Prescience Communications Limited v Commissioner of Taxation Office
[2006] FCA 1561
•17 NOVEMBER 2006
FEDERAL COURT OF AUSTRALIA
Prescience Communications Limited v Commissioner of Taxation Office
[2006] FCA 1561INCOME TAX – INTERLOCUTORY INJUNCTION – application for an interlocutory injunction to restrain the Commissioner of Taxation from exercising a power conferred by s 263 of the Income Tax Assessment Act 1936 (Cth) – consideration of Australian Broadcasting Corporation v O’Neil [2006] HCA 46.
Income Tax Assessment Act 1936 (Cth)
JMA Accounting Pty Ltd & Anor v Commissioner of Taxation & Ors (2004) 139 FCR 537
Commissioner of Taxation v Citibank (1989) 20 FCR 403
Reynolds v Commissioner of Police of the Metropolis [1985] QB 881
Australian Broadcasting Corporation v O’Neil [2006] HCA 46
Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618
American Cyanamid Co. v Ethicon Ltd [1975] AC 396PRESCIENCE COMMUNICATIONS LIMITED v COMMISSIONER OF TAXATION OFFICE
QUD447 OF 2006
GREENWOOD J
17 NOVEMBER 2006
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QUD447 OF 2006
BETWEEN:
PRESCIENCE COMMUNICATIONS LIMITED
(ABN 90 116 440 003)
ApplicantAND:
COMMISSIONER OF TAXATION OFFICE
RespondentJUDGE:
GREENWOOD J
DATE OF ORDER:
17 NOVEMBER 2006
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The Applicant file and serve by 4.00pm, Wednesday 22 November 2006, an Application document bearing Application No. QUD447 of 2006 in accordance with Form 5 of the Federal Court Rules which properly formulates the Applicant’s claim for final and interlocutory relief.
2.The Applicant file and serve by 4.00pm, Wednesday 22 November 2006 all affidavits upon which the Applicant proposes to rely in support of an Application for interlocutory relief.
3.The Respondent file any affidavits in reply by 4.00pm, Friday 24 November 2006.
4.The Application for interlocutory orders be heard on a date to be nominated by the District Registrar.
5. The costs of this Application be reserved.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QUD447 OF 2006
BETWEEN:
PRESCIENCE COMMUNICATIONS LIMITED
(ABN 90 116 440 003)
ApplicantAND:
COMMISSIONER OF TAXATION OFFICE
Respondent
JUDGE:
GREENWOOD J
DATE:
17 NOVEMBER 2006
PLACE:
BRISBANE
REASONS FOR JUDGMENT
I have before me an Application for an interlocutory injunction made on behalf of Prescience Communications Limited to restrain, pending the trial of the proceedings, the Commissioner of Taxation from copying documents held in an electronic form on a computer described in the material as a ‘Tower’ computer and information held on three hard drives to be used in conjunction with either the Tower computer or other computer equipment. The Application came before the Court on an urgent basis on Tuesday, 14 November 2006 at 3.00pm on the footing that the proposed Respondent, the Commissioner of Taxation, has and retains possession of the computer and three hard drives and proposes to implement a protocol which would result in the ‘imaging’ or copying of the documents encoded on the computer and hard drives.
The Applicant appears by Mr Robertson of counsel and relies upon the affidavit of Esme Hui Ling Dean sworn 14 November 2006. Having regard to the urgency of the matter, the Applicant was not in a position to formulate, file and serve an Application formulating the scope of the proposed final and interlocutory relief. Rather, the Applicant sought to list the matter on the afternoon of 14 November 2006 and agitate the urgency of securing an interlocutory order.
Although the Applicant seeks an order pending trial, I propose to treat the Application as, in effect, an Application for an ex parte injunction, on notice, to restrain for an immediate and short period the proposed Respondent from engaging in conduct which might seriously prejudice the Applicant during the period between the making of this Application and a date when an Application on proper material can be dealt with, provided, of course, the Applicant is able to otherwise demonstrate the elements necessary to secure an interlocutory injunction even of limited duration.
