Under a `business system franchise agreement' the owner of an
established business format (the franchiser) grants to another
person (the franchisee) the right to distribute products or perform
services using that system. A wide variety of activities are the
subject of franchise agreements.
The terms of agreements vary considerably but generally the
franchisee gets the use of the system and any necessary management
back-up for a specified period, of perhaps five to ten years, in
return for:
The continuing fees may be calculated as a percentage of
turnover, a mark-up on purchases from the franchiser or a regular
fixed payment per outlet. Continuing fees are intended to pay for
services, which may be required in later years.
It is important to obtain a copy of the signed agreement if a
question arises over the tax treatment of a franchise
payment/receipt.
