:-) Not that its stopped people giving out free advice. There is more than
one question here: "Should wdog.com.au be prevented from using the domain
wdog.com.au? Reason being breach of trademark"

Without going into too much detail:

A court must determine that a trademark has been breached, no-one else
(especially not a DN registrar or an angry would-be DN registrant).

If it has been established that a breach of trademark has occurred in
registering the domain name, the WA business may be required to surrender
the domain name (including instructing INA/MelbIT to transfer its licence to
the trademark holder).

If it has been established that a breach occurred by trading under the
business name, the business name might need to be deregistered, in which
case the DN should also be forfeit. This also begs the question should the
business name (and trademark) registrars disregard "Internet addressing" (eg
disregard "com.au" as part of a name) when considering whether one name is
too similar to another. Some business name registrars do, some don't.

The WA business could try to argue to have the trademark removed as there
might be some time limitations on registering a trademark for products that
don't exist yet (see www.ipaustralia.gov.au for more info or give them a
ring). The argument about differing trademark categories may or may not wash
(depends which way it is argued) but from the description below it appears
that they're operating in pretty much the same area.

The onus is absolutely on the party registering the business name to do the
appropriate checks. They don't appear to have been done in this case.
Whether the com.au as part of the business name sufficiently differentiates
it from the trademark (without the com.au) would be an interesting, but
probably unsuccessful, argument. Ditto for the mere registration (rather
than use) of business and domain names. Your client might be able to keep
the domain and/or business name, but not use it. There should be some case
law on that.

If the trademark holder has the will and cash for the fight, and goes for
the appropriate remedies (above) there appears to be little hope for the
current DN holder to usefully hold onto the DN. Unless it's itching (no pun
intended) for a fight, a  legal battle might not be commercially sensible.
If the tm holder insists, wdog.com.au could try for the com.au dispute
resolution procedure (commercial arbitration) rather than the courts.

Regards,
Doug

[standard disclaimers apply]