Ms Brennan of counsel instructed by the Australian Government Solicitor (‘AGS’) appeared on behalf of the Commissioner of Taxation in response to the Application for an interlocutory order. The Commissioner of Taxation relies upon the affidavit of Katie Anne Lynch, a solicitor employed in the office of the AGS, sworn 14 November 2006. That affidavit annexes copies of correspondence exchanged between the solicitors for the Applicant and the Australian Taxation Office (‘ATO’) and correspondence between the solicitors for the Applicant and the AGS.
The background facts for present purposes are these.
On 8 November 2006, Mr Tyson Fawcett and other officers of the ATO entered the premises in Brisbane of Prescience Communications Limited at Railway Terrace, Dutton Park, Brisbane in reliance upon powers conferred upon the Commissioner of Taxation under s 263 of the Income Tax Assessment Act 1936 (Cth) (‘the I T A Act’).
That section, although well known, is in these terms:
‘SECTION 263 ACCESS TO BOOKS ETC
263(1) [Authorised Access] The Commissioner, or any officer authorised by him in that behalf, shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act and for that purpose may make extracts from or copies of any such books, documents or papers.
263(2) [Production of written access authorisation] An officer is not entitled to enter or remain on or in any building or place under this section if, on being requested by the occupier of the building or place for proof of authority, the officer does not produce an authority in writing signed by the Commissioner stating that the officer is authorised to exercise powers under this section.
263(3) [Facilities and assistance to officers] The occupier of a building or place entered or proposed to be entered by the Commissioner, or by any officer, under subsection (1) shall provide the Commissioner or the officer with all reasonable facilities and assistance for the effective exercise of powers under this section.
Penalty: 30 penalty units’
In reliance upon the affidavit of Ms Esme Dean, the Applicant contends that officers of the Commissioner entered the premises and removed a Tower computer and three hard drives for the stated purpose of imaging material held electronically on the hard drives. The Applicant contends that Mr John Andrews of WHD Lawyers who attended the premises on behalf of the Applicant expressly objected to the imaging of the hard drives. Ms Lynch exhibits to her affidavit a copy of a written undertaking signed by Tyson Fawcett described in the document as ‘Team Leader’ and ‘Authorised Officer of the Commissioner of Taxation’ and John Andrews on behalf of Prescience Communications. The document bears the date 9 November 2006 and is in these terms:
‘The Commissioner by his authorised officers is undertaking access for the purposes of the taxation laws.
The Commissioner and the parties have agreed upon a process to facilitate access to places and documents which are recorded in a document entitled “Terms of Inspection” dated 9 November 2006 (the Terms of Inspection).
The parties have agreed that the computer tower together with three hard‑drives will be removed from the premises of Prescience Communications Limited and lodged at the offices of the Australian Government Solicitor at 340 Adelaide Street, Brisbane, Queensland where they will be held securely, in a sealed plastic bag.
The Commissioner undertakes that he will not commence imaging the hard‑drives until 10 am on 9 November 2006.’
On 9 November 2006, the Melbourne lawyers for the Applicant, Coadys Lawyers (‘Coadys’), wrote to Mr Fawcett noting that ATO officers had removed the computer and three hard drives from the premises of the Applicant for the purposes of imaging those hard drives and asserted that officers of the Commissioner could only copy documents stored in electronic format if those officers reasonably believed that the material was relevant to investigations and other tax matters arising under the I T A Act. The lawyers asserted that the proposal to image the hard drives was improper and impermissible and that only those documents relevant to the matters set out in a notice issued under s 263 of the I T A Act could properly be copied.
On 9 November 2006, Ms Lynch wrote to Coadys and advised that the relevant material was held in a sealed plastic bag by the AGS, asserted that Mr Andrews had agreed to such an arrangement by force of the written undertaking, advised that the Commissioner did not propose to image the hard drives until 10.00am that day and advised that the Commissioner, in view of the Applicant’s objections, would refrain from imaging the hard drives that morning. Ms Lynch identified in that letter, in the following terms, some of the factors influencing officers of the Commissioner in seeking to secure an image of the hard drives:
‘Our client advises that the decision to image the hard‑drives was made in the light of the following factors, including the events which took place at your client’s premises yesterday, and which are of serious concern to the Tax Office:
-that your client refuses entry to the premises between approximately 9am and 10am yesterday morning and prevent the Tax Office from obtaining access to documents;
-documents appear to have been shredded and destroyed during that time;
-a number of hard‑drives appear to have been removed from the premises;
-various electronic documents have been deleted;
-attempts appear to have been made to remove the remaining hard‑drives from the premises;
-encryption software appears to have been loaded on to your client’s computers;
-your client failed to provide a password for the encryption software;
-erasure software appears to have been installed which may have facilitated the destruction of records.’
