The Franchising Code of Conduct (the Franchising Code) sets out the obligations (including annual obligations) relating to advertising and marketing funds operated by a franchisor.
Given that the end of the financial year is approaching and that new substantial penalty provisions have recently been implemented, we have set out below the main obligations in the Franchising Code relating to franchise marketing funds (and the maximum penalties which may be applied for a failure to comply with those obligations).
Separate Bank Account
A franchisor must maintain a separate bank account for the Franchise Marketing Fund in which marketing fees and advertising fees contributed by franchisees are deposited.
The maximum penalty for a failure to maintain a separate bank account for payments to the marketing fund by franchisees is 600 penalty units (from 1 July 2023 $187,800.00).
As foreshadowed when the Franchising Code was amended in 2021, the penalties for failure to comply with Franchising Code obligations have doubled.
Franchisor Contribution to Marketing Fund
If the franchisor is operating any franchise business units (ie, company businesses), then the franchisor must contribute to the Marketing Fund on behalf of each business unit on the same basis as each franchisee.
This applies only to businesses operated by the franchisor and does not apply to any businesses operated by a different but related company or other entity (including a company or entity which has common ownership or directorship or is otherwise related).
The maximum penalty for a failure to contribute to the marketing fund on behalf of each business unit operated by the franchisor on the same basis as each franchisee is 600 penalty units (from 1 July 2023 $187,800.00).
Marketing Fund Annual Financial Statement
An annual financial statement detailing all of the franchise marketing fund’s receipts and expenses for the last financial year must be prepared within 4 months of the end of each financial year. For example, in respect of the financial year ending 30 June 2022, the Marketing Fund Annual Financial Statement must be prepared on or before 31 October 2022.
The Marketing Fund Annual Financial Statement should include sufficient detail of the franchise marketing fund’s receipts and expenses so as to give meaningful information about:
- the sources of income; and
- items of expenditure, particularly with respect to advertising and marketing expenditure.
The maximum penalty for a failure to prepare an annual financial statement as required by the Franchising Code is 600 penalty units (from 1 July 2023 $187,800.00).
Audit of Marketing Fund Annual Financial Statement
The Marketing Fund Annual Financial Statement must also be audited by a registered company auditor within 4 months of the end of the financial year to which it relates unless 75 per cent of contributing franchisees have agreed otherwise by 30 September.
For example, the Marketing Fund Annual Financial Statement for the year ending 30 June 2022 must be audited on or before 31 October 2022.
The maximum penalty for a failure to audit the annual financial statement as required by the Franchising Code is 600 penalty units (from 1 July 2023 $187,800.00).
Provision of Marketing Fund Annual Financial Statement and Audit to Franchisees
A copy of the Marketing Fund Annual Financial Statement and a copy of the Audit of the Marketing Fund Annual Financial Statement must be provided to each franchisee within 30 days of preparation of the statement and the audit respectively.
For example, if the Marketing Fund Financial Statement is prepared on 31 August 2022 and the audit of that statement is prepared and dated 21 September 2022, a copy of the Marketing Fund Financial Statement must be provided to each franchisee on or before 30 September 2022 and a copy of the audit of that statement must be provided to each franchisee on or before 21 October 2022 for the franchisor to comply with the requirements of the Code.
The penalty provision relating to this obligation was inadvertently missed out in the 2021 amendments to the Franchising Code. However, the penalty provision has again been included in the recent amendments to the Franchising Code.
The maximum penalty for a failure to provide franchisees with a copy of the Marketing Fund Annual Financial Statement and a copy of the Audit of the Marketing Fund Annual Financial Statement as required by the Franchising Code is 600 penalty units (from 1 July 2023 $187,800.00).
Audit Not Required in Certain Circumstances
While a Marketing Fund Annual Financial Statement must be prepared every year, an audit of the Marketing Fund Annual Financial Statement for any given financial year is not required if-
- 75 per cent of the franchisees in Australia, who contribute to the fund, have voted to agree that you do not have to comply with the requirements to audit the Marketing Fund in respect of a financial year; and
- such vote to agree not to audit is made within 3 months after the end of the relevant financial year.
For example, a franchisor must have its Marketing Fund Financial Statement for the year ending 30 June 2022 audited unless 75 per cent of the franchisees vote to agree that the franchisor does not have to comply with the requirements to audit the Marketing Fund in respect of the 2022 financial year and such vote to agree by the franchisees occurs between 1 July 2022 and 30 September 2022 inclusive.
Marketing and Advertising Spend
Regardless of the franchise agreement, any marketing or advertising fees held in the franchise marketing fund may only be paid to:
- “legitimate marketing or advertising” expenses (as referred to in the Franchising Code), expenses which have been agreed to by a majority of franchisees or expenses which have been included in the disclosure document; and
- the reasonable costs of administering and auditing the franchise marketing fund.
Federal Court Decisions
We also note the decision of the Federal Court in the case of ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12 which is the first Court decision which examined the provisions of the Franchising Code relating to franchise marketing funds and the meaning of terms such as ‘sufficient detail’ and ‘meaningful information’.
The Court held that providing what is essentially no more than mere profit and loss statements for a marketing fund is in breach of the obligation to include “sufficient detail” of the fund’s receipts and expenses so as to give “meaningful information” about sources of income and items of expenditure.
Justice Bromwich held that a mere accounting exercise would not suffice and it is the franchisee, and not just their accountant, who must be placed in a position to know what the income and expenses of the fund are for the purpose of making some meaningful assessment of whether that use is appropriate.
Further, Justice Bromwich’s observations about the level of detail required for compliance include:
- that different items or categories of expenditure may require different levels of detail;
- generally, more significant expenses require more detail as these expenses will be more important to franchisees;
- there may be some cases where lesser expenditure requires more detail to understand why it is appropriate;
- greater detail is required for expenditure on advertising and marketing;
- descriptions of expenditure should not be in bare and general terms (Ultra Tune’s use of the description ‘Promotion & Advertising – Television’ was held to be insufficient);
- information is meaningful if it enables franchisees to understand to whom, when and on what money from the fund was spent;
- content and form of statements must make sense to an ordinary reader (a franchisee), rather than just an accounting professional; and
- the availability of other sources of information, such as through in-house newsletters or through viewing the actual television advertisements, is not a substitute for the need for financial statements to contain sufficient detail and meaningful information as the Franchising Code requires that sufficient detail and meaningful information be included in the financial statement itself.
This case was appealed (Ultra Tune Australia Pty Ltd v ACCC [2019] FCAFC 164) and the Full Federal Court agreed with the findings of the trial judge Justice Bromwich in relation to the detail and meaningful information required to be provided in marketing fund financial statements.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
