Private ruling: Assessable income
Date of advice: 14 February 2019
Published: May 2019
Ruling period: The income year ending 30 June 2019
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Are the gross fees, which are paid into the X account by the customers of the Taxpayer’s Sub-Franchise, assessable income of the Taxpayer in terms of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the total of all the royalties and other charges imposed upon the total gross fees, which are paid into the X account by all the customers of all the Z Sub-Franchises in Australia assessable income of the Taxpayer in terms of section 6-5 of the ITAA 1997? | A2: Yes. | Q3: Are the gross fees, which are paid into the X account by customers of Z Sub-Franchises other than the Taxpayer’s Sub-Franchise, that represent customer payments made for services provided by Z Sub-Franchises other than the Taxpayer’s Sub-Franchise, assessable income of the Taxpayer in terms of section 6-5 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: The Taxpayer is a sole trader operating a Sub-Franchise with Z Limited of Country X as well as being the Z Master Franchisee for Australia. The Z Sub-Franchise business is the supply of a service. The Taxpayer is an Australian resident for tax purposes. A copy of the Taxpayer’s Z Sub-Franchise agreement was provided. The Taxpayer operates the Sub-Franchise under a registered business name. The Taxpayer also entered into the Z Master Franchise Agreement for Australia with Z Limited. A copy of that Master Franchise Agreement was provided. It showed a list of ongoing fees payable to the Master Franchisee namely a royalty and other charges. The fees from all customers of all Z Sub-Franchises in Australia are paid into an X account. The Taxpayer as the Master Franchisee for Australia is responsible for remitting to the Sub-Franchisees their income minus the applicable royalty and fees payable to the Australian Master Franchisee and minus any refund of fees made by the Master Franchisee on behalf of a Sub-Franchisee to a customer of that Sub-Franchisee. In other words the Sub-Franchisees receive payments from the Australian Master Franchisee that are net of all fees and other charges. Accordingly, the Taxpayer, as the holder of a Z Sub-Franchise is required to ensure that the total fees paid by all the customers of the Taxpayer’s Sub-Franchise operation are paid into an X account in Australia. In other words, the gross fees paid for the services provided by the Taxpayer’s Sub-Franchise are paid into that X account. Similarly in the role as the Master Franchise holder the Taxpayer acts to ensure all the Sub-Franchise holders in Australia comply with this requirement to have all their customers make payments to the X account. That X account is administered by the Taxpayer, as the holder of the Z Master Franchise for Australia. In that role the Taxpayer deducts the royalty and other charges from the gross fees received. The net fees, after deductions for the royalty, other charges and any refunds made on behalf of a Sub-Franchise holder, are then distributed to the Sub-Franchisee together with an account for the amounts deducted. The Taxpayer, as one of the Australian Sub-Franchisees is a recipient of such net fees. The royalties and other charges imposed and collected by the Taxpayer as the Master Franchisee are shared between the Taxpayer and Z Limited as set out in the Master Franchise Agreement. The Taxpayer must pay the relevant specified percentage of each amount collected to Z Limited in Country X. Therefore, in the current income year ending 30 June 2019 the Taxpayer will receive two income streams in relation to Z. The first income stream is the total of the gross fees from all the customers of the Taxpayer’s Z Sub-Franchise that is paid into the X account of the Z Master Franchise for Australia. The second income stream received by the Taxpayer comes about because the Taxpayer is currently the holder of the Z Master Franchise for Australia. That income stream is the total royalty and other charges which the Taxpayer deducts from the total gross fees received from all customers of all Z Sub-Franchises in Australia that are paid into the X account. In accordance with the Master Franchise Agreement the Taxpayer is required to pay a percentage of the royalty and a percentage of each other charge to Z Limited in Country X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Subsection 6-5(1) | Subsection 6-5(2)

Reasons for decision: Summary: The gross fees paid into the X account by customers of the Taxpayer’s Z Sub-Franchise are assessable income of the Taxpayer. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts, which is called ordinary income. Subsection 6-5(2) provides that if you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia, during the income year. The Taxpayer is a resident of Australia. Business income is a form of ordinary income. The income the Taxpayer derives from the operation of the Z Sub-Franchise is income from the carrying on of a business in Australia, The gross fees paid by the customers of the Taxpayer’s Z Sub-Franchise for services provided by that Z Sub-Franchise is business income of the Taxpayer. This is ordinary income that is assessable income of the Taxpayer in terms of subsection 6-5(1) of the ITAA 1997. | Summary: The total amount of royalties and other charges imposed upon the fees paid into the X account by all the customers of all the Z Sub-Franchises in Australia is assessable income of the Taxpayer. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts, which is called ordinary income. Subsection 6-5(2) provides that if you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia, during the income year. The Taxpayer is a resident of Australia. Business income is a form of ordinary income. The Taxpayer is the Z Master Franchisee for Australia. In that role the Taxpayer administers the X account. In Australia the customers of each Z Sub-Franchise are required to pay their fees into the X account. The Z Master Franchisee imposes royalties and other charges on the gross fees paid into the X account. The royalties and other charges are deducted from the gross fees. Any refund of fees made by the Master Franchisees to a customer of a Sub-Franchise is also deducted. A net amount is then paid to the respective Sub-Franchisee together with an account containing a calculation of the net amount. The total of the royalties and other charges collected by the Taxpayer in carrying on business as the Z Master Franchisee for Australia is ordinary income which is assessable income of the Taxpayer in terms of subsection 6-5(1) of the ITAA 1997. | Summary: Fees paid into the X account by customers of Z Sub-Franchises, other than by customers of the Taxpayer’s Z Sub-Franchise, are not assessable income of the Taxpayer. | Detailed Reasoning - Detailed reasoning: The X account which is administered by the Taxpayer is used to receive fees paid by all customers of all Z Sub-Franchises in Australia. The X account is a central collection point for the payment of fees. The fee paid by a customer of a specific Z Sub-Franchise is a fee for services to be provided by that specific Z Sub-Franchise to the customer. The fee is therefore the assessable business income of that specific Z Sub-Franchise. The administrative practice of fee payment to a single X account does not alter this fundamental fact. The Taxpayer as the Z Master Franchisee for Australia administers the X account and thereby receives all of the fees in that capacity. The fees received by the Taxpayer from customers of Z Sub-Franchises, other than the fees from customers of the Taxpayer’s Z Sub-Franchise, do not constitute the assessable income of the Taxpayer.