Ms Lynch advised Coadys that officers of the Commissioner intended to proceed to image the hard drives subject however to the following suggested process.
‘-our client’s IT forensic officers will use forensic software to recover any deleted files from the hard drive and to index documents relevant to the Tax Office’s enquiries. Your client may be present during that process.
-your client will be provided with a copy of the extracted documents in readable format to enable it to assert any claim to legal professional privilege and/or dispute relevancy in relation to those electronic documents.
-our client agrees not to argue that there has been any implied waiver of legal professional privilege for the purpose of this process in relation to the electronic documents.
-your client will be given 7 days from the date upon which it is provided with a copy of the electronic documents to assert any claims to legal professional privilege.’
On 9 November 2006, Coadys again wrote to Ms Lynch asserting that the ATO had no authority from the Applicant to image material on the hard drives held on behalf of the ATO by the Australian Government Solicitor (‘AGS’). The lawyers for the Applicant asserted that the proposal to image the hard drives was contrary to law and was objected to by the Applicant. Those lawyers requested the return of all hard drives to the Applicant immediately. The Applicant’s lawyers proposed a method by which the ATO officers might access documents held in electronic form on the hard drives. The proposal was this.
‘If your client wishes to proceed with accessing or copying documents stored in electronic format on those hard drives, which it could reasonably argue are relevant, then we propose that this be done so on the following bases:
·first, those hard drives taken from our client be immediately returned; and
·second, access and copying be done at a mutually convenient time, in the presence of a representative or representatives of our clients.
The Applicant’s lawyers said that unless that course of action was adopted proceedings would be commenced.
On 9 November 2006, Ms Lynch responded to that letter and again advised that the computer and three hard drives had been removed from the Applicant’s premises with the consent of the Applicant’s agent, Mr John Andrews. Ms Lynch suggested that the computer and hard drives remain in the possession of the AGS overnight and be returned to the Applicant’s premises at 10.00am on the following morning, 10 November 2006. Ms Lynch further advised that upon the return of the hard drives, officers of the Commissioner would exercise a right of access conferred by s 263 of the I T A Act and observed:
‘…
5.We understand from our client that imaging of the hard drives is required to preserve the integrity of the documents contained in the hard drives. The erasure software and encryption software installed on your client’s hard drives prevent our client from exercising its right to access the documents contained on those hard drives. …’
Ms Lynch again proposed adoption of the process described in the earlier letter [11]. Ms Lynch also observed:
‘…
7.In undertaking the above process tomorrow at your client’s premises, we remind you of your client’s obligation pursuant to s 263(3) of the ITAA 1936 to provide our client with all reasonable assistance in the exercise of his powers under s 263. …’
On 10 November 2006, Ms Lynch again wrote to Coadys and advised that the ATO had attempted to return the computer and hard drives to the Applicant’s premises at Railway Terrace, Dutton Park at 10.00am that morning and that no one was present at the premises. Accordingly, the computer and hard drives remained with the ATO and Ms Lynch awaited urgent advice as to ‘where and to whom to return the hard drives’. Ms Lynch reiterated in her letter that upon the return of the hard drives, officers of the Commissioner intended to exercise a right of access pursuant to s 263 of the I T A Act and would proceed to image the hard drives in accordance with the process outlined in the earlier letters [11] and [15].
On 10 November 2006, WHD Lawyers responded and reasserted that the Applicant did not consent to the ATO officers taking an image of the contents of the computer and hard drives, asserted that no such right arose under s 263 of the I T A Act, asserted that the Applicant did not authorise ATO officers to image the hard drives and suggested that ATO officers ought to deliver the computer and hard drives to the officers of WHD Lawyers to be held on behalf of the Applicant. In that case, WHD Lawyers would seal and hold the computer and hard drives until a process agreed between the parties was adopted for enabling ATO officers to secure access to information stored on the material.
