Legal and technical issues affecting accountants
Legal protection for you or your firm’s intellectual property can be expensive but cutting costs could impact the protection you do have. There are other ways to protect your IP that don’t rely on statutory methods of registration. You could use methods such as ensuring the confidentiality of your information, unregistered trademarks or fiduciary obligations. These methods always rely upon a court protecting the unregistered rights of the owner. However, unregistered rights are subject to another party's registered rights.
If you can’t justify the initial cost of protection, it's possible that the IP has little to no value to your business. If that’s the case, then registration is unnecessary.
Expenses associated with protecting your IP, such as labour, registration, renewal or legal fees or even some administration allocations could be claimed as a deduction at tax time, unless there’s an exchange of property.
Benefits of a trademark
A trademark can be used in a global sense to identify an organisation or a product. The courts will generally provide protection for the owner of a trademark if the proper registration process has been followed. There is cost for the registration process.
It’s important that you develop a cost-justifiable trademark strategy.
Courts will support unregistered marks and logos. However if there’s a dispute against a statutory registered name or mark, you’ll have to establish the original owner's reputation. One salient example occurred when a small online clothing business, named after the owner’s daughter, had to stop using the name Zara – the same name as a global fashion chain. This instance demonstrates the difficulty small businesses experience when trying to prove reputational ownership of a name in defence of a statutory owner of the same name.
Getting evidence of reputation is costly and can be very difficult for smaller traders. Proving a reputation is not required for a registered trademark. This is the main reason we have a trademark registration system.
It’s important to remember that the trademarks office considers them on a phonetic basis. If the trademarks are phonetically similar (for example, "Kola" vs "Cola") then the first-registered mark will be cited against the application. There are a number of ways to respond to an examiner's report under the Trademarks Act, including providing evidence of your use of the trademark .You can also argue that the goods or services claimed are sufficiently different and consumers would not get confused.
Common law trademarks
A common law trademark refers to one that hasn’t been registered but hat has a strong reputation in the public’s mind, to the point where use of the same or similar trademark by someone else could be stopped on the grounds it would mislead or deceive consumers.
To register a trademark you must be first to use and register it. The name cannot be geographic, descriptive, or laudatory. Even if your trademark registration has lapsed, you must still be the first to use it.
Trademarks can be renewed up to six months after expiry. If it isn’t renewed, it will be removed from the register. However, there’s still a risk that the trademark owner might still be using it, which could create other risks such as passing off or misleading and deceptive conduct under the Australian Consumer Law.
You should lodge a provisional patent application ideally as soon as a new product is developed. This will give you a priority date for the product or invention. You can then consult an IP lawyer to draft a confidentiality agreement which you’ll need before discussing your concept with other organisations, such as manufacturers, retailers or potential buyers. This should establish the best protection by giving you a ‘foot in the door’. However your idea won’t be fully protected until IP Australia examines the patent and issues a grant. . Protection will date back to the publication of the full patent application.
A patent is a depreciating asset for the purposes of Division 40 ITAA 1997 but is not a CGT asset. If you sell a patent, any gain is assessed pursuant to subdivision 40-D. There are no CGT concessions applicable to the gain.
An unregistered innovation, such as confidential information to the extent that the taxpayer has any legal or equitable rights to protect the innovation, is a CGT asset. Any gain generated from the its ‘sale’ will be a capital gain and thus eligible to the relevant CGT concessions.
If the owner of a patent grants a licence for the patent and receives a lump sum amount,, that money is assessable pursuant to Division 40. If the taxpayer grants or assigns an interest in an item of intellectual property, for example a licence, the taxpayer is treated as having stopped holding part of the item (subsection 40-115(3)). Then there is a balancing adjustment event (Section 40-295) and the consideration received is the amount relating to the balancing adjustment.
You should always register a product drawing or design to prevent others from using it. Don’t rely on copyright.
Copyright law removes protection from a design or drawing of a product if the copyright owner has made more than 50 of the products for sale. This means anyone can make products using the design in your drawing.
If your material is either text or diagrams, considered designs for workbooks, then it’s protected by copyright without you needing to register. The copyright protection stops others from using your text or diagrams without permission, but it doesn’t stop others from using the ideas contained in your text or diagrams. If you want protection for your ideas, you’ll need to consider patent protection, which may not always be possible.
You could also repeat your practice name or another brand as the source of this material. If you wish to protect your practice name or the other brand, you will need to consider a trademark application.
To achieve appropriate asset protection it’s a good idea to register the IP under different ownership to the entity conducting business.
The preferred structure both from a taxation and asset protection perspective is to hold the IP in a standalone company, which licenses the use of that IP to a trading entity for an appropriate license fee. The arrangement should be properly documented with an appropriate termination clause, which ends the licensing arrangement if the trading entity becomes financially distressed. Make sure you have covered the issue of IP ownership.
The difficulty of using a trust to own IP is that you can’t sell an interest in a trust, unless it’s a unit trust. If the asset is copyright, registered designs or patents, selling the shares will be subject to CGT with all the inherent benefits.
If the above assets are owned by a trust, Division 40 is the only tax treatment with all the financial detriment that brings.
Using a company to protect your IP allows an acquirer to get the share and use the tax consolidation regime to assign values to the IP. This would have no detrimental impact to the vendor of the shares. If you’re developing patents, the R&D concession is only available to a company..
