Australia: Franchising Matters

Last Updated: 22 October 2006
Article by Paul Kirton


In edition 3 of Franchise Matters, we examined the decision of the Full Court of the Federal Court in Poulet Frai Pty Ltd v The Silver Fox Company Pty Ltd (otherwise known as "Lenards case"). We now update you on what appears to be the final chapter to this case.


In September 1998, the Silver Fox Company ("Franchisee") purchased a Lenards Chicken franchise in South Australia. Over the following 2 years, the franchise repeatedly failed to achieve the specified minimum gross revenue targets. In July 2000, Poulet Frai ("Franchisor") terminated the Franchise Agreement.

The Franchisee sued the Franchisor and Master Franchisee on the basis of misleading and deceptive conduct in breach of section 52 of the Trade Practices Act. The trial judge found that the Franchisor and Master Franchisee had misrepresented

(1) the potential sales and profitability of the franchise; and

(2) the desirability of the location for the Lenard's Chicken shop.

The Franchisor and Master Franchisee appealed to the Full Federal Court, which overturned the trial judge's decision. The Full Federal Court held that the financial information provided to the Franchisee was a guide only. Additionally, the suggestion that the Franchisee relied on the financial information was completely opposite to the Franchisee's written acknowledgments that it had made its own investigations.

The Update

Not to be defeated, the Franchisee recently sought leave to appeal to the High Court of Australia. However, the High Court has refused to grant the Franchisee leave to appeal, and upheld the Full Federal Court's finding that the Franchisor and Master Franchisee had NOT engaged in misleading and deceptive conduct.


The High Court's reinforcement of the Full Federal Court's decision signals a positive for Franchisors. While it does not mean that Franchisors can be careless in the representations and disclosures they make to potential franchisees, it does highlight that it is the franchisee's own responsibility to get advice and satisfy itself as to the potential profitability and suitability of the particular franchise system. The Lenards case also reinforces the usefulness of disclaimers and 'entire agreement' clauses in franchise agreements. Lastly, it also reminds Franchisors of the importance of ensuring that their franchisee signs a Representations Certificates located in the franchise agreement.


This following case highlights the circumstances in which a court will enforce restraint of trade provisions, preventing former franchisees from operating a competing business once the franchise relationship has ended. Raine & Horne Pty Ltd v Adacol Pty Ltd (2006) NSWSC 36 Raine & Horne Pty Ltd ("Raine & Horne") granted Adacol Pty Ltd ("defendant") a franchise, pursuant to a Franchise Agreement to conduct a real estate business from 2 separate premises. The Franchise Agreement was due to end on the 3 August 2007. During 2005 a representative from the competitor Ray White approached the defendant and asked the defendant to become a Ray White franchise.

In December 2005, the defendants informed Raine & Horne that they were leaving the franchise and had since entered into a Franchise Agreement with Ray White and, in effect, terminated the Franchise Agreement with Raine & Horne. The defendants were operating from the same premises, however changed the décor according to Ray White colours. Raine & Horne sought an injunction to prevent the defendant from operating a competing business.

Clause 29.1 of the Franchise Agreement stipulated that for a period of 12 months after the termination, the defendant could not "conduct or be in any way employed or interested in a real estate agency business which carries on business substantially within a radius of five kilometres from the premises". The court was faced with having to balance public policy issues against protecting the legitimate interests of the Franchisor.


In enforcing the restraint, the court said that "restraints of trade may be valid where they are reasonably necessary to protect some identified legitimate interest of the party seeking to enforce the restraint, and where they do no more than is reasonably necessary to achieve that". The restraint of trade clause did not prevent the defendant from carrying on its business, it simply prevented the defendant from establishing a business within a particular locale. For this reason, the court felt it reasonable to enforce the restraint of trade provision.


1. What tax is payable when a franchisor grants a franchise or a franchisee sells the franchise?

Most amounts received by a franchisor relating to the grant or operation of a franchise (such as franchise fees, training fees, renewals etc) should be assessable income and taxable as ordinary income. Expenses which relate to the granting or operation of a franchise (such as legal or advertising costs) and are part of the ordinary business for the franchisor should be deductible outright.

Whilst many franchises are often granted as greenfield sites, a franchise could also be granted in conjunction with the sale of an existing franchisor owned business or existing franchise, which will include goodwill. Goodwill is a capital asset and any gain made on the sale would be a capital gain for the selling party, whether franchisor or existing franchisee. The selling party may be able to reduce the gain if certain capital gains tax ("CGT") concessions or exemptions may be available.

2. How is Intellectual Property ("IP") treated for tax purposes?

The franchisor or related entity is likely to own intellectual property ("IP") which it licenses to the franchisees in receipt of licence/royalty fees. These fees, whether payable upfront or over time, should be assessable as ordinary income.

Costs involved in developing IP may be claimable as an outright deduction if part of ordinary business activities for the franchisor.

Alternatively, the franchisor can claim depreciation deductions for the cost of certain IP (specifically, a patent, registered design, copyright or in-house software), or otherwise, the costs may form part of the cost base for the IP (such as trade mark) for CGT purposes which will reduce a potential capital gain on the disposal of the IP.

3. GST issues

Assuming that the franchisor is registered for GST, it would also be required to charge GST on taxable supplies it makes to the franchisee. The supply of the franchise and any services performed pursuant to the franchise agreement (such as training for the franchisee etc) should be taxable supplies and therefore GST would be required to be remitted by the franchisor. In relation to ongoing licence/royalty fees, it is common for recipient created tax invoice ("RCTI") arrangements to be entered into, whereby the franchisee issues RCTIs, reducing the administrative burden on the franchisor.


One of the issues that is often overlooked, particularly where there have been long negotiations or a protracted sign up process, is the requirement to pay stamp duty. Failure to pay stamp duty, when required by law, may render a Franchise Agreement, Lease/Licence Agreement or Sale of Business Agreement unenforceable in a Court.

Stamp duty is a State based tax levied by the various State Governments on certain transaction documents.

The transaction documents that are liable for stamp duty and the amount or rates of stamp duty payable vary from State to State. Some examples of the types of documents which can be subject to stamp duty include:

  • Franchise Agreements
  • IP Licence Agreements
  • Transfer of Business Agreements
  • Leases/Licence Agreements
  • Guarantees and Indemnities
  • Mortgages and Trusts

Generally, the location of the franchise business or business premises will determine which State's Stamp Duty laws apply. However, if the business is located within more than one State then the transactions documents may need to be assessed for Stamp Duty in a number of States. Most of these types of stamp duty has been abolished in Victoria.

Most States and Territories have a time limit in which stamp duty must be paid on a transaction document and, if not paid, then penalties apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.