On 13 November 2006, Ms Lynch wrote to Coadys and advised that the computer and hard drives would be delivered to the offices of WHD Lawyers at 9.00am on 14 November 2006 and that until then, the computer and hard drives would remain held securely at the offices of the AGS. Ms Lynch advised that upon return of the computer and hard drives, officers of the Commissioner would exercise a right of access and proceed to image the hard drives in accordance with the process earlier identified.
On 14 November 2006, Ms Lynch wrote to Coadys in these terms:
‘…
2.We advise that our client returned the computer tower and hard drives to your town agents, WHD Lawyers this morning with the intention of exercising his right to access pursuant to s 263 of the Income Tax Assessment Act 1936 (ITAA 1936) and proceed to image the hard drives in accordance with the process outlined in our previous letter, which preserves your client’s right to make claims for legal professional privilege and dispute relevancy.
3.As previously advised, imaging of the hard drives is required to preserve the integrity of the documents contained in the hard drives. The erasure software and encryption software installed on your client’s hard drives prevent our client from exercising its right to access the documents contained on those hard drives.
4.We understand that your client does not consent to our client proceeding to image the hard drives at the offices of WHD Lawyers. In the circumstances, our client has returned the sealed computer tower and hard drives to this office to be held securely in accordance with the previous arrangement.
5.We note that your client now intends to bring an application to the court. We undertake that our client will not proceed to image the hard drives pending that application being determined.’
Ms Esme Dean in her affidavit deposes to discussions with Mr Joblin, an officer of the ATO, and another ATO officer described as Colin on the morning of 14 November 2006 at the offices of WHD Lawyers. The ATO officers took the computer and hard drives to those offices. The gentleman described as Colin explained the process those officers intended to implement. Ms Dean says Colin said this:
‘An electronic box will be used to image the entire contents of the hard drives in order to preserve the content and integrity of the hard drive. The documents that are imaged cannot be altered. After the documents are imaged, they will be transferred to another hard drive which the ATO will provide.’
Ms Dean says Mr Joblin said that after the hard drives had been imaged, the computer tower and three hard disks would be returned to Prescience Communications and the ATO would take the imaged hard drives to the AGS where that material would be sealed and kept secure until claims to privilege in connection with the documents had been dealt with. The ATO officers, according to Ms Dean, proposed that the ATO would not have access to the documents during that period. Ms Dean asked the officers whether the ATO would consent to more time than seven days to deal with the privilege question. Ms Dean says Mr Joblin said, ‘Well, it will be kept at AGS for a period to be determined between the parties for your client to claim privilege. If your client wants 14 days then that should be ok’.
Coadys advised Ms Dean that the Applicant objected to the proposals of the ATO officers and suggested that the computer and three hard disk drives be held at the officers of WHD Lawyers until such time as the parties could agree a process. Ms Dean advised that the Applicant required the hard drives to be returned and disputed claims by the ATO to an entitlement to image the entire contents of the hard drives. The ATO officers maintained that they were entitled to take an image of the documents stored on the computer and the hard drives. Ms Dean asserted that the Applicant’s position was that the ATO was not entitled to access the documents other than in accordance with the principles of the decision of this Court in JMA Accounting (JMA Accounting Pty Ltd & Anor v Commissioner of Taxation & Ors (2004) 139 FCR 537) (‘JMA Accounting’). Ms Dean says that the ATO officers said they would take the hard drives away with them and image the electronic information that afternoon. Ms Dean reiterated that the Applicant did not consent to the ATO taking an image of the hard drives.
In paragraph 18 of Ms Dean’s affidavit, she deposes to this matter:
’18.Colin then said words to the following effect, “Can I ask a question? If we are able to establish that some documents are relevant why can we not take an image of the entire hard drive? I have already ascertained that a few thousand names on the hard drive are relevant and it is the deleted files which we need to access in order to find out if they are relevant to our investigations.” I replied, “It is the ATO’s inability to establish relevance without first taking an image of the hard drive that my client objects to. Your client is not entitled to take an image of the entire contents without first establishing relevance” At this point, Ben [Joblin] stopped Colin from saying anything further.’
