Now that the Competition and Consumer (Industry Codes —Franchising) Regulations 2024 (New Code) has had an opportunity to settle, this article takes a closer look at the changes made to specific purpose funds (formerly known as marketing funds) and what these changes practically mean for franchisors.

Marketing funds –> Specific purpose funds

As many will be aware, the New Code extends the former marketing fund obligations to capture any fund controlled or administered by the franchisor¹ into which, under a franchise agreement, a franchisee is required to pay money for use towards a specified common purpose. While the New Code does not define what precisely amounts to a ‘specified common purpose’, it does note that ‘examples of specific purpose funds could include a marketing fund for advertising or a cooperative fund for information technology‘.

Beyond these examples, an ordinary interpretation of the words ‘specified common purpose’ could well have the effect of capturing other funds such as payments made in advance for conferences or services organised by a Franchisor to be performed on behalf of its Franchisees. The lack of specificity in this expression seems deliberate, particularly when one refers to the Explanatory Statement,² which states that the driving principle behind extending the scope of these obligations was that franchisees should be told meaningful information about how the contributions they must make are used and whether they will see personal benefit from it.

Expenses used by the fund

As in the previous Code, the New Code³ expressly states that despite any terms of a franchise agreement, a fund administrator must only use the fund to:

1. meet expenses:
   1. that have been disclosed to franchisees at item 15(1)(f)⁴ in the disclosure document (see further comments on this below);
   2. that are ‘legitimate’ expenses for the specified purpose for the fund;
   3. that have been agreed to by a majority of franchisees that are required to make payments to the fund; or
2. pay the reasonable costs of administering and auditing the fund.

Changes to disclosure obligations

Percentage of total income spent

Most will recall that the previous Code required Franchisors to disclose the (marketing) fund’s expenses for the previous financial year and include the percentage spent from the (marketing) fund across four mandated categories: production, marketing, administration and other stated expenses, within their Disclosure Documents.

The New Code has removed this obligation. Instead, section 31(3)(b) of the New Code requires a Franchisor to disclose the total of the income spent on expenses and costs listed in item 15(1)(e) of its Disclosure Document.⁵ This is a material change to what has been required in the past and will require the annual financial statement to be remodelled to:

• list the expenses against the line items listed in the Disclosure Document; and
• show the percentages spent on each line item as a proportion of the total income.

Provision of Annual Financial Statement in Disclosure Document

The Old Code required Franchisors to circulate the Annual Financial Statement and Audit (if applicable) within 30 days of preparing and receiving it, respectively.

The New Code, ‘ups the ante’, requiring Franchisors to not only comply with these obligations for each specific purpose fund but also include a copy of the annual financial statement for each specific purpose fund within the Disclosure Document, given to prospective franchisees. This change again reflects a broader shift toward enhanced transparency and accountability in how franchisee contributions are managed.

What does this mean for Franchisors?

1. Review your Franchise Agreement – Franchisors should carefully review the terms of their Franchise Agreement(s) (yes, all different versions in circulation!) and determine whether the Franchise Agreement obliges franchisees to contribute funds for specified common purpose (as defined in the Code). If you do find payments that fit into this category, it is important that you:

1. hold these monies in a separate bank account;
2. ensure item 15 of your Disclosure Document accurately reflects the details of each specific purpose fund;
3. track the income and expenses made for that specific purpose fund against the nominated expense categories mentioned in the Disclosure Document;
4. comply with the existing annual reporting and auditing requirements that exist (ie preparing an annual financial statement within 4 months from the end of the financial year, obtaining an audit or vote to not audit by relevant deadlines and circulating the financial statements together with the audit (if applicable)).

We anticipate that the widening of scope from ‘marketing funds’ to ‘specific purpose funds’ may catch out unsuspecting franchisors who have not developed robust reporting frameworks to meet the requirements (and deadlines) of the New Code.

2. Work with your marketing team/agency – Franchisors should invest time in building reporting matrixes that accurately align to the requirements of the New Code. References to the prior mandated categories: production, marketing, administration and other stated expenses should be discarded and new templates developed around the expenses stated at Item 15(1)(e) of the Franchisor’s Disclosure Document. Further, education as to how expenses should be allocated within this matrix should be socialised across the Franchisor’s marketing team and external agencies to ensure that reporting is accurate.

