By Nina Rossi, Principal Lawyer, DC Strategy Lawyers
International retail and service concepts are, even with COVID-19, looking at the Australian market as a new market. With such interest it is important to understand the Australian market, as there are specific and often more complex legal issues to consider that apply, particularly in Australia.
Why Choose Australia?
Australia has a diverse, highly skilled workforce, with consumers having relatively high disposable income. Australia is a First-world economy, with all features that support and enable successful business operations, including strong protection of commercial and intellectual property rights.
Australians are also generally very receptive to proven international brand and, for example, Decathlon, UniQlo, IKEA, Aldi, Carl’s Jr., Ben & Jerry’s and many more are very well received by Australian consumers. In short, international franchise concepts have ample opportunity to establish a profitable business in Australia.
Franchising in Australia (The Law)
Australia has a national (federal) set of franchise laws, which are contained in the Franchising Code of Conduct (Code). These laws apply across all States of Australia and were recently amended, effective from 1 July 2021. Aspects of these changes include changes to disclosure to franchisees, as well as the process around dispute resolution.
The Franchising Code of Conduct applies to all franchises (including Master Franchises) granted in Australia, and Franchise Agreements and Disclosure Documents must comply with the Code.
Choosing a Structure
Direct Franchising into Australia
Direct franchising from an overseas franchisor to an Australian single-unit franchise, without implementing any Australian-based operations company, is highly unusual, as the distance and inability to support an individual franchise make this (normally) prohibitively costly. This structure is costlier and will normally subject the franchisor to a non-resident withholding tax, where the franchisee will have to remit to the Australian Tax Office a prescribed percentage of the amounts paid or credited to a non-resident franchisor as royalty or a similar payment, including the initial franchise fee. Applicable tax treaties might reduce tax payments; however, overall it is for these reasons that direct franchising is very rare in the Australian market.
Master Franchising, Area Development and Area Representatives
Master franchising, area development, area representatives and hybrid arrangements are by far the most common as multi-unit vehicles for international expansion of a franchise system into Australia.
Under a master franchise agreement, a franchisor grants a “master franchisee” a territory within which to sub-franchise to third parties. This structure might result in a certain loss of control for a franchisor, and an additional party with whom profits and royalties must be shared. However, it is beneficial to a franchisor because the master franchisee can act as a local, self-sufficient party who organises franchise recruitment, site selection, construction and operational support.
Under an area development agreement, a franchisor grants a franchisee the right to roll out multiple corporate stores, but not sub-franchise without the franchisor’s express approval.
Many franchisors adopt this model in Australia, as it reduces the management and training time for the franchisor and allows rapid rollout of the concept in Australia.
Area representatives (sometimes also referred to as “master agents”) recruit and train and support franchisees within a defined territory over a fixed period of time. Generally, these agreements prohibit the franchisee from directly sub-franchising, but rather allow the area representative to refer prospective franchisees to the franchisor and train and support the franchisees once recruited. In return, these area representatives receive a percentage of the initial franchise fee and a percentage of the ongoing fees (generally around one third, depending on the responsibilities and requirements of the system).
Joint Venture Franchising
A joint venture franchise is a contractual structure where each venturer, usually the franchisor and the local partner, makes a contribution for a single common purpose, usually a local entity. This is increasingly being used in Australia, but is still not a common arrangement, as it is difficult to divide up the company on termination (particularly if the termination arose due to a breach by the franchisee).
Australian-based Subsidiary of Affiliate
Using an Australian subsidiary or foreign company registered as conducting business in Australia as the franchisor is sometimes an effective way to enter the Australian market if that entity also has an intellectual property licence agreement with the holding company (which itself is often in a low tax jurisdiction), which charges the Australian entity “IP fees” that then remove income back to the holding company. Incorporation can be done very easily and quickly online. However, at least one director is required to be an Australian resident if the entity is domiciled in Australia, and the company must always have an Australian-based address for service. Matters in regard to withholding tax and corporate tax rates also need to be considered.