Having regard to the urgency of the matter, I do not have before me an Application that properly frames the final or interlocutory orders sought by the Applicant. Nor do I have a copy of the s 263 notice.
Ms Brennan emphasises the difficulties that officers of the Commissioner have experienced in securing access to the premises, obtaining a password, the presence of encryption software, the presence of erasure software which would cause data to be deleted should files be opened, the apparent shredding of documents, the removal of hard drives from the premises, the deletion of electronic documents and attempts to remove hard drives from the premises. In addition, Ms Brennan says that the Application proceeds on the footing, identified in paragraph 18 of Ms Dean’s affidavit, that officers of the Commissioner are not entitled to make a copy of a document unless and until those officers have been able to establish the relevance of the documents to be copied and that, according to the Applicant, officers of the Commissioner are not entitled to take an image of the entire contents of the hard drives without first establishing relevance.
Ms Brennan says that the ‘purpose’ enlivening the power conferred by s 263 of the I T A Act is the investigation of serious schemes to evade or avoid obligations to pay tax falling upon taxpayers under the I T A Act. Ms Brennan says that if the foundation of the arguable question the Applicant seeks to raise is that no power to make a copy of information contained on the hard drives arises in the Commissioner unless officers of the ATO have first determined the relevance of the documents electronically stored on the hard drives, for the purposes identified in the s 263 notice, that is not the law. Ms Brennan makes a further point that the proposal of the ATO officers is not that a copy of the documents will be taken but that the disks will be ‘imaged’ in accordance with the process identified in Ms Lynch’s correspondence. The difference between an ‘image’ and a ‘copy’, as I understand the submission, is that the imaged material cannot be manipulated. For present purposes, I accept that an image of a document is relevantly a copy. In addition, Ms Brennan says that the public interest in the investigation of tax evasion schemes in conjunction with the risks to the integrity of the data previously described, inevitably weighs the balance of convenience heavily in favour of the Commissioner.
The Applicant contended in exchanges with the AGS and presently contends in this Application that JMA Accounting v Commissioner of Taxation makes it clear that no power resides in the Commissioner to simply image or copy a body of documentation whether held electronically or physically without first determining the relevance of that material to the matters the subject of examination for the purposes of the Act.
In JMA Accounting, the Commissioner’s taskforce investigating tax evasion schemes wanted to inspect computer records of an accounting practice (JMA) conducted from two premises. The taskforce was apprehensive that documents might be destroyed and no notice was given to the operating entities of the accounting practice. Officers of the taskforce exercised powers conferred by s 263, entered JMA’s offices, searched for and took copies of documents, took control of all documents located at two offices (a Sunnybank office and a Queen Street city site) including those contained on computer databases, denied JMA staff access to the documents for work or other purposes and spent two full days copying on to computer disks most of the documents under their control. At the end of the first day, the taskforce locked JMA’s offices refusing JMA staff access to the premises. This method which resulted in taskforce officers taking control of JMA’s offices was found to be beyond power.
The question ultimately dealt with by the Full Court was whether the Commissioner’s offices had the power to copy records and take those records away. In deciding that question, the Full Court had to consider the balance between a citizen’s right to privacy and the overriding public interest in preventing criminal conduct and evasion of the law and unnecessarily tying the hands of those charged by the Parliament with investigating fraud or evasion.
In JMA Accounting, the Full Court made a number of observations about the scope of s 263 and implementation protocols surrounding the exercise of the power conferred by s 263.
The Court recognised that although the power of search and seizure is very wide, it is not unlimited. Section 263 does not oust legal professional privilege. The preservation of privilege requires some method to be adopted for the determination of any claim for privilege to be tested before documents are read. Section 263 contains no such procedure and often, reaching agreement about a preferred procedure is difficult or not always a subject of cooperation. Accordingly, the Court, in a series of decisions, established that the exercise of search and seizure powers required the provision of a ‘practical and realistic opportunity’ (Commissioner of Taxation v Citibank (1989) 20 FCR 403) in the party in possession of the documents or electronic information, to claim privilege. The exercise of such a statutory power is not necessarily conditioned in its validity by whether the Court regards the manner of exercise as reasonable. However, such a statutory power expressed in ‘wider general terms’ only authorises a search and seizure that is ‘reasonable in all the circumstances’. Nevertheless, an officer of the Commissioner is not prevented from conducting a search under s 263 until all claims for privilege have been resolved. Mere seizure of a document without it being read will not infringe privilege. In the context of privilege, the Full Court observed that legal professional privilege is not infringed by merely taking a copy of the document and that an officer exercising s 263 powers may, in particular circumstances, ‘look’ at a privileged document, although ‘not closely’ but ‘merely enough’ to enable the officer to ‘decide’ whether the document may be copied.
