Trustees of CB Simkin Trust v Commissioner of Inland Revenue
[2003] NZCA 43
•5 March 2003
IN THE COURT OF APPEAL OF NEW ZEALAND
CA57/02
BETWEENTHE TRUSTEES OF THE CB SIMKIN TRUST AND THE TRUSTEES IN THE NC SIMKIN TRUST
Appellants
ANDCOMMISSIONER OF INLAND REVENUE
Respondent
Hearing:3 February 2003
Coram:Gault P
Blanchard J
McGrath JAppearances: P C Dengate-Thrush for Appellants
J H Coleman and K Parkash for Respondent
Judgment:5 March 2003
JUDGMENT OF THE COURT DELIVERED BY GAULT P
[1] The trustees of the two appellant trusts seek to overturn the disallowance by the Commissioner, upheld on appeal to the High Court, of claims for depreciation of certain intangible property.
[2] Precisely the same issues arise in respect of the two trusts. The deductions for depreciation claimed by each in the 1996 and 1997 income years are in contention. Each purchased a trademark or trademarks from a company engaged in a business in which the mark or marks were used. The purchases did not include the goodwill of the businesses in which the marks were used but expressly included “the absolute right of use” of the marks. At the same time as purchasing the marks the trustees licensed them back to the respective vendor companies. The licences granted exclusive rights to use the marks for a defined period of seven years subject to the payment of annual royalties. Shortly thereafter the trustees sold their “residual” rights in the trademarks with the sales to take effect on dates corresponding with the expiry of the licences.
[3] The depreciation claimed by each trust in each income year was the proportionate part of the write-off over the seven year period of ownership of the marks of the difference between the amount paid on acquisition and the amount specified as consideration for the sale at the end of that period.
[4] For the CB Simkin Trust the amount in issue is $59,417 in the 1996 income year and $142,601 in the 1997 year. For the NC Simkin Trust the amounts are $57,071 for the 1996 year and $136,971 for the 1977 year.
[5] The basis for the claims is that in the relevant period the trusts were the owners of the trademarks; inherent in the ownership was the right to use the marks; that that right diminished in value between acquisition and sale and qualified for depreciation within sEG1 Income Tax Act 1994. In particular, it is contended, the owner’s right to use a trademark is depreciable as “Depreciable intangible property” expressly listed in Schedule 17 of the Act.
[6] Under sEG1 depreciation is an entitlement. That section reads:
EG1(1) Deduction for depreciation. Subject to this Act, a taxpayer is allowed a deduction in an income year for an amount on account of depreciation for any depreciable property owned by that taxpayer at any time during that income year.
EG1(2) No deduction in year property sold. No depreciation deduction shall be allowed in respect of any property for the income year in which the property is sold or otherwise disposed of, except in the case of property that is ¾
(a)A building; or
(b)Schedule depreciable property.
[7] As Mr Dengate-Thrush emphasised, it is the owner of depreciable property that is entitled to the deduction.
[8] “Depreciable property” as applicable to the 1996 and 1997 income years was defined as follows:
“Depreciable property” in relation to any taxpayer, —
(a)Means any property of that taxpayer which might reasonably be expected in normal circumstances to decline in value while used or available for use by persons —
(i)In gaining or producing assessable income; or
(ii)In carrying on a business for the purpose of gaining or producing assessable income; but
(b) Does not include —
(i)Trading stock of the taxpayer:
(ii)Land (excluding buildings and other fixtures and such improvements as are listed in Schedule 16):
(iii)Financial arrangement:
(iv)Intangible property other than depreciable intangible property.
(v)…
.
.
.
(ix)
[9] “Depreciable intangible property” is included within the definition of “Depreciable property” where it is property of the taxpayer which might reasonably be expected in normal circumstances to decline in value while used. “Depreciable intangible property” itself is defined:
“Depreciable intangible property” means intangible property of a type listed in Schedule 17, which Schedule describes intangible property that has —
(a)A finite useful life that can be estimated with a reasonable degree of certainty on the date of its creation or acquisition; and
(b)If made depreciable, a low risk of being used in tax avoidance schemes:
[10] The types of property listed in Schedule 17 included the following:
1.The right to use a copyright
2.The right to use a design or model, plan, secret formula or process, or other like property right.
3.A patent or the right to use a patent.
4.The right to use land.
5.The right to use plant or machinery.
6.The copyright in software, the right to use the copyright in software, or the right to use software.
7.The right to use a trademark.
8.Management rights and licence rights created under the Radiocommunications Act 1989.
[11] We are concerned with item 7 “The right to use a trademark”. The taxpayers (the trustees) contend that the right to use the trademarks inherent in their ownership falls within that item and qualify for depreciation in the period between purchase and sale.
[12] The Commissioner did not accept that view. In accordance with the reasoning in Adjudication Reports, he disallowed the deductions and issued the amended assessments the subject of these challenge proceedings. The reasoning is exactly the same in the Reports on the two cases. It draws a distinction between the right to use that inherently goes with ownership of a trademark and the right to use enjoyed by another under licence from the owner. The latter right, under the relevant licence is, in each case, enjoyed exclusively by the licensee. The Adjudication Reports set out the reasoning in these terms.
