Depreciation of right to use trademarks
2004 case note - taxpayers not entitled to depreciation deduction for trademarks because they did not own the right to trademarks - intangible property, Sch 17.
Income Tax Act 1994
Summary
The tax payers are not entitled to a depreciation deduction in relation to trademarks because they did not own the right to use the trademarks.
Facts
This was an appeal by the tax payers from a decision of the Court of Appeal (reported at (2003) 21 NZTC 18,117) upholding the High Court decision (reported at (2002) 20 NZTC 17,611).
The issues are the same for both Trusts. Each purchased trademark(s) from companies engaged in businesses which used the trademark(s). Simultaneously, the Trusts licensed the trademark(s) back to the respective vendor companies, granting exclusive rights to use the trademarks for seven years.
The Trusts then sold their residual rights in the trademarks (and names) to third parties, with the trademark to remain the property of the Trusts for seven years (ie the period of the licence).
The licensees paid annual royalties for the right to use the trademarks.
The Trusts claimed depreciation in the 1996 and 1997 years, in relation to the trademarks, on the basis they were the owners of the trademarks.
The Commissioner disallowed the claims, on the basis the Trusts were not entitled to claim depreciation.
Decision
The Privy Council upheld the earlier decisions, dismissing the appeal and ordering the appellant to pay the costs of the appeal.
The depreciation regime states only the owner of the right to use a trademark can depreciate the right to use the trademark. The Trusts did not own the rights to use the trademarks because that right had been licensed exclusively to the licensees.
Lord Scott expressed the view that it is unclear whether the words after "Schedule 17" in the section OB 1 definition of "depreciable intangible property" are intended as explanatory of the reasons for the particular types of intangible property listed, or whether they are criteria that an item of intangible property must possess in order to qualify for depreciation (paragraph 6 of the judgment).
However, his Lordship considered this does not need to be resolved if the item does not fall within the listed types, and their Lordships found the relevant item to be "the right to use a trademark", which is listed.
Their Lordships rejected the tax payers' arguments that the Trusts retained the "proprietary" right to use and the licensees had only a "contractual" right to use as offending common sense.
The tax payers' also argued that if the Trusts were not the owners of the right to use the trademarks, then the licensees must be, because someone must be able to claim the depreciation. Their Lordships dispatched this argument, stating that the licensees had no capital asset to depreciate (they were entitled to, and did, deduct the annual royalty), and furthermore the fact that the licensees could not claim the depreciation did not assist the trustees with their claim to a depreciation allowance.