The Full Court identified at [16] of the Reasons, three broad propositions concerning the conduct of search and seizure. Firstly, the person exercising such a power is only entitled to seize those documents which he is authorised to take consistent with the conferral of power properly construed. Secondly, the search and seizure must be carried out reasonably and thirdly, the repository of the power must do no more than is reasonably necessary to satisfy himself that he has the documents which he is entitled to seize.
In this Application, the Applicant says that the Commissioner has failed to act consistently with proposition 2, that is, the Commissioner has failed to carry out the search and seizure reasonably on the footing that officers of the Commissioner have made a decision to image every electronic document contained on the hard drives or alternatively on the hard drives in conjunction with the seized computer. In JMA Accounting, two particular criticisms were made of the ATO taskforce members. Firstly, that documents were copied and removed from the premises before a claim for privilege had been made and secondly, that documents were copied in such a way that ‘no proper consideration could have been given to whether they were required “for the purposes of the [Income Tax Assessment Act]”.’ As to the protocol for the protection of privilege, the Full Court found at [20] of the Reasons that the proposed protocol was a ‘perfectly adequate’ proposal to achieve the preservation of a practical or realistic opportunity to claim privilege.
The elements of that protocol are reflected in the proposal contained in the correspondence from Ms Lynch [11].
Moreover, in JMA Accounting, the officers of the Commissioner were not obliged to ‘reach an accommodation with JMA’ about the protocol. Provided the proposal ‘was a reasonable one, all that the officers were required to do was to ensure that the proposal was implemented’.
As to the second contention, the Full Court observed that the only documents which could be copied in the exercise of the s 263 power were those ‘which had, or could reasonably be supposed to have had, some relevance to the investigation that was then being undertaken by the taskforce as well as other documents which might be relevant to other matters under the Income Tax Assessment Act and which came to light during the search’ (JMA Accounting v Commissioner of Taxation [24]).
At paragraphs [26] and [27] of the Reasons of the Full Court, their Honours made these observations:
‘26.Provided the judge’s statement [the hearing judge] that ATO officers were permitted to copy documents of “possible interest” was intended to mean (as we think it does) documents which the officers reasonably believed might be of interest to the ATO, it is unexceptional. If, on the other hand, the judge meant to say that the officers could also copy documents in relation to which there was only a remote chance that they were relevant for the purposes of the Act then with great respect he is in error.
27.One problem which confronted the officers when conducting the search is that they were faced with a vast number of documents to go through. If the officers had looked at each document carefully they would be there for days. In our opinion, such a search is not required by s 263. At the end of the day the only obligation imposed upon the officers was to conduct the search in a reasonable fashion. Whether or not they were acting reasonably depended upon the circumstances of the case. Those circumstances included, among other things, the nature and volume of documents to be examined and their location.’
[emphasis added]
In considering what steps might be reasonable, their Honours had regard to the observations of Slade LJ in Reynolds v Commissioner of Police of the Metropolis [1985] QB 881 at 895 – 896 to the effect that a police officer in executing a search warrant is entitled to remove from the premises files, books and bundles of documents which, at the time of removal, he reasonably believes contain (i) forged material; or (ii) material which might be of evidential value. Further, any necessary sorting process in relation to items removed would then need to be carried out with reasonable expedition and those items found not to contain forged material or found not to be of evidential value should be returned reasonably promptly.
In the circumstances of the JMA Accounting case, ATO officers at the Sunnybank site copied ‘all email store folders’. None of the contents of those folders were examined before the act of copying. They were simply copied in bulk and that copying was found to be impermissible. The ATO officers, having regard to the nature of the bulk material, could not be said to be acting reasonably or hold a reasonable belief that all of the material related to the subject matter of the investigation.
