The increasing number of franchises in South Africa and the contribution of franchises towards economic activity in the country has led to a rise in the awareness of tax implications on franchise owners. The South African Revenue Service (SARS) recently issued a ruling that provides more clarity on a tax deductible, in the context of franchisees.
“Franchisees have long battled with the tax deductibility of the initial fee that is paid under a franchise agreement. When SARS issues a ruling such as this, it is usually because there was ambiguity in the market and in this case, there was confusion among franchisees on the tax deductibles they could claim. With the new ruling, namely Binding Private Ruling 285 (“BPR 285”), SARS is giving franchise owners the guidance they need to be able to determine whether a specific tax deduction is available and how SARS interprets franchisees’ business in relation to this deduction,” says Natasha Wilkinson, Admitted Attorney of the High Court of South Africa and member of Tax Consulting South Africa.
Both initial fees and continuing franchise fees are tax deductible
The initial fee that franchisees pay, for example, can be tax deductible under section 11(a) of the Income Tax Act, No. 58 of 1962 if it is not capital in nature. If the initial franchise fee is capital in nature, then sections 11(gC) or 11(f) apply.
Both the initial fee, as well as the continuing fee that franchisees pay to use everything from the franchisor’s system, system property, marks, to the use of the franchisor’s computer systems, central database and the imparting of knowledge, are dedictible in terms of section 11(f).
“Franchisees have to pay a franchisor to be able to use the brand name and receive assistance from their network of support, for example. Franchisees are also responsible for annual fees that are paid to the franchisor. SARS is essentially lessening the burden on franchisees by increasing the tax deductibles that they can claim and giving them more guidance on how to go about claiming relevant franchisee tax deductions,” says Wilkinson.
Why franchisees need experienced guidance for tax issues
A set of requirements outlined in the legislation would have to be met by franchisees to claim a tax deduction. Franchisees could open themselves up to tax issues with SARS if they inadvertently claim the incorrect deduction, so it is worthwhile to peruse BPR 285 or contract an experienced tax consultant to guide you through the process if you are unsure about which tax deduction applies to your franchise business.
“While BPR 285 is welcomed, franchisees should still seek expert assistance to ensure that they do not fall within the parameters of SARS’ qualification in the ruling. This would have dire consequences for franchisees and may result in the deduction under section 11(f) either being reduced substantially or disallowed in its entirety. Besides guidance and advice, a tax consultant can also assist you in claiming the deduction and following the appropriate administrative processes for this,” concludes Wilkinson.
MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, firstname.lastname@example.org, www.atthatpoint.co.za
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