Private ruling: Legal expenses
Date of advice: 16 July 2015
Published: July 2015
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are your legal expenses relating to your trade mark dispute deductible in the income year they are incurred? | A1: Yes.

Relevant facts and circumstances: You received a demand that you cease using your name as the complainant alleged that you were in breach of a registered trademark. Your legal advisor responded to the demand with the offer that you would change your company name to avoid any lengthy and expensive litigation. You subsequently changed your name. You received another demand that you cease using the domain name because they believed it breached their trademark. Your legal advice at the time was that the complainant was on good legal grounds that you were infringing its trademark rights. The complaint was heard by the relevant authority and was dismissed. You received invoices for the legal services provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: 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. 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). In the Administrative Appeals Tribunal case of Pech & Anor v Commissioner of Taxation [2001] AATA 573; (2001) 47 ATR 1215; 2001 ATC 2210 (Pech's case), a deduction for legal expenses was allowed in relation to defending an alleged infringement of a trade mark. Here, Pech used a trademark he devised (but did not register) in his sale of goods. The trademark was later registered by a business associate. The business associate then sued Pech for unauthorised use of the trademark. The Tribunal held Pech's legal expenses were revenue in nature and deductible because where legal costs are incurred in defending a taxpayer or its officers from criticism of the method of trading of the business, the outgoings will clearly be in the nature of revenue and not capital. In your case, it is considered that your situation is similar to Pech's 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.