Despite several high-profile court cases involving disgruntled franchisees, the franchise model remains an attractive option for businesses.

The annual total sales revenue for Australia’s franchise sector is estimated at $146 billion – and growing – so it’s little surprise that it continues to thrive.

But, how exactly does a business determine whether franchising is an appropriate model?

Which tax and commercial decisions should it make in order to attract the most suitable franchisees?

Business structure

When entering into a franchising business model, it’s important to have an appropriate structure that provides both asset protection and tax efficiency.

Considerations include:

  1. A company structure to operate the franchisor business which provides asset protection and allows profits to be retained and re-invested
  2. The use of a family trust to hold shares in the company
  3. Multiple companies may be considered to separate assets from liabilities
  4. The use of a holding company
  5. Land real estate used to operate any of the business activities may need to be kept outside of the corporate group to preserve the CGT discount.

Incentivising key employees

Issuing equity to founders and employees of a company will often be linked to the commercial objectives of that company.

However, it is important to consider the tax implications of any equity issues.

From a tax perspective, the default position of an Employee Share Scheme (ESS) is to tax an employee upfront on any value they get upon receiving shares, options or performance rights.

Tax laws allow start-ups to apply ESS tax concessions. If available, these concession rules provide the best tax outcomes, because:

  • The employees will only trigger a tax liability once the shares are sold
  •  There is certainty on CGT discount for any capital gains made on the sale of the shares
  • Companies have the ability to value the shares, options or performance rights on a concessional valuations basis.

R&D tax incentive

Franchisors in innovative industries may potentially have access to the R&D tax incentive which may provide 43.5 percent cash offset for eligible R&D costs.