DEPRECIATION REQUIRES USE OF PROPERTY
Trustees in the CB Simkin Trust and the Trustees in the NC Simkin Trust v Commissioner of Inland Revenue (2005) 22 NZTC 19,001
The decision of the Privy Council was given in December 2004 in this longstanding dispute over the application of the depreciation regime.
The two trusts in question claimed depreciation deductions in 1996 and 1997. They purchased trademarks from an entity which applied those marks in the course of its business. The purchase purported to give the trusts the absolute right of use of the trademarks but at the same time as purchasing the trademarks the trusts licensed them back to the vendors. Those licenses granted exclusive rights to use the trademarks for a period of seven years, subject to the payment of royalties each year. The trusts then sold their residual rights in the marks with effect from the expiry of the licenses which had been granted to the original vendors.
The Commissioner disallowed the trusts’ claims for depreciation on the basis that the licenses of the trademarks had removed from each of the trusts the right to use the trademark and that, if any right to claim depreciation existed, it was in the hands of the licensees.
The Privy Council upheld the Commissioner of Inland Revenue’s position stating that during the seven year period of the licenses the trustees did not own any “depreciable intangible property” within the meaning of the Income Tax Act and its 17th Schedule. The trademarks themselves were not depreciable intangible property because the Schedule referred only to the right to use trademarks and during the period of the licenses the Board held that the trustees did not possess that right of use because it had been made over to the exclusive licensees. The Board held that it made no difference to the trustees’ claim that the licensees could not have claimed depreciation either. They deducted annual royalties together with their business expenses, but there was no capital expenditure incurred by the licensees that could form the basis for a depreciation claim.
The Board noted that had the license been granted for a premium, that premium would have been depreciable on the basis that it was a capital cost incurred by the licensees for the grant of a right to use.
The Board considered that the exclusivity conferred by the deeds of license was inconsistent with any argument that the trusts retained a right to use. It noted that had any breach of the trademark occurred the only parties that could have conducted a passing off action were the licensees, and that spoke against the existence of a continuing right to use in the trusts.
Moreover, the Board noted that a trademark, and for that matter copyright other than copyright in software or in a sound recording, fell outside the general concept of depreciable intangible property because there was no finite useful life attributable to the property. In the case of a trademark it could continue indefinitely whereas the right to use a trademark was limited by the terms of its grant.
The broad argument consistently offered by the taxpayers in this case had been that a right to use was effectively “embedded” in ownership of the trademark itself. The trademark was capable of being turned to account in the sense of it being licensed and was in fact being “used” as required by the depreciation regime because of such licensing. Similar arguments had been made in the 1990s for depreciable intangible property and gave rise potentially to multiple claims for depreciation where intangible property was licensed and sublicensed several times. The Simkin case marked a move away from the possibility of multiple or “cascading” depreciation claims by focusing on the actual use of the intangible property in a productive business as opposed to the application of the property to a business of licensing.
The Privy Council’s decision emphasises the importance of property having a finite useful life, of determining the way in which the property is actually used and by whom it may be defended. Where intangible property has been dealt with in a way that shifts the incidents of “ownership”, such as taking action against unauthorised use, it is the person holding the right to take such action that is likely to be regarded as having the right to use the relevant property, and so to be entitled to a depreciation allowance if acquisition of the property has involved a capital outlay.
© G D Clews 2005