Avowal Administrative Attorneys Ltd v District Court at North Shore

[2010] NZCA 183

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA73/2009
[2010] NZCA 183

BETWEENAVOWAL ADMINISTRATIVE ATTORNEYS LIMITED
First Appellant

ANDDENISE ANNE CLARK
Second Appellant

ANDNIKYTAS NICHOLAS PETROULIAS
Third Appellant

ANDTHE DISTRICT COURT AT NORTH SHORE
First Respondent

ANDTHE COMMISSIONER OF INLAND REVENUE
Second Respondent

Hearing:27 April 2010

Court:William Young  P, Hammond and O'Regan JJ

Counsel:G D Clews and A A H Low for Appellants
J C Pike and P H Courtney for Respondents

Judgment:11 May 2010 at 4 pm

JUDGMENT OF THE COURT

A        The appeal is dismissed.

BCosts are awarded to the second respondent on a band A basis for a complex appeal, and usual disbursements.  We certify for two counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by O’Regan J)

Table of Contents

Para No

Introduction  [1]
Issues  [4]
Facts  [6]
Relevant statutory provisions  [10]
Procedural history  [14]
         Preliminary decision  [15]
         Interim decision  [24]
         Venning J’s decision  [26]
Ground 1: Was a preliminary screening required?  [28]
         Auckland site  [28]
         Motueka site  [41]
Ground 2: Double tax agreement  [48]
Ground 3: “Books or documents”  [62]
Ground 4: Ms Chisnall’s consent  [70]
Ground 5: Role of advising on law reform  [72]
Ground 6: Contempt of New South Wales Court  [74]
Disposal  [80]

Introduction

[1]       This appeal raises issues about the scope of the power of the second respondent, the Commissioner of Inland Revenue, to access premises and obtain information under s 16 of the Tax Administration Act 1994 (TAA) and the manner in which those powers must be exercised.

[2]       The appeal concerns two search and seizure operations undertaken by officers of the Inland Revenue Department as delegates of the Commissioner and computer experts engaged to assist with the operations (for ease of reference we will refer to those involved as IRD officers).  The operations involved a number of properties in different cities and towns, but the searches which remain in issue are those undertaken at office premises in a building in Queen Street, Auckland and a lodge near Motueka at which the second appellant Ms Clark, and the third appellant Mr Petroulias, were living.  Those operations were part of a co-ordinated operation in both Australia and New Zealand undertaken as part of an investigation of activities conducted by the first appellant, Avowal Administrative Attorneys Ltd, Mr Petroulias and Ms Clark, along with a number of other individuals and entities which are no longer involved in the litigation. 

[3]       In the course of these activities, IRD officers removed certain computer hard drives from the premises to which access had been gained under s 16 for the purpose of cloning the hard drives.  The manner in which this was done was said to have breached ss 16 and 16B of the TAA.  Some challenges to these aspects of the operations in judicial review proceedings in the High Court failed and are now appealed.  However, other challenges succeeded and there is no cross appeal in respect of them.

Issues

[4]       The grounds of appeal pursued by the appellants define the issues which we must address.  Those grounds are:

(a)The IRD officers had intended that at each site accessed under s 16, a preliminary key word search of electronic records would be undertaken to isolate material that was likely to be of interest in relation to the Commissioner’s inquiries, and also to isolate information in respect of which privilege claims could be made.  We will call this the preliminary screening.  However, the preliminary screening did not happen at the Auckland site or on all of the computer hard drives found at the Motueka site.  At Auckland this was said to be because a blanket privilege claim was made over all the information on the relevant computer hard drives.  At Motueka this was said to be because indications of the use of encryption software were discovered.  It was argued in the High Court that the failure to undertake a preliminary screening was fatal to the lawfulness of the search and that the material obtained from the clones should not be accessed and should be destroyed or returned.  This aspect of the claim failed in the High Court and is now renewed in this Court.

(b)The High Court found that it was a permissible use of the Commissioner’s powers for him to obtain information under s 16 for the purpose of supplying it to the Australian Tax Office (ATO) under the Australia/New Zealand Double Tax Agreement (DTA), particularly art 26 of the DTA.  However, the Court also found that the s 16 operations were not solely for the purpose of gaining information to assist the ATO, because the Commissioner was also seeking information about possible tax law breaches in New Zealand.  That finding is challenged in this Court.  In addition, the appellants now argue that the power to pass information to the ATO under the DTA is limited by ss 81 and 88 of the TAA.  The essence of the argument is that:

(i)section 81 prevents the supply of information to the ATO unless the Commissioner is obliged to supply it under the DTA (s 88);

(ii)the DTA does not oblige the Commissioner to supply information to the ATO unless the method by which the Commissioner acquired the information conformed with Australian law and practice; and

(iii)the s 16 operations did not comply with Australian law and practice.

