Inglewood & Districts Community Enterprises Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2010/2462)
Judgment date: 31 August 2011
Date published: 23 November 2011

Summary of decision:
Outlines the ATO's response to this case, which concerned whether a Franchise Establishment Fee and Franchise Renewal Fees in a Franchise Agreement were deductible under section 8-1 or 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of facts:
Bendigo Bank Ltd operates a 'Community Bank Model' which involves local communities establishing and operating their own Bendigo Bank Branch. Each branch operates as a corporate franchise of the bank, using the name, logo and various systems of the bank. A franchisee is appointed as an authorised representative of the bank and manages the branch on behalf of the bank in the local community. The bank still carries on the banking business. | A franchise agreement governs the management of the branch and the rights and obligations of the franchisee and the bank. A franchisee is entitled to certain fees and commissions and to a share of the profits from the operations of the branch, and must pay various fees for the right to use the bank's System and other intellectual property. | The applicant was incorporated on 15 February 2007 and entered into a franchise agreement with the bank during the 2008 income year to operate a branch in Inglewood. | The Commissioner made a private ruling that a Franchise Establishment Fee of $100,000 was not immediately deductible under section 8-1 of the ITAA 1997, nor was it deductible in accordance with section 40-880. The Commissioner also ruled that any Franchise Renewal Fees of $10,000 and $50,000 payable on renewal of the franchise agreement were not deductible under section 8-1 and, accordingly, were not deductible over the eligible service period under Subdivision H of Division 3 of Part III of the Income Tax Assessment Act 1936 . | Issues decided by the Administrative Appeals Tribunal | There was no dispute before the Tribunal that the Franchise Establishment Fee was of a capital nature. The Tribunal found that the applicant paid the Fee to secure the right to use the bank's System and other intellectual property, and not for particular services rendered by the bank prior to the opening of the branch (paragraphs 14 to 17). The fee was excluded from deduction under section 40-880, because it was either paid in relation to legal or equitable rights conferred by the franchise agreement under paragraph 40-880(5)(d), or paid in respect of acquiring a CGT asset, and would be taken into account in working out a capital gain or loss under paragraph 40-880(5)(f) (paragraph 22). | In relation to the Renewal Fees, while the Tribunal accepted that the fees would be paid for the renewal of the structure of the applicant's business, it found that they would be on revenue account because the renewal term of 5 years is a relatively short period that would recur, and the applicant would be left with nothing if renewal did not occur (paragraph 31).

Issues decided:
There was no dispute before the Tribunal that the Franchise Establishment Fee was of a capital nature. The Tribunal found that the applicant paid the Fee to secure the right to use the bank's System and other intellectual property, and not for particular services rendered by the bank prior to the opening of the branch (paragraphs 14 to 17). The fee was excluded from deduction under section 40-880, because it was either paid in relation to legal or equitable rights conferred by the franchise agreement under paragraph 40-880(5)(d), or paid in respect of acquiring a CGT asset, and would be taken into account in working out a capital gain or loss under paragraph 40-880(5)(f) (paragraph 22). In relation to the Renewal Fees, while the Tribunal accepted that the fees would be paid for the renewal of the structure of the applicant's business, it found that they would be on revenue account because the renewal term of 5 years is a relatively short period that would recur, and the applicant would be left with nothing if renewal did not occur (paragraph 31).

ATO view of decision:
The ATO accepts that it was reasonably open to the Tribunal to find that the Franchise Renewal Fees would be on revenue account, in the context of an expected long-term collaboration between the applicant and the bank in a small town.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1936 Subdivision H of Division 3 of Part III Income Tax Assessment Act 1997 8-1 40-880 108-5(1) 110-25(2)
Case references: BP Australia Ltd v FC of T (1965) 112 CLR 386 44 ATC 312 [1965] TR 317 Case S24 (1995) 17 NZTC 7, 169 85 ATC 256 City Link Melbourne Ltd v FC of T (2004) 141 FCR 69 2004 ATC 4945 Colonial Mutual Life Assurance Society Ltd v FC of T (1953) 89 CLR 428 [1953] HCA 68 Fanmac Ltd v FC of T (1991) 91 ATC 4703 22 ATR 413 FC of T v Chapman (1989) 89 ATC 4246 20 ATR 438 FC of T v CityLink Melbourne Ltd (2006) 228 CLR 1 2006 ATC 4404 62 ATR 648 FC of T v Duro Travel Goods Pty Ltd (1953) 87 CLR 524 [1953] HCA 32 FC of T v Krakos Investments Pty Ltd (1995) 61 FCR 489 32 ATR 7 96 ATC 4063 Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634 [1946] HCA 34 Labrilda Pty Ltd v DF C of T (1996) 65 FCR 119 32 ATR 206 96 ATC 4303 Spriggs and Riddell v FC of T (2009) 239 CLR 1 72 ATR 148 2009 ATC 20-109 Sun Newspapers Ltd v FC of T (1938) 61 CLR 337
Subject references: Franchise Fees Franchise Renewal Fees Business Capital Expenditure Cost base of an asset