In the previous edition
Hill Mayoh discussed how the construction of your franchise and the description of it in the Franchise Agreement can have a direct bearing on the franchise’s tax effectiveness. This article takes a look at alternative business structures & how this decision can assist in the franchisee’s tax effectiveness. The same logic also applies to franchisors.
Business Structure
Before buying a franchise (or in the franchisor’s case commence operation as a franchisor) the franchisee should seek expert advice from
franchise consultants to determine which structure is best for their particular (personal & business) circumstances. This relates to both during the operation of the business and the proceeds upon its eventual sale – ie: begin with the end in mind.
For an individual or family to protect their personal assets (eg family home) the franchisee should consider being either a company or a trust with a corporate trustee. A franchisee owning and operating their business as a sole trader, partnership or trust with an individual as trustee is putting their personal assets on the line.
NB: It should be noted it is normal for both the franchisor & the banks to require personal guarantees – although the banks are now lending a % over the assets & undertakings of many franchised businesses, normally at a higher interest rate.
By way of explanation a Fixed (Unit) Trust is normally used when non related parties enter into a joint venture (eg: 2 families buy a franchise together), the unit-holding representing their % ownership and therefore distribution of profit. The Discretionary (Family) Trust is where a family buys a franchise, the trustee having the ability to distribute profit at its discretion. In order to maintain the flexibility for distribution of income and preserve the 50% CGT concession as explained below in the case where two families buy the franchise together it is commonplace for the beneficiaries of the Unit Trust to be Family Trusts.
There are four main Capital Gains Tax (CGT) concessions available to small business, subject to various conditions plus a general 50% discount for individuals and trusts ( incl. partnerships of these). A company therefore does not receive this general 50% discount however may qualify for the specific small business CGT exemptions subject to various conditions including business assets remaining below $6 million or business turnover remaining below $2 million.
Therefore where asset protection, succession planning & income splitting requires the use of an entity to purchase & operate a business, a trust (or even a partnership of trusts) can be preferable to a company. A corporate beneficiary can be included to keep income from being taxed in excess of the corporate tax rate.
Summary
Whilst there are many ongoing tax issues for franchisees the above are considered as essential tax planning strategies for both the franchisee and the franchisor.
NB: These notes are intended as a guide only. You should not act solely on the basis of the information contained in this article because many aspects of the material have been generalised and the taxation laws apply differently to individual people based upon their particular circumstances. Further, as taxation and other related laws change frequently, there may have been changes to the law since this article was written. Do not act on the information contained in these notes without first obtaining specific advice from a tax professional regarding your particular circumstances.
Brian Mayoh is a partner in the
accounting services practice of Hill Mayoh which specialises in providing accounting, tax and business advisory services to the franchise sector, the practice having numerous franchisees & franchisors as clients.
18-Sep-2008