Franchise Tax in Australia: What Every Franchisee Needs to Know Before Signing

Buying a franchise is one of the most popular pathways to business ownership in Australia — over 1,400 franchise systems operate here, employing more than 600,000 people. But the franchise model comes with a unique set of tax considerations that standard business advice doesn't always cover.

Before you sign a franchise agreement, or if you're already operating a franchise and want to make sure you're getting the tax right, this guide covers the key issues you need to understand.

The Initial Franchise Fee: Deductible or Capital?

One of the first questions we get from franchisees is whether the upfront franchise fee is deductible. The answer is: it depends.

The initial franchise fee is typically paid for the right to operate under the franchisor's brand and system — it's an intangible asset (a licence). In most cases, this fee:

• Is not immediately deductible as a business expense
• Is treated as a capital cost — either depreciated over the life of the franchise agreement (if it has a limited effective life) or held as a non-depreciable capital asset
• May form part of your cost base for CGT purposes when you sell the franchise

Some initial franchise fees also include a training component or a "business setup" component, and the portion allocated to these activities may be separately deductible. It's important to have the fee properly allocated in the franchise agreement and your financial records.

Ongoing Royalty Fees and Management Fees

Royalties paid to the franchisor on an ongoing basis — usually a percentage of weekly or monthly turnover — are fully deductible as a business operating expense. The same applies to marketing levy contributions, technology fees, and any other regular fees under the franchise agreement.

These fees also attract GST at 10%, which you can claim as an input tax credit in your BAS (provided you're registered for GST, which virtually all franchisees will be).

GST and Franchise Businesses

GST applies broadly in franchise businesses. Key points:

• Most franchise businesses sell goods or services that attract GST at 10%
• Food franchises may have complex GST classifications — some food items are GST-free (basic food), while others (hot food, meals) are taxable. Getting the POS classification right from day one is critical.
• Royalties, marketing levies, and franchise fees paid to the franchisor all include GST
• If you purchase an existing franchise from another franchisee, the sale may be treated as a going concern — GST-free if conditions are met

Business Structure: Which is Best for a Franchise?

Choosing the right business structure before signing the franchise agreement is critical — it's much harder to change later. Your franchise agreement will specify who the approved operator can be.

Sole Trader

Simple and low-cost, but all profits are taxed at personal marginal rates (up to 47%). No liability protection. Suitable for very small franchise operations under $80,000 net profit.

Company

A company (Pty Ltd) provides: (1) liability protection — your personal assets are generally protected from business debts; (2) a flat tax rate of 25% for small base rate entities; and (3) a more credible structure when dealing with landlords, suppliers, and the franchisor. Most franchisors prefer or require a company structure. Profits must be extracted via salary or franked dividends.

Trust

A discretionary trust with a corporate trustee provides income splitting flexibility (distribute to family members at lower marginal rates) and asset protection. However, some franchisors don't permit trust structures — always check the franchise agreement before setting one up.

Deductions Specific to Franchise Businesses

Beyond standard business deductions, franchise businesses have some specific items to consider:

• Franchise renewal fees — if you renew your franchise at the end of the term, the renewal fee may be immediately deductible (unlike the initial fee) as it's maintaining an existing right rather than acquiring a new one
• Training costs — mandatory franchisor training courses are deductible
• Required refurbishments — major fit-out upgrades required by the franchisor are capital (depreciated) but often qualify for the instant asset write-off if under the threshold
• National marketing fund contributions — fully deductible
• Legal and accounting costs — pre-opening legal review of the franchise agreement is a capital cost (part of the cost base of acquiring the franchise), but ongoing legal and accounting fees for running the business are deductible

Selling Your Franchise: CGT Implications

When you sell your franchise, you'll have a capital gains tax event. The capital gain is calculated as:

Sale price received – (Initial franchise fee + fit-out costs + improvement costs + selling costs)

Good news: if you've held the franchise for more than 12 months, you may be entitled to the 50% CGT discount. Even better, if the franchise qualifies as a "small business", you may be entitled to one or more of the small business CGT concessions:

• 15-year exemption — if you've held the franchise for 15+ continuous years, the entire gain may be tax-free
• 50% active asset reduction — reduces the taxable gain by a further 50%
• Retirement exemption — up to $500,000 of the capital gain can be CGT-exempt if contributed to super
• Rollover relief — defer the CGT if you're buying another business

These concessions can reduce — or even eliminate — the CGT payable on a franchise sale. Planning well in advance (ideally 1–2 years before selling) is key to maximising them.

Common Tax Mistakes Franchisees Make

• Claiming the initial franchise fee as an immediate deduction (it's typically capital)
• Wrong business structure — the structure that suits a start-up may not suit a thriving franchise after 5 years
• Not keeping records of all capital improvements (these reduce CGT on eventual sale)
• Failing to claim the small business CGT concessions when selling
• Incorrect GST treatment on food items
• Underpaying staff under the relevant Award