For many years, franchisors have been familiar with the Franchising Code of Conduct requirements relating to marketing funds. Those obligations — such as preparing annual financial statements and arranging audits — were traditionally understood to apply primarily to advertising or promotional funds collected from franchisees.
However, recent changes to the Code have introduced a broader concept: the “specific purpose fund.” This means the statutory obligations that previously applied mainly to marketing funds may now extend to a much wider range of franchise system levies.
For franchisors, this change is important. Funds that might historically have been treated as operational levies could now fall within the Code’s regulatory framework.
What is a “specific purpose fund”?
The Code defines a specific purpose fund as a fund that meets three criteria.
First, the fund must be controlled or administered by the franchisor or master franchisor, or by an associate acting for them.
Second, the franchise agreement must require franchisees to pay money into the fund.
Third, the fund must be used for a specified common purpose relating to the operation of the franchised business.
In practical terms, if a franchisor collects money from franchisees and holds or manages those funds for a defined system-wide purpose, the fund may fall within this definition.
The key takeaway is that the definition is functional rather than descriptive. The fund does not need to be labelled a marketing fund. If it meets the criteria above, the Code will treat it as a specific purpose fund regardless of what it is called in the franchise documentation.
What obligations apply?
Where a franchise agreement requires franchisees to contribute to a specific purpose fund, several statutory obligations arise under the Code.
First, the fund administrator must prepare an annual financial statement for the fund within four months after the end of each financial year. That statement must detail the fund’s income and expenditure for the relevant period.
A copy of the financial statement must then be provided to franchisees within 30 days of being prepared.
Second, unless an exemption applies, the fund administrator must also arrange for the financial statement to be audited by a registered company auditor within four months of the end of the financial year. The auditor’s report must then be given to franchisees within 30 days of receipt.
These obligations carry significant consequences. Failure to comply can attract civil penalties of up to 600 penalty units.
Third, the Code requires that payments made to the fund must be held in a separate bank account maintained with a financial institution.
Finally, the Code places restrictions on how the fund may be used. The fund administrator must only apply the funds to:
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expenses disclosed to franchisees in the disclosure document;
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legitimate expenses connected with the specified purpose of the fund;
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expenses agreed to by a majority of contributing franchisees; or
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reasonable costs of administering or auditing the fund.
These restrictions are designed to ensure transparency and accountability where franchisors collect pooled funds from franchisees.
What other funds could be captured?
One of the most significant practical consequences of the Code change is that it may capture funds that franchisors do not traditionally consider to be “marketing funds.”
For example, many franchise systems require franchisees to contribute to technology or software funds. These levies might be used to fund point-of-sale systems, customer platforms, ordering technology or cybersecurity infrastructure across the network.
If franchisees are required under the franchise agreement to contribute to such a fund, and the franchisor administers that fund for a system-wide technology purpose, it may satisfy the definition of a specific purpose fund.
Similarly, annual conference or system development levies could also fall within the definition. Where franchisees contribute money towards system conferences, training events or network development initiatives, those contributions may arguably be funds collected for a specified common purpose.
If those funds are controlled or administered by the franchisor, they may attract the same statutory obligations as marketing funds.
Why this matters for franchisors
The expansion from “marketing funds” to “specific purpose funds” means franchisors should take a fresh look at how they structure system levies.
Funds collected from franchisees for technology, training, conferences or system development may now trigger the Code’s financial reporting and auditing obligations if they meet the statutory criteria.
In practice, this means franchisors should review their franchise agreements and disclosure documents to identify any funds that could fall within the definition and ensure that appropriate governance, accounting and reporting processes are in place.
While the change promotes transparency across franchise networks, it also reinforces the importance of carefully structuring system levies to ensure compliance with the Code.
As with many aspects of franchising regulation, the label applied to a fund is less important than how it operates in practice. If a fund is controlled by the franchisor, funded by franchisee contributions and used for a common system purpose, it may well be a specific purpose fund — and subject to the Code accordingly.