Edited version of private ruling

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Ruling

Subject: Legal costs in protecting a trademark

Question:

Are your legal expenses relating to your trade mark dispute deductible in the income year they are incurred?

Answer

Yes.

Relevant facts and circumstances

You have been trading with, and branding your products with, a particular name for many years.

You became aware that another company wanted to use the same name for a specific line of products similar to those that you produce and had applied for the name to be registered to them as a trade mark.

You then took action to oppose the application to protect your trade mark.

You have incurred a significant amount in legal expenses relating to the drafting of affidavits and correspondence with lawyers.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

The legal expenses were incurred in carrying on your business and are not capital in nature as they relate to the operation of the business rather than the business structure itself. Therefore, the legal expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction will not be allowed where the outgoings are of a capital, private or domestic nature.

It is clear that the expenditure in the present case was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, the issue that requires further examination is whether the expenditure is capital in nature.

The nature or character of legal expenses follows the advantage which is sought to be gained by incurring the expenses.

Where legal expenses arise as a consequence of the day to day activities of a business, the object of the expenditure is devoted towards a revenue end and the legal expenses are deductible (Herald & Weekly Times v. Federal Commissioner of Taxation (1932) 48 CLR 113; 2 ATD 169).

Where the expenditure is devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible (Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403).

The deductibility of expenses incurred to prevent infringement of a trade mark was considered by the High Court in FC of T v. Duro Travel Goods Pty Ltd (1953) 87 CLR 524; 27 ALJ 297; [1953] ALR 608 (Duro Travel Goods Case). In that case a company took action against a competitor to prevent them from using a similar name. The High Court held that the expenses were not capital in nature and therefore deductible. In handing down the decision, Taylor J. stated:

The expenditure was not incurred for the purpose of creating a new asset or advantage or for the purpose of increasing the value of any existing part of the "profit-yielding subject". Nor, as I have said, was it undertaken to preserve the "profit-yielding subject" or any part of it for no attack was made upon the validity of the respondent's existing rights and those rights remained, notwithstanding the expenditure, precisely as they were before. The expenditure was, it seems to me, incurred in the course of and for the purpose of exploiting those rights to the fullest extent in the course of the taxpayer's business. The limits to the exclusive right to the use of a trade name or a trade mark are not capable, at any particular time, of precise and exhaustive definition and it is apparent that in the course of trading activities questions must frequently arise whether the proprietor's rights have been infringed. In this respect such rights are quite unlike many other forms of property and the precise benefits and advantages which they confer are capable of ascertainment only by a more or less gradual process. Expenditure incurred in this process is, at least in the circumstances of this case, incurred in operating the "profit-yielding subject" and is not an expenditure or outlay upon establishing, replacing or enlarging it.

It is considered that the facts of your case are 'on all fours' with those in the Duro Travel Goods Case. Your legal expenses are not capital in nature as the expenses relate to the operation of the business rather than to the business structure itself. Therefore, the legal expenses incurred are deductible under section 8-1 of the ITAA 1997.

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