Item 7 of the Schedule 17 includes “the right to use a trademark”. By virtue of the definition of “depreciable intangible property” it is apparent that the right to use a trade mark is property that has a finite useful life that can be estimated with a reasonable degree of certainty on the date of its creation or acquisition, and a low risk of being used in tax avoidance schemes if made depreciable.
Schedule 17, by referring to the “right to use” a trade mark, does not focus on absolute ownership (which could have been dealt with by simply referring to “a trade mark”), but instead has a focus on the right to use a trade mark (consistent with the type of rights that the taxpayer has licensed the other parties in the arrangement to exercise). The use of the words “right to use” appears to draw a distinction between ownership rights and licensee rights.
A specific consideration in respect of the interpretation of the words “the right to use” a trade mark is the way trade marks can be exploited. Section 37(1) of the Trade Marks Act 1953 provides that a person other than the proprietor of the trade mark can use such a trade mark if they are a “registered user”. A registered user needs to be registered by the Commissioner of Trade marks on application by the proprietor and the proposed user. The procedures for being registered are set out in the remainder of section 37. In this statutory context, it may be implied that a right to use a trade mark was a reference to a registered user. Ownership rights in a trade mark may be referred to differently, perhaps by just stating “a trademark” in item 7.
Item 7 specifically refers to “the right to use” a trade mark. This can be compared to the formulation of other items in the schedule. For example, item 3 refers to “a patent or the right to use a patent”. Item 6 refers to “the copyright in software, the right to use the copyright in software, or the right to use software”. These contextual clues show that in some instances the legislative drafter saw fit to include both the intangible property per se, as well as the right to use that intangible property. A strong interpretative inference from the differing use of wording in the same Schedule is that there was indeed a distinction to be drawn between the ownership of intangible property, and a grant of the right to use that intangible property.
This can also be noticed when one considers that item 1 of the Schedule is “the right to use a copyright”. Comparing this to item 6 and the depreciability of software rights, it can be seen that ownership of copyright other than in software would not be depreciable. Parliament has seen fit to draw a distinction between the copyright in software and the copyright in other types of copyrightable material.
Further support comes from item 10 of the Schedule, which was added in 1997, effective 23 September 1997. That provides:
10.The copyright in a sound recording, if the copyright was produced or purchased by the taxpayer on or after 1 July 1997, and copies of the recording have been sold or offered for sale to the public.
The fact that copyright in a sound recording needed to be mentioned individually suggests that in the absence of item 10, ownership of such a copyright would not be covered by item 1, and would not be depreciable.
The presence of item 3 regarding patents, which are in some ways analogous to trade marks, is a strong contextual argument suggesting that mere ownership of a trade mark is insufficient to give rise to a depreciation deduction as depreciable intangible property. The argument that ownership of a trade mark gives the owner rights to use, and hence amounts to the right to use a trade mark, is unconvincing in view of the other items in the Schedule. If such an argument was correct then there would be no requirement to refer to “a patent” in item 3, nor to “the copyright in software” in item 6.
There is a principled reason why item 7 may be meant to only cover a licensee of a trade mark rather than the owner. A trade mark can last perpetually, subject to renewal, and would not have a finite useful life that can be estimated with a reasonable degree of certainty, cf a licence to use a trade mark. Given the definition of “depreciable intangible property”, and in particular the characteristics set out in that definition (a finite useful life that can be estimated with a reasonable degree of certainty), it seems that a licence to use a trade mark has such characteristics whereas the trademark itself may not.
[13] In the High Court, Ronald Young J, in a judgment delivered on 26 February 2002 and reported at 2002 NZTC 17,611 reached the same conclusion on essentially the same reasoning. He dealt particularly with the argument for the taxpayers that the depreciation entitlement is that of the owner of the property and not a licensee. He held that the property interest qualifying as depreciable intangible property is the use right, not the ownership rights in the trademark.
[14] In this Court we were presented with substantially the same arguments as were considered and rejected below. They were succinctly captured in Mr Dengate-Thrush’s written summary outlining the appellants’ case.
The appellants say:
That they acquired with the purchase a bundle of rights, including the right to use the trade marks.
The fact of licensing the marks is irrelevant to owning that right to use. A licence is a permission to do something which would otherwise be an infringement. It is not a legal assignment, nor has the Commissioner ever attempted to argue that the licences constitute an equitable assignment of the choses in action.
Because of the on-sale, the taxpayers own all the rights associated with the trade marks, including the “right to use the trade mark” for seven years. Accordingly, they have the right to use a trade mark (which is the right mentioned in Schedule 17) and this clearly has a finite useful life which can be estimated with reasonable certainty on the date of its acquisition. Accordingly, the taxpayer owns a type of property described in the Income Tax Act 1994 as “depreciable intangible property”.
As the owner of that right, it is entitled to claim depreciation under the standard provisions providing that owners may claim a deduction on account of depreciation (s.EG1).