A second category of information contained on desktop computers and a server was copied by a computer technician at JMA’s Sunnybank site. When searching the computers, the technician looked for key words, client lists, financial transactions and downloaded that information. The technician also downloaded Excel spreadsheets, Word documents and undertook key word searches for specific entities. The Court found that ‘although brief, this was a sufficient examination in the circumstances’.
As to the server, a technician, Mr Chang, conducted a limited examination. The information on the server was contained in a ‘work file directory’ which was downloaded in full. Mr Chang gave evidence that to look at every file on the server or to search every work file would take several days and possibly weeks. The Full Court at [33] said, ‘In other words, Mr Chang had no idea whether the information downloaded was relevant or not. Everything which was current was taken regardless of its relevance. This is not good enough. In legal terms, no reasonable effort was made to distinguish between the relevant and the irrelevant’.
As to the Queen Street city premises, an ATO computer technician conducted a search of documents contained in the hard drive of computers at those premises, databases, email files and PDF files. He selected all files initially and browsed files by title. Any file that was not relevant by title was not copied. The technician explained that selecting files on the basis of titles did not mean that every document or file might be relevant or that some relevant documents might not be missed. However, the alternative was to copy the entire contents of the hard drive. The technician elected not to take that course. The Full Court concluded that such a search of the computer files was ‘brief but reasonable’.
As to the server at the Queen Street city site, the technician examined the directories by title, looked inside the directories, looked at random files within the directories and only those directories he then considered relevant were downloaded. This too was found by the Full Court to be ‘a reasonable examination of the documents in order to determine their possible relevance’.
In this proceeding, the ultimate question to be determined prospectively is whether officers of the Commissioner would be acting reasonably in the manner of exercise of the power conferred by s 263 by taking an image of all documents stored on the three hard drives and/or the tower computer, in all the circumstances. The Applicant’s present contention is that officers of the ATO have not formed any view of the relevance of the material contained on the hard drives because they have no apparent knowledge of the scope or content of the material. Unlike the technician in JMA that examined the desktop computers at the Sunnybank office and the technician who examined the desktop computers and the server at the Queen Street site, there has been, according to the Applicant, no ‘brief but sufficient’ and no ‘brief but reasonable’ examination of the documents and like the technician at the Sunnybank site who downloaded entire directories from the server at the Sunnybank site, no ‘reasonable effort has been made to distinguish between the relevant and the irrelevant’.
The question of whether conduct in this context is reasonable must be judged contextually in all the circumstances of each case. In this case, Ms Dean at paragraph 18 of her affidavit refers to a proposition put to her by the ATO’s officer ‘Colin’ which seems to suggest that on some unidentified basis the ATO officers have at least formed a view about relevance. Colin said, ‘I have already ascertained that a few thousand names on the hard drive are relevant and it is the deleted files which we need to access in order to find out if they are relevant to our investigation. If we are able to establish that some documents are relevant why can we not take an image of the entire hard drive?’ The other contextual circumstances are those identified at [10] which Ms Brennan emphasises at [25].
The ‘organising principles’ governing the grant of an interlocutory injunction are those identified at [19] of the joint judgment of Gleeson CJ and Crennan J in Australian Broadcasting Corporation v O’Neil [2006] HCA 46 and the explanation of the organising principles is set out in the Reasons of Gummow and Hayne JJ at paragraphs [65] – [72]. At [19] Gleeson CJ and Crennan J said this:
‘As Doyle CJ said in [Jakudo Pty Ltd v South Australian Telecasters Ltd (1997) 69 SASR 440 at 442-443], in all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff’s entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances of the case, under which issues of justice and convenience are addressed. We agree with the explanation of these organising principles in the reasons of Gummow and Hayne JJ and their reiteration that the doctrine of the court established in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 should be followed.’ (per Gleeson CJ and Crennan J)
[emphasis added]
At [65] – [72], Gummow and Hayne JJ affirm that the governing principles the Court addresses on applications for interlocutory injunctions are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd. In assessing whether the applicant has made out a prima facie case in the sense contemplated in Beecham, ‘it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial’ [65]. Their Honours discussed the apparent distinctions between the views expressed and assumptions made concerning the approach adopted in Beecham and that reflected in the speech of Lord Diplock in American Cyanamid Co. v Ethicon Ltd [1975] AC 396. At [70], Gummow and Hayne JJ said this:
‘70.When Beecham and American Cyanamid are read with an understanding of the issues for determination and an appreciation of the similarity and outcome, much of the assumed disparity in principle between them loses its force. There is then no objection to the use of the phrase “serious question” if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham.’
