What tax does a franchisee have to pay?
Franchisees can often pay different amounts of tax depending on what industry the franchise is in and more importantly what business structure they are using.
Most franchisees when they sign up for a franchise don’t get the proper advice about what business structure is suitable for them both at the time and going forward. Sometimes financial circumstances can change over time and the current business structure may no longer be applicable or the best for the business owner so it is best to have this reviewed regularly.
Now, there are four commonly used business structures in Australia; sole trader, partnership, trust or company. The taxation for each structure is different.
Let’s start with income tax which is the tax you pay on any money your franchise business earns. This means the total sales or income minus any allowable deductions or expenses.
Companies and trusts are probably the most commonly used business structures. A company pays its own tax, separate from the owner’s personal income. Currently the company income tax rate is 27.5 per cent for any small business with turnover under $25 million which would cover most franchisees.
A trust does not usually pay any tax, the profits are distributed to the beneficiaries who are then assessed and subject to tax at their marginal rates which can range from nil to 47 per cent.
Goods and services tax
GST, commonly known as goods and services tax is applicable to most things and as a franchisee you would be required to add 10 per cent to anything that is sold. You are also entitled to claim the GST you have paid on your expenses.
The difference between the GST you have charged on your sales minus the GST you have paid on your expenses is the GST that is payable. That is unless you were a franchisee in a specific industry like health or exports etc when GST may not apply. Your accountant should be able to advise what items are subject to GST and not.
Capital gains tax
Capital gains tax is the final tax that is applicable if you sell your franchise business. Any profit you make from the sale price after deducting the cost to purchase or setup the franchise is subject to capital gains tax.
Depending on your tax structure and financial circumstances, you may be entitled to small business concessions which will help in reducing or eliminating the profit on the sale. In a company you are not entitled to the 50 per cent discount on the profit so any profit is just taxed at the company tax rate of 27.5 per cent.
Under a trust structure the capital gain is distributed to the beneficiaries and they will be able to access the capital gains discount to reduce the capital gain if they are entitled to it. As well an active asset deduction of 50 per cent may apply, and the gain may be able to be further reduced or even in some cases eliminated by applying a retirement exemption.
Be tax aware
Other taxes that a franchisee may be subject to are the wages tax Pay As You Go Withholding Tax, Payroll Tax (dependent on which state and threshold applies) and possibly Fringe Benefits Tax.
A franchisee should be aware of these taxes and meet with their accountant or business advisor when the business structure is setup at the start. They should also review them each year to ensure they are paying the correct amount of tax based on their structure, and to review whether the current structure is still the most appropriate one for them.