[15] At the centre of the argument is the contention that the trusts necessarily own the rights to use the marks. That ownership is a necessary prerequisite to the ability to licence that right to another. Granting the licences constitutes exercise (use) by the owners of the rights to use the trademarks. It was submitted that the Commissioner and the Judge below wrongly disregarded this reality. The licensee, it was said, has a purely contractual right of use and is not an owner. To permit licensees to depreciate property (which the Commissioner’s approach would do) would be contrary to the whole policy of the Act of permitting depreciation of wasting capital in which the owner has invested. It would allow licensees to depreciate the owner’s asset.
[16] Having fully considered counsel’s argument, we are satisfied the Commissioner and the Judge reached the correct conclusion.
[17] We accept that it is the owner of depreciable property who is entitled to deduct depreciation. In this case the intangible depreciable property as specified in Schedule 17 is “the right to use a trademark”. What is meant by that is a matter of construction. The meaning is to be discerned from the words used in their full context.
[18] Schedule 17 lists the items which, according to the definition, constitute depreciable intangible property. According to the definition the Schedule describes intangible property that has a finite useful life that can be estimated with a reasonable degree of certainty on the date of its creation or acquisition. Each of the items in the Schedule is to be interpreted in light of that description. Two of the items specify, in addition to the right of use, the property that may be used. That is the case in items 3 and 6. The remainder are limited to the right of use. That must be taken to represent clear drafting intent. Patent rights (item 3) and copyright in software (item 6) are statutory rights which include exclusive rights to use. The plain intention is that the depreciable intangible property extends not only to the statutory intellectual property right of the owner but also the right to use the patent or software copyright. The right of use, if separate from the patent or copyright, must be a right of someone other than the patent or copyright owner – clearly a licensee. If the right to use were merely that inherent in the ownership of the patent or software copyright there would be no need to specify it separately.
[19] Item 6 of the Schedule can be compared with item 1. If item 1 were intended to relate to the right of use inherent in the ownership of copyright, item 6 would be unnecessary.
[20] Mr Coleman, for the Commissioner, must be right in his submission that the rationale for including in items 3 and 6 the statutory intellectual property rights (patent and copyright) but not including the corresponding rights in other items such as 2 (designs and confidential information) and 7 (trade marks) reflects deliberate policy. Such policy would be consistent with the view that patents and copyright in software have a finite useful life that can be estimated with a reasonable degree of certainty from the date of creation or acquisition. The useful life of copyright in software generally would be regarded as having a shorter useful life than copyright in other works.
[21] Items 4 and 5 relate to rights of use of tangible items (land and plant and machinery) and clearly are limited to rights distinguishable from rights of use inherent in the ownership of the tangible property itself.
[22] The argument that a licensee cannot be the owner of the right of use, which is an inherent aspect of the bundle of rights constituting ownership of a trade mark, is best met by considering the right to use land. While undoubtedly the owner of the land (the reversion) has a right of use, subject to the lease, as a matter of legal analysis of the concept of ownership, that does not mean it is wrong or a misuse of language to describe a lessee as the owner of the lease. The lease constitutes a right of use of finite duration that can in normal circumstances be expected to decline in value while used.
[23] The same applies to the right to use an intellectual property right (copyright, design, trademark). A licensee may acquire by licence the right of use. Where that is for a finite term it may be expected to decline in value through the term. Any capital expense in acquiring the right will be depreciable over the period the right is enjoyed. There is no straining of language in describing the licensee as the owner of the right to use. That right to use is quite different intangible property from the right of ownership of the intellectual property right.
[24] In this context, the right to use a trademark in Schedule 17 means the right in fact to use. That is enjoyed by the licensees, not the licensors, in this case because the grants of the right to use are exclusive to the licensees. While the licensors may in theory have the right to use as an incidence of ownership, in fact they have no right of use exercisable during the term of the licences.
[25] Interpreting the schedule in this way is entirely logical. Trademarks, whether registered or unregistered, attract rights of indefinite duration. Registered marks may be renewed indefinitely. Unregistered marks inure so long as they constitute part of a goodwill to which common law rights attach. In normal circumstances the longer and more extensively a trademark is used, the greater its value. Trademark ownership rights are not property which might reasonably be expected in normal circumstances to decline in value while used so as to meet the definition of “Depreciable property”. Therefore it would not be expected that the ownership rights the appellants seek to depreciate would be included as depreciable intangible property.
[26] Accordingly, we are satisfied that the ownership rights the appellants seek to depreciate are not the rights to use trademarks to which item 7 of Schedule 17 relates. Therefore, it does not avail the appellants to point to the finite period of ownership and disparity of consideration between acquisition and disposal.
[27] The decision of Ronald Young J was correct and the appeal is dismissed.
[28] The appellants must pay costs to the Commissioner which we fix at $5,000 together with disbursements approved, if necessary, by the Registrar.
Solicitors:
Billings, New Plymouth for Appellants
Crown Law Office, Wellington, for Respondent
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