Their Honours Gummow and Hayne JJ expressed the view that ‘the apparent statement by Lord Diplock that, provided the court is satisfied that the plaintiff’s claim is not frivolous or vexatious, then there will be a serious question to be tried and this will be sufficient’, does not accord with the doctrine as established by Beecham and ‘should not be followed’. Their Honours Gummow and Hayne JJ observed at [71] that such a view obscures ‘the governing consideration that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought’ and at [72] their Honours said this:
’[72]The second of these matters, the reference to practical consequences, is illustrated by the particular considerations which arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application. …’
These explanatory views of the organising principles were adopted by Gleeson CJ and Crennan J.
The legal obligation cast upon the Commissioner in the exercise of the power conferred by s 263 is to conduct the search in a reasonable fashion having regard to all the circumstances of the case. Those circumstances include the need to preserve the integrity of the electronic information having regard to the constraints imposed by the encryption software and the risk of loss of information by the erasure software. Those considerations are also conditioned by the contentions on the part of the Commissioner set out at [10]. For present purposes, the Applicant contends that the imaging of the hard drives does not even reach the threshold of a ‘brief but reasonable’ or ‘brief but sufficient’ or alternatively ‘a reasonable examination’. One difficulty for the Applicant is the evidence contained in Ms Dean’s affidavit deposing to the expression of opinion by one of the ATO officers that he had already ascertained that information on the hard drives is relevant and therefore information contained on other files and some deleted files would, as a matter of inference, be relevant. Nevertheless, having regard to the contention that no attempt has been made to determine on any footing the relevance of the material on the hard drives, it seems to me that the interim position ought to be preserved until the matter can be properly addressed. However, having regard to the public interest in the proper investigation of tax avoidance or tax evasion arrangements and Parliament’s conferral of powers for that purpose upon the Commissioner, it is important that the matter be resolved quickly. I propose to make the following orders:
1.I will direct the Applicant to file and serve an Application document bearing Application No. QUD447 of 2006 in accordance with Form 5 of the Federal Court Rules which properly formulates the final and interlocutory relief sought pending the trial of the action by 4.00pm, Wednesday 22 November 2006.
2.I will direct the Applicant to file and serve all affidavits upon which the Applicant proposes to rely in support of an Application for interlocutory relief, by 4.00pm, Wednesday 22 November 2006.
3.I will direct the Respondent to file any affidavits in reply by 4.00pm, Friday 24 November 2006.
4.The Application for interlocutory orders shall be heard on a date to be nominated by the District Registrar.
5.The costs of this Application will be reserved.
By paragraph 5 of the letter of Ms Lynch dated 14 November 2006 to Coadys, the Respondent has provided an undertaking that the Commissioner will not proceed to image the hard drives pending the determination of the Applicant’s present Application. Subject to the question of whether the Commissioner of Taxation so undertakes pending the determination of the further Application, there will be no cause to make any Order restraining the Commissioner from imaging the information on the hard drives and computer. The material before me suggests that the Applicant is content, for the purposes of the interim Applications, with an arrangement that the computer and hard drives remain in the possession of the AGS in a sealed bag pending the resolution of these interlocutory Applications. That being so, there is no cause for any Order for the interim preservation of the material by force of an Order that the solicitor for the Commissioner retain possession of the material pending the determination of the interlocutory Applications.
I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 17 November 2006
Counsel for the Applicant: Mr Robertson Solicitor for the Applicant: Ms Dean, WHD Lawyers Counsel for the Respondent: Ms Brennan Solicitor for the Respondent: Ms Lynch, Australian Government Solicitor Date of Hearing: 14 November 2006 Date of Judgment: 17 November 2006
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