Undertaking this exercise provides a good opportunity for a Franchisor and its marketing teams to align their views on what amounts to ‘legitimate expenses’ to be incurred by a specific purpose fund. We are observing that many expenses are not categorised in an organised manner throughout the year, leaving the Franchisor to manually allocate expense items, calculate corresponding percentages and retrospectively provide ‘sufficient details’ and ‘meaningful information’ about each expense item. Investing time in building robust matrixes, collecting the appropriate level information about such expenses at the time they are incurred and educating your teams means that compliance with the Code is not an afterthought, but is instead ingrained in day-to-day reporting. If you operate other specific purpose funds, similar processes should also be put in place to monitor how those funds are being spent.

3. Decide whether an audit is necessary – Many Franchisors are aware that an audit of a specific purpose fund is not required where 75% of contributing franchisees vote to agree that the fund does not need to be audited. However, few realise that this vote must be undertaken within 3 months of the end of the Franchisor’s Financial Year. For many Franchisors, the vote for non-audit must occur by no later than 30 September. If you are planning on relying on this exemption, it is essential that the voting process is clearly articulated well in advance to the Network, and that the voting process is implemented in a manner that allows you to comply with your record keeping obligations under the New Code.⁶

4. Engage your auditor early – If you do proceed with having the Annual Financial Statement for the specific purpose fund audited, ensure that your nominated auditor:

1. is aware that the Audit must be finalised by no later than 4 months from the end of financial year;
2. understands that there is no ability to apply for an extension under the New Code; and
3. refers to the New Code (and not the Old Code) within the Audit Report.

5. Provide meaningful information and sufficient detail – Despite the widely publicised Ultra Tune Decision⁷ (and its subsequent judgments), we are still observing Franchisors failing to grasp the level of detail required to be disclosed in its Annual Financial Report. It is no longer appropriate for Franchisors to simply submit profit and loss statements or balance sheets reflecting expenses incurred by the Fund. Such documentation needs to be accompanied with meaningful notes, explaining matters such as:

1. to whom have the fees been paid;
2. what services were obtained and when; and
3. in relation to marketing expenses, which products/services were promoted across the relevant campaign.

It is important that Franchisors remember that the more significant an item of expenditure is, ‘the greater the level of detail that will be required to facilitate an informed assessment by the franchisee concerned.’ Where Franchisors are unsure as to the level detail required to be included, they should not ‘skimp’ on information but rather should ‘err on the side of candour, rather than secrecy’.⁸

6. Seek expert advice – The New Code has demonstrated that franchising in Australia is becoming increasingly more specialised. Interpretations of the New Code require far more nuance and insight than ever before. Franchisor’s should ensure that they are working with specialist teams (lawyers, accountants and marketing agencies) to ensure that its processes are compliance focussed from the ground up.

We appreciate that the pressure is on for Franchisors to ensure that their compliance processes are on point, and this pressure is only mounting. However, we are seeing a rise in disputes about how specific purpose funds are expended and reported. It has never been more critical for franchisors to firmly grasp their obligations under the New Code. Fortunately, our national Franchise and Retail Team is highly experienced in advising a diverse range of franchise systems, spanning food, retail, home care services, fitness, beauty services, education, uniform supply, and trade services – who can assist with providing expert advice.

Please reach out to our specialist franchise team to discuss further.

This article was written by Matthew Rowe, Partner, and Emily Lucas, Special Counsel, and assisted by Natalie Luckman, Law Graduate.

¹ or a master franchisor, or an associate of a franchisor or master franchisor.
² Explanatory statement: Competition and Consumer Act 2010 and Competition and Consumer Act 2010.
³ Section 61(4) of the New Code.
⁴ Note: Section 61(4)(a)(i) of the New Code appears to incorrectly reference item 15(1)(f) of Schedule 1, instead of item 15(1)(e) of Schedule 1.
⁵ Note: Section 61(4)(a)(i) of the New Code appears to incorrectly reference item 15(1)(f) of Schedule 1, instead of item 15(1)(e) of Schedule 1.
⁶ Note, section 37 of the New Code states that if a franchisee or prospective franchisee gives something to a franchisor in writing, a franchisor must keep that written thing for at least 6 years after receiving it.
⁷ ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12.
⁸ ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12.