The Google transaction structure is based around the source of income. If a foreign entity is owned by Australians, the Controlled Foreign Entity Regime will apply to attribute the income back to Australia. The Australian laws dealing with ownership of passive assets in foreign jurisdictions is subject to government scrutiny. Such structures are not recommended. The cost of establishing a foreign passive owning structure is significant and does not justify the ATO reviews, in our view.
There are rules about links between the Australian IP system and the international IP system. Under the Paris Convention, someone who applies for a trademark in Australia has six months to lodge an international application and be able to claim the Australian priority date.
The same period applies to a registered design. For patents it’s 12 months.
Copyright follows a separate regime. Australia is party to an international convention which means that the copyright rights that are obtained in Australia also apply equally in overseas jurisdictions.
It's very important that you ensure protection of your IP in all jurisdictions where you anticipate it will be applied. This could involve a proper review of your business strategy to ensure the IP is registered in all such jurisdictions. This will ensure your IP is protected as the business expands into new markets.
There is no type of patent which provides global protection. The “European patent” covers most European countries. To get a patent in non-European countries, you need to get a separate one in each country. The Patent Cooperation Treaty allows you to file one application for multiple countries, but to get a patent in those countries the application must be examined and granted in each of those countries separately.
- The cost of developing a new and separate asset is of a capital nature and ordinarily such costs should be capitalised and shown as an asset in a balance sheet. However, if the business is a reporting entity, the current accounting standards prevent the internally generated IP from being shown as an asset, unless the circumstances are exceptional. The accounting standards prevent a balance sheet reflecting revaluation of such assets. In the case of a non-reporting entity, the accounting standards have minimal implications and accordingly, the asset can be revalued.
You don’t need to register for copyright protection. Creating the material is all that’s required. However, putting “Copyright” or “©”, and the name of the creator, on copyright material to alert others that rights exist in the material can be beneficial.
Copyright protection is limited to reproduction of actual text or drawings. It doesn’t cover the ideas that the text or drawings disclose.
Computer software is protected by copyright as if it was a literary work. The exception is if the software provides an algorithm which can be registered as a patent. There is no need for anyone to determine if those rights exist. They just do.
You should maintain a register of IP Assets for existing IP and R&D work. Future IP Rights (for example, IP that has not yet been developed) can be assigned or licensed. There is a limited spectrum of IP for software. For example, copyright, but possibly patents and trademarks if the brand is commercially important.
If you are accessing material protected by copyright, rights under copyright do not change if the creator is located overseas. That material would still be protected in Australia under international treaties.
If you transfer IP from yourself to a trust, there’ll be taxation implications depending on it nature. Certain items of IP (copyright, patents and registered designs or interests therein) are all treated as revenue assets for the purposes of Division 40. Transfer of these assets subject to the value of the asset will not attract CGT or any of the concessions but will be fully taxed.
Trademarks and other forms of IP not referred to above will be CGT assets and a transfer of ownership will create a CGT liability. However, if those assets are used in a business of the taxpayer, it's possible for the various CGT concessions to apply (Division 115 and Division 152).
If the client’s objectives include the sale of their business, including all the assets and Division 40 intellectual property, it’s essential to ensure that what is ultimately sold is a CGT asset subject to CGT assessment.
This can be achieved if the CGT asset sold is, for example a share in a company which “houses” the business assets.
In accordance with the Division 152 provisions, a share will be an active asset if 80 per cent of the market value of the assets of the company are active. Even if the assets include depreciating assets, they are still considered active. There is a special inclusion of IP assets that are used for passive income, if the value in the asset has been developed by the taxpayer.
The value of IP is based on the future economic benefits to the owner. Generally, those economic benefits are capitalised and discounted back to the present value. It's important where there is a transfer between the individual and their trust, to ensure that the market value is used for the transfer to minimise taxation implications.
IP is a Commonwealth statutory asset and the transfer of statutory IP will not be subject to duty unless it’s transferred in combination with the transfer of other business assets. It’s important to review each state's duty legislation as there are differences in how these assets are treated. In Queensland, for example, duty is only payable on the transfer of IP when it’s transferred with other business assets.
- The Personal Property Securities Register covers IP. The scope of what is covered under a PPSR Security Interest registration would be determined by the underlying security document. If IP is generated by an organisation, it can be subject to a security interest.
There are disadvantages in this approach.
- Asset protection: If the individual suffers some financial distress associated with a private matter and the IP is exposed.
- Asset protection: Where the IP is used in a business activity and suffers the risk of litigation associated with business transactions.
- Subject to the nature of the IP, there are significant taxation implications if the sale of the IP attracts Division 40.
- If the property wishes to be commercialised, it becomes necessary to restructure the ownership of the asset at the later time. This may cause revenue implications both tax and duty (although it's possible for rollover provisions to be used to mitigate this).
The process isn’t complex. However it’s important that you read the information about the process on the IP Australia website. Key issues include the class of goods and services that the person wants to register against.
To apply for a logo or any type of trademark you need to log on to eServices on the IP Australia website to register as a user. Then select the online application form to go through the process of recording details of the trademark together with the correct class of goods and services.
The above information has been developed in consultation with IP Australia which is the Australian Government agency that administers intellectual property (IP) rights and legislation relating to patents, trademarks, designs and plant breeder’s rights.
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