(c)Although the searches at all sites, including at Auckland and Motueka, involved hard copy records, there is no issue relating to the hard copies now pursued in the appeal.  Accordingly, the case is confined to information found on computer hard drives at both sites.  It was argued in the High Court that the s 16 power did not permit the Commissioner to get access to computer hard drives because s 16 refers to “books or documents” and this did not include computer hard drives.  The rejection of that argument is challenged on appeal.

(d)It was found in the High Court that the removal of computer hard drives from the Auckland site for cloning was done with the consent of the representative of Avowal who was on the scene, Ms Amanda Chisnall.  That factual finding is challenged on appeal.

(e)It was suggested in the High Court that the Commissioner could have been undertaking the action under s 16 for the purposes of advising on law reform.  That finding is also challenged on appeal.

(f)In the High Court, the appellants argued that the actions of the ATO and the Commissioner in initiating co-ordinated action under s 16 and its Australian equivalent, s 263 of the Income Tax Assessment Act 1936 (the Australian Act), created a substantial risk of serious injustice to Mr Petroulias, who was about to stand trial in Australia. The High Court rejected any link between the s 16 operations and the trial. In this Court, the appellants argued the s 16 operations, at least that at Motueka, amounted to a contempt of the Australia trial court. This argument had not been pursued in the High Court.

[5]       We will deal with each ground of appeal in turn.  Before doing so, however, we will briefly outline the factual background, the statutory context and the way the matter was dealt with in the High Court.

Facts

[6]       Mr Petroulias is a former senior officer of the ATO.  He is now serving a prison term in Australia after conviction for charges associated with his misuse of that position.  The Commissioner and the ATO believe that, following his departure from the ATO, he, Ms Clark and others were involved in promoting tax schemes which affected the tax bases of both Australia and New Zealand.  In 2004, the ATO sought assistance from the IRD under the DTA in connection with its investigations of Mr Petroulias, Ms Clark and others.  Investigations were undertaken in New Zealand, including interviews with Ms Chisnall about the operations of Avowal and associated companies. 

[7]       As a result of the investigations undertaken in New Zealand, the IRD identified a number of premises which were likely to contain books or documents that were relevant or necessary to progress the investigation.  In relation to the residential premises, access warrants were sought under s 16(4) of the TAA and it was intended that these warrants would be executed at the same time as access was obtained to business premises under s 16(1).[1]  This was a co-ordinated operation with the ATO.  On 8 November 2006 a series of simultaneous access operations and associated searches were carried out in both New Zealand and Australia.  The access to the Auckland site was obtained using the Commissioner’s power under s 16(1), while access to the Motueka site was pursuant to a warrant issued under s 16(4).

[1]      These provisions are explained below at [10] – [11].

[8]       The briefing for the IRD officers involved in the operations provided that they would undertake preliminary screening.  A proceeding was commenced in the District Court in anticipation of privilege claims which would require resolution under s 20(5).  In Auckland, where Avowal shared premises with a firm which held itself out to be a law firm (and privilege issues were therefore anticipated), an independent barrister was engaged to witness the search and provide independent guidance where required. Counsel for the Commissioner, Mr Pike, said the measures taken in relation to the s 16(1) operation in Auckland were designed to follow the guidance given by this Court in A Firm of Solicitors v District Court at Auckland[2] for search operations where privilege claims can be expected.

[2]A Firm of Solicitors v District Court at Auckland [2006] 1 NZLR 586 (CA) at [103], [105] – [107].

[9]       The precise relationship between Mr Petroulias and Ms Clark on the one hand and Avowal on the other is not clear, but they pursued this appeal together and were all represented by the same counsel.  Ms Chisnall was a director and shareholder of Avowal but said she held shares as agent for a Hong Kong company which Ms Clark represented.

Relevant statutory provisions

[10]     As noted earlier, the key provisions in relation to the issues arising on this appeal are ss 16 and 16B of the TAA.  The relevant parts of s 16 provide as follows:

16       Commissioner may access premises to obtain information

(1)       Notwithstanding anything in any other Act, the Commissioner or any officer of the Department authorised by the Commissioner in that behalf shall at all times have full and free access to all lands, buildings, and places, and to all books and documents, whether in the custody or under the control of a public officer or a body corporate or any other person whatever, for the purpose of inspecting any books and documents and any property, process, or matter which the Commissioner or officer considers necessary or relevant for the purpose of collecting any tax or duty under any of the Inland Revenue Acts or for the purpose of carrying out any other function lawfully conferred on the Commissioner, or considers likely to provide any information otherwise required for the purposes of any of those Acts or any of those functions, and may, without fee or reward, make extracts from or copies of any such books or documents.

...

(4)       A judicial officer who, on written application made on oath, is satisfied that the exercise by the Commissioner or an authorised officer of his or her functions under this section requires physical access to a private dwelling may issue to the Commissioner or [an authorised officer] a warrant to enter that private dwelling.

[11]     The relevant part of s 16B is sub-section (1) which provides:

16B     Power to remove and copy documents

(1)       The Commissioner, or an officer of the Department authorised by the Commissioner, may remove books or documents accessed under section 16 to make copies.

[12]     It should be noted that s 16C of the TAA now provides for the IRD to obtain a warrant to remove books or documents from a place and retain them for a full and complete inspection in some circumstances.  That provision was not in force at the time of the searches in the present case.  However, the existence of this power means that the issues raised in this appeal may be of limited significance for future access operations undertaken by the IRD.

[13]     As noted earlier, a claim of privilege was made at the Auckland site in respect of all information on the computer hard drives which the IRD officers wanted to subject to preliminary screening.  Provision is made for the resolution of privilege claims in s 20(5) of the TAA which provides:

20Privilege for confidential communication between legal practitioners and their clients

(5)       Where any person refuses to disclose any information or book or document on the ground that it is privileged under this section, the Commissioner or that person may apply to a District Court Judge for an order determining whether or not the claim of privilege is valid; and, for the purposes of determining any such application, the District Court Judge may require the information or book or document to be produced to the District Court Judge. An application under this subsection may be made in the course of an inquiry under section 18 to the District Court Judge who is holding the inquiry.

Procedural history

[14]     The judicial review proceeding commenced by the appellants and others was initially dealt with by Baragwanath J.  He issued two judgments. 

Preliminary decision

[15]     The first[3] (which we will call the preliminary decision) addressed the following preliminary question of law:

In circumstances where the Commissioner (or his officers) is entitled to access property under s 16 of the Tax Administration Act 1994, is the Commissioner or his officers required, under ss 16 and 16B of that Act or s 21 of the New Zealand Bill of Rights Act 1990, to inspect any books or documents accessed before removing them from the premises to make copies.

[3]Avowal Administrative Attorneys Ltd v The District Court at North Shore (2007) 23 NZTC 21,610 (HC).

[16]     The Judge answered that question as follows:[4]

Yes, in the circumstances stated there must be such inspection of the books or documents (including computer entries) before removal that the Commissioner has general reason to believe and does believe that it is necessary or relevant for the purposes of s 16(1). 

But there is no need at that stage for detailed examinations.  That may be performed after the books, documents or computer records have been removed for further examination or copying.

[4] At [29].

[17]     There was no appeal from the preliminary decision and it was accepted as a general statement of the law in the proceedings which followed in the High Court.  However, the finding was made without findings of fact as to what had occurred during the s 16 operations.  In particular, there is nothing in the preliminary judgment to indicate that a blanket privilege claim had been made at Auckland or that encryption software had been encountered at Motueka.

[18]     The preliminary decision relies in part on the decision of the full Federal Court of Australia in J M A Accounting Pty Ltd v Carmody.[5] That case concerned a similar exercise by the ATO under s 263 of the Australian Act. Section 263 is in similar form to s 16, though not exactly the same. In that case, the full Federal Court rejected a submission that ATO officers could not conduct a s 263 search until all claims for privilege had been resolved. The Court did, however, conclude that the only documents which the ATO officers could copy were those which had, or could reasonably be supposed to have had, some relevance to its investigation. This meant that it was necessary for the ATO officers to form a view that a particular document might be of interest to the ATO before copying it.

[5]      J M A Accounting Pty Ltd v Carmody [2004