order. The ATO committed to taking note of those stores on the compliant list (it was around 90% of the franchisees) when targeting the sector and undertook to be less intrusive in the case of an audit.
Being a franchisee, you will also have to consider other forms of tax, such as FBT, CGT, YT, GT, payroll tax, and many others too numerous to mention.
The other taxman for retail franchisees is the landlord.
In addition to collecting rent, there are a number of other levies applied to tenants by landlords that you’ll need to understand by fully reading your lease/head lease/sub lease/premise license agreement.
The GST of landlords is percentage rent. In addition to your agreed rent, many leases contain a clause that stipulates additional rent to be paid if your turnover exceeds certain preset levels.
Other landlord taxes include annual minimum reviews, market reviews, outgoings, council rates, merchants associations, air conditioning levy, rubbish collection levy, etc, etc.
In addition you will also find a refurb clause requiring you to upgrade your shop fit and signage every four to five years. This can prove to be very expensive, as landlords of large shopping centres tend to employ expensive and demanding retail design consultants who are full of expensive ideas.
I can recall on one occasion during my time at Brumby’s one of these poncey architects with no retail experience rejected our signage and shopfit because he didn’t like the name Brumby’s, despite us having more than 200 stores at the time with more than a 20 year history.
If you’re currently contemplating signing a franchise agreement, make sure that you do your homework, get advice and fully understand the various taxes the franchisor intends to collect from you.
The other GST of your franchise deed is your weekly royalty to the franchisor based on a percentage of turnover, this can vary from 5% to 10%.
Franchisors also tax their franchisees with upfront franchise fee, which in most cases is a diminishing asset as you have to repay this fee every six to 10 years – in a lot of cases this can represent an additional $5000 a year.
Other taxes include the ad levy. Make sure you fully understand how the franchisor can spend the ad money as you will find it is very open ended, and most franchisors can use your ad levy money as an income.
Other items to look for before using a franchise deed include training fees, both upfront and ongoing, general legal costs and legals for renewals, project management and design fees, renewal fees, exit fees, percentage of sale fee and refurbishing requirements to upgrade signage and shop fitting and to comply with the franchisors latest ideas in IT, signage, or anything else.
One other tax under the new amendments to the franchise code applicable from 1 March is the rebates franchisors receive from your purchases required under your franchise agreement.
This hidden tax is often in contravention of the trade practices act regulations for third line enforcing and franchisors are required to get an exemption to have franchisees purchase from recommended suppliers.
Before you sign your franchise agreement make sure you fully understand all of the taxmen that you have to pay as a consequence. In the words of Joe Walsh in the song Life’s Been Good: “Make sure that you have accountants pay for it all.”
Michael Sherlock was managing director of Brumby’s Bakeries, a 320 store franchise chain in Australia and New Zealand, from 1999 to 2007. Michael oversaw the growth of Brumby’s from its early days in 1975 where it was established to support the work of a health and education foundation to its recent sale to the ASX listed, Retail Food Group for $46 million. Michael is also a contributor to the book “Top Franchise CEO’s Secrets Revealed”.
For more Franchise Facts blogs, click here.