Managing franchise finances

Given the labour-intensive nature of managing a franchise business, efficient wages management is an essential skill that franchisees must learn to master.

Identifying tax withholding scales for employees, what allowances require tax to be deducted, preparing Pay-As-You-Go payment summaries and making correct employer super contributions are all additional tasks which make running a business daunting, particularly for start-up operators and small businesses.

Large and established enterprises are likely to have the luxury of dedicated accounting staff to manage these tasks, but for other small operators it is a time-consuming and expensive job they can happily do without.

The wage bill is large enough in itself for franchise businesses to be shouldering these often excessive administration costs.

Handled incorrectly, the payment of wages can cause enormous strain to employers in terms of compliance and, in some cases, excessive tax payments.

Compounding the complexity of the issue is the various categories of employment within a franchise, from part-time and casual staff primarily enlisted around peak periods through to full-time employees.

The Superannuation Guarantee Legislation and numerous other tax office rulings have generated an enormous amount of paperwork for operators also juggling the day-to-day operations and other significant work challenges.

Unspoilt for choice

There are numerous tax withholding scales and many employers find it almost impossible to determine which is the correct one under specific circumstances. By the time HECS debts and supplements are taken into account, determining the right tax scale is indeed a difficult proposition.

The large range of tax scales is causing frustration and confusion among many industry employers and, in turn, leading to a reduction in productivity.

Staff super contributions

Employers face similar difficulties trying to calculate superannuation contributions.

Under the Superannuation Guarantee Legislation, employers are required to pay nine percent of an employee’s ordinary time earnings as superannuation – but many employers are unclear exactly what constitutes ordinary time. As a result, employers tend to err on the side of safety when it comes to working out compulsory superannuation contributions and effectively over-pay employees, potentially costing themselves thousands of dollars a year.

The ATO is increasing its Superannuation Guarantee Charge audit activity and, given the large fines facing those found to be in breach of the law, this cautious approach is understandable, although it can be self-defeating. We have seen a number of cases where employers have been paying their superannuation on overtime because of a misunderstanding of what constitutes ordinary time earnings.

Overtime, for example, is not ordinary time earnings, but shift allowance is. Where there are four or five employees involved, the additional payments can run into thousands of dollars.

Allowances and reimbursements

One of the most confusing areas is that of allowances and reimbursements. When allowances are paid to employees, there are complicated rules about whether tax must be withheld, what must be reported on the employee’s PAYG payment summary and whether superannuation must be paid.

The Tax Office defines allowances as ordinary time earnings, but reimbursements are not. However there are some allowances that are actually classed as reimbursements and are not subject to superannuation. For example, there is no need to pay superannuation on items such as meal allowances.

Automate to save

Employers are being forced to spend countless hours buried under a mountain of paperwork and, at the end of it all, they still often can’t establish the correct tax withholding scale or superannuation contribution.

Instead, employers should look to automate their wage systems as much as possible to relieve much of the time spent on paying employees and minimise the risk of breaching current rules and regulations.

The best bookkeeping software programs allow the employer simply to type in the information from the employee’s tax instalment declaration form and the program automatically calculates the appropriate tax scale.

This saves a lot of needless anxiety and at the same time ensures employers are only paying their correct superannuation entitlement.

Consolidate this knowledge with information from Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.