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Franchisees beware – Declare all income, or else!

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The recent conviction of the founder of the Banjo’s Bakery Group, Mark Saxby, for defrauding the Commonwealth highlights the ramifications of failing to declare all income in taxation returns.

Saxby introduced a practice of taking $1,000 from the till of his Hobart store every Saturday, Sunday and public holidays and altering the sales sheets to hide the cash skimming.  This practice went on for a number of years and the cash that was removed from the till on those days was not declared for income tax purposes.

This was clearly illegal and resulted in Director of Public Prosecutions obtaining a warrant to search Saxby’s office and home before launching prosecutions.

The Court is yet to sentence Saxby, but he potentially faces a substantial jail term.

Saxby’s practices were revealed to prosecutors by former employees and ultimately supported by evidence given by his ex-wife.

Whether or not Saxby is sentenced to jail, his criminal convictions will tarnish his commercial reputation for a very long time.

Pulling cash out of a business and not declaring it to the ATO or the franchisor might be seen as a way of increasing wealth and funding a more comfortable lifestyle.  But as Mr Saxby has discovered, such activity can be regarded as criminal and may result in a jail term or substantial fines and penalties.

Furthermore, the deliberate failure to disclose all sales to a franchisor is tantamount to fraud and is something that would destroy the relationship between a franchisee and franchisor.  In fact, the Franchising Code of Conduct permits the immediate termination of a Franchise Agreement if a franchisee has been fraudulent in connection with the conduct of the franchised business.

To make things worse, a failure to properly record all sales will also impact on the price that might be achieved on the sale of the business.  Most businesses are sold on a multiple of profit and, quite obviously, if not all sales are recorded in the books of account, profit results will be lower.  Any prudent purchaser of a business will want to see the vendor’s financial statements as lodged with their taxation returns and ascertain from the franchisor the sales actually reported to the franchisor.  A prudent purchaser will not pay extra for the cash that has been taken out of the business without it being recorded as sale proceeds.

It may well be that the prudent purchaser also happens to be an under cover tax investigator.

Therefore there is absolutely no benefit whatsoever in failing to disclose all sales in your taxation returns, financial statements and reports to a franchisor.  The consequences of adopting this practice may well include a loss of the business (due to the franchisor terminating for fraud), or a criminal conviction resulting in substantial penalty or jail time.  This will most certainly destroy reputations both at business and personal level.

For further information please contact one of our Franchising lawyers.

Author: Philip Colman