The Judicial Committee of the Privy Council Decisions

CB Simkin Trust & Anor v Inland Revenue (New Zealand) [2004] UKPC 55 (14 December 2004)

Privy Council Appeal No. 64 of 2003

The Trustees in the CB Simkin Trust and the Trustees in

the NC Simkin Trust Appellants

v.

The Commissioner of Inland Revenue of New Zealand Respondent

FROM

THE COURT OF APPEAL OF NEW ZEALAND

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 14th December 2004

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Present at the hearing:-

Lord Bingham of Cornhill

Lord Clyde

Lord Millett

Lord Scott of Foscote

Lord Brown of Eaton-under-Heywood

[Delivered by Lord Scott of Foscote]

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Background

1. The appellants in this appeal are the respective trustees of two Trusts, the Nyall Colin Simkin Family Trust and the Christopher Bruce Simkin Family Trust. The trustees of the former Trust (the "NC Simkin Trust") are Nyall Colin Simkin and a Mr Christian. The trustees of the other trust (the "C.B. Simkin Trust") are Christopher Bruce Simkin and a Mr Wells.
2. The exact relationship between Nyall Colin Simkin and Christopher Bruce Simkin is not disclosed by the papers before the Board. They are obviously closely related and are associated, together with other members of the Simkin family, in carrying on two distinct businesses. One of the businesses is carried on by Autolodge Motels Ltd ("ALM"). ALM's business is the provision of accommodation to travellers. ALM has 200,000 issued shares of which 70,000 are held by Nyall Colin Simkin, 70,000 by Christopher Bruce Simkin and 30,000 by another member of the Simkin family, Bruce Alfred Simkin. The other business is carried on by Constellation Enterprises Ltd ("Constellation"). Its business is the retailing of liquor in various establishments for consumption off premises. Its shareholders are Christopher Bruce Simkin and Nyall Colin Simkin. Two other family companies feature in the story. Riversdale Enterprises Ltd carried on the business of property holding. Its shareholders were Christopher Bruce Simkin and Boulevard Holdings Ltd. Boulevard Holdings Ltd has 10,000 issued shares of which Nyall Colin Simkin and Christopher Bruce Simkin each hold 3500, and 3000 are held jointly by Bruce Alfred Simkin and Mr Christian. On 11 December 1998 Riversdale Enterprises Ltd was merged with Boulevard Holdings and then removed from the register of companies. But the events with which the issues in this appeal are concerned all predate that merger.
3. Section EG1 of the Income Tax Act 1994 allows a taxpayer to deduct from his taxable income "an amount on account of depreciation for any depreciable property owned by that taxpayer" in the tax year in question. Depreciable property may include "depreciable intangible property", as defined in section OB1 of the Act.
4. Trademarks are a well recognised species of intangible property. Most businesses use trademarks, whether registered or unregistered, for the purposes of their business. Both ALM and Constellation did so. A number of transactions relating to the trademarks used by ALM and Constellation were put into effect in 1994 (Constellation) and 1995 (ALM) and led to claims for depreciation being made by the appellants for the tax years to 31 March 1996 and 31 March 1997. It is the validity of those depreciation claims that are in issue in this appeal.

The legislation

5. Section OB1 of the 1994 Act defines "depreciable property". It says that "depreciable property"

"(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 deriving gross income; or

(ii) In carrying on a business for the purpose of deriving gross income; but

(b) Does not include –

...

(iv) Intangible property other than depreciable intangible property."

So, in order for intangible property to qualify for depreciation, the property must be "depreciable intangible property."

6. Section OB1 goes on to define "depreciable intangible property" as –

"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."

This is an unusual definition and their Lordships are not clear what purpose is intended to be served by the words that follow "Schedule 17". Are they merely explanatory of the reasons for the selection of the particular types of intangible property that are listed in Schedule 17? Or are they criteria that an item of intangible property of a type listed in Schedule 17 must possess in order to qualify for depreciation? These questions do not, however, need to be answered if the intangible property in question does not fall within one or other of the listed types.

7. Schedule 17 lists ten categories of intangible property. Only one, "the right to use a trademark", is relied on by the appellants but it is convenient to set out all ten categories so that "the right to use a trademark" can be read in its statutory context. The ten categories are as follows –

"(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 or 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.

(9) A consent granted under the Resource Management Act 1991 to do something that otherwise would contravene sections 12-15 of that Act (other than a consent for a reclamation), being a consent granted in or after the 1996-97 income year.

(10) The copyright in a sound recording."

8. Their Lordships draw attention to what is not to be found in schedule 17. Copyright, other than copyright in software or in a sound recording, is not depreciable intangible property. Nor is a trademark. What distinguishes these types of intangible property from those that are included is the longevity of the useful life of the omitted types. A trademark does not have a "finite useful life". Its useful life can continue indefinitely. The right to use a trademark, on the other hand, will last only for as long as the trademark owner has granted that right.

The transactions

9. AML: AML used for its business purposes the name "AutoLodge" and prior to 17 October 1995, had applied to register the trademark "AUTOLODGE".

(i) By an agreement for sale dated 17 October 1995 ALM sold to the NC Simkin Trust the right to the name, Auto Lodge, and to the trademark AUTOLODGE. The sale was for the sum of $766,000 plus GST. The rights sold were expressed to include "the absolute right of use" of the name and the trademark and all rights relating to the registration application.

(ii) By a Deed of User and a Deed of Licence both dated 17 October 1995 the trustees of the NC Simkin Trust granted ALM the exclusive right for a term of 7 years from 17 November 1995 to use the mark AUTOLODGE in connection with the provision of goods and services in New Zealand. The consideration for the grant was the payment by ALM of an annual royalty of $153,200. The two Deeds were expressed to be terminable by either side on 12 months prior written notice but no such notice was ever given. The Deeds contained a number of other provisions but none that is relevant to the entitlement of the trustees to claim a depreciation allowance.

(iii) By Deed of Sale dated 7 December 1995 the trustees agreed to sell the Trust's residual rights in the name "Auto Lodge" and the trademark AUTOLODGE to Riversdale Enterprises Ltd with effect from 17 November 1995 (clause 1 of the Deed) for the sum of $104,760 plus GST. But clause 2 of the Deed provided that

"Notwithstanding the sale evidenced by clause 1 of this Deed the Vendor [ie the trustees] and the Purchaser [ie Riversdale] acknowledge that the Trademark [AUTOLODGE] shall remain the property in all respects (other than the residual interest of the purchaser hereunder) of the Vendor for a period of seven years from [17 October 1995] …"

Clause 2 went on to say that during the seven year period

"… the Vendor and [ALM] and any person authorised by them shall be free to use the Trademark in all respects as the absolute owner …"

10. It is to be noticed that the Deed of User and the Deed of Licence were expressed merely to grant ALM the right to use the trademark AUTOLODGE. No mention was made of the right to use the name AutoLodge. Nonetheless the grant of the exclusive right to use the trademark AUTOLODGE must surely have barred the grantors from using or granting anyone else the right to use for business purposes the name AutoLodge. And it is to be noticed also that whereas the Deed of Sale recited an agreement to sell for $104,760 plus GST "the residual rights in the Name and Trademark", the operative part of the Deed referred only to a sale of "the residual rights in the Trademark". It seems clear to their Lordships that the right to use the name AutoLodge and the right to use the trademark AUTOLODGE were treated as indistinguishable. Any other construction would offend common sense and, understandably, no argument based upon the absence in the Deed of User and the Deed of Licence of any reference to the right to use the name AutoLodge has been presented to their Lordships.
11. The effect of these four Deeds seems to their Lordships to be that -

(i) the trustees of the NC Simkin Trust were owners of the name AutoLodge and the trademark AUTOLODGE over the seven year period 17 October 1995 to 16 October 2002;

(ii) ALM were granted the exclusive right to use the trademark AUTOLODGE (and accordingly the right to use the name AutoLodge) for the same period;

(iii) Riversdale became the owners of all rights in the trademark AUTOLODGE and the name AutoLodge as from 17 October 2002;

(iv) the trustees of the NC Simkin Trust paid $766,000 on 17 October 1995 for the rights in respect of the name AutoLodge and the trademark AUTOLODGE but recouped $104,760 on 17 November 1995 when the rights were sold to Riversdale.

12. Constellation: Constellation used for its business purposes the names "The Mill" and "The Mill Liquor Save" and, prior to 17 October 1995, had applied to register the trademark "THE MILL".

(i) By an agreement for sale dated 17 October 1995 Constellation sold to the CB Simkin Trust the right to the names The Mill and The Mill Liquor Save and to the trademark THE MILL. The sale was for the sum of $1,154,000 plus GST. The rights sold were expressed to include "the absolute right of use" of the names and the trademark and all rights relating to the trademark registration.

(ii) By a Deed of User and a Deed of Licence both dated 17 October 1995 the trustees of the CB Simkin Trust granted Constellation the exclusive right from 17 October 1995 to use the trademark THE MILL in connection with the provision of goods and services in New Zealand. The consideration for the grant was the payment by Constellation of an annual royalty of $230,800. The Deeds contained the same provisions as to duration, termination and otherwise as were contained in the Deed of User and Deed of Licence between the trustees of the NC Simkin Trust and ALM.

(iii) By Deed of Sale dated 7 December 1995 the trustees of the CB Simkin Trust agreed to sell the Trust's residual rights in the names The Mill and The Mill Liquor Save and in the trademark THE MILL to Riversdale Enterprises Ltd with effect from 17 November 1995 (clause 1 of the Deed) for the sum of $155,790 plus GST. As with the comparable NC Simkin Trust Deed of Sale clause 2 of the Deed provided that the trademark would remain the property of the trustees of the CB Simkin Trust for seven years from 17 October 1995. The clauses in each of the Deeds of Sale were in the same terms, mutatis mutandis.

13. The CB Simkin Trust Deed of Sale has the same oddity as is to be found in the NC Simkin Trust Deed of Sale (see paragraph 11 above). For the reasons given in paragraph 11 it seems to their Lordships that the grant to Constellation of the right to use the trademark THE MILL entitled Constellation to use the name The Mill. Whether the Deed of User and Deed of Licence entitled Constellation also to use the name The Mill Liquor Save seems to their Lordships less clear. It may be that the right to use that name remained with the trustees for the seven year period. But presumably nothing turns on this for no argument was addressed to their Lordships on the point.
14. The effect of the four Deeds to which the CB Simkin Trust trustees were parties seems to their Lordships, so far as ownership and use of the name The Mill and the trademark THE MILL are concerned, to be exactly the same as the effect of the four Deeds relating to the ownership of and right to use the name AutoLodge and the trademark AUTOLODGE, mutatis mutandis.

The right of the trustees to claim a depreciation allowance

15. The trustees contend that the result of the transactions described was that over the seven year period they owned the right to use the trademark that they had purchased from ALM (or Constellation) on 17 October 1995 and sold as from seven years thereafter to Riversdale. The Commissioner's response in the courts below and before your Lordships was and is that under the Deed of User and the Deed of Licence the trustees granted ALM (or Constellation) "the exclusive right … to use the Trademark" for the seven year period. This response was accepted both by Young J at first instance and by the Court of Appeal and seems to their Lordships to be incontestably sound and correct.
16. Mr Dengate-Thrush, counsel for the appellant trustees, advanced a number of arguments in support of his clients' case. His core argument was that the entitlement of the licensee to use the trademark was merely a contractual right. It was not, he said, a proprietory right. A contractual right to use a trademark could not, he submitted, be described as "depreciable property owned by …" the taxpayer (s. EG1(1) of the 1994 Act). Notwithstanding the grant to the licensee, ALM or Constellation, of "the exclusive right … to use" the trademark, the licensor remained during the seven year licence period the owner of the right to use the trademark.
17. Their Lordships are unable to accept this submission. A contractual right is as capable of being "property" as any other intangible right. To say that a trademark proprietor who has granted a licensee the exclusive right to use the trademark is nonetheless during the currency of the licence the owner of the right to use the trademark seems to their Lordships to offend commonsense. Mr Dengate-Thrush submitted that, as between the licensor and licensee, the licensee's remedy if the licensor did make some business use of the trademark would be a contractual remedy and not a proprietory one. Their Lordships do not follow the distinction. The licensee's remedy would be not only damages but also, unless he proposed to accept the licensor's repudiation of the licence, an injunction to restrain the licensor's use of the mark. Mr Dengate-Thrush pointed out that if a third party were to make some unauthorised use of the trademark it would be the licensor not the licensee, who would have to bring infringement proceedings. But each of the Deeds of Licence entitles the licensee to call on the licensor "to take such action as may be necessary to restrain the infringement" and, if necessary, "to take such infringement action on its own account (in the name of the Owner if necessary) …" (clause 6.2). These provisions are entirely consistent with the exclusive right to use granted to the licensee and inconsistent with the notion that the licensor can be described as retaining the "right to use". Moreover, if and so long as the mark remained unregistered, the remedy for an unauthorised use of the mark by a third party would have to be a passing-off action. But a passing-off action could not have been brought by the trustees and could only have been brought by ALM or Constellation, as the case may be, i.e. by the licensees.
18. Mr Dengate-Thrush protested that if the trustees were held not to be the owners of the right to use the trademarks, then it must follow that the ALM and Constellation were the owners of the right to use. But ALM and Constellation were paying an annual royalty at full market value for the right to use the trademarks and had no capital asset in respect of which depreciation could be claimed. How could it be right that no one was entitled to claim a depreciation allowance in respect of an asset that was unquestionably "depreciable intangible property"? Their Lordships of course agree that ALM and Constellation could not claim a depreciation allowance in respect of the rights they had acquired under their respective Deeds of User and Deeds of Licence. They were entitled to, and no doubt did, deduct the annual royalty, together with all other business expenses, from their gross income in order to arrive at their net taxable income. They had no capital asset to depreciate. If, instead of the grant of a seven year licence at an annual royalty, they had been granted a seven year licence in consideration for the payment of a premium, their Lordships can see no reason why they should not have been entitled to a depreciation allowance in respect of the wasting value of the capital asset they had acquired. The trustees' claim to a depreciation allowance is not improved by the circumstance that ALM and Constellation could not have made that claim.
19. The trustees' claim to a depreciation allowance fails for the reason that for the seven year period the trustees did not own any "depreciable intangible property". The trademarks, of which the trustees were the owners, were not depreciable intangible property. The right to use the trademarks was depreciable intangible property but during the seven year period the trustees did not own that right. That right belonged to the exclusive licensees.
20. For these reasons, substantially those given by Young J and the Court of Appeal, their Lordships will humbly advise Her Majesty that this appeal should be dismissed. The appellants must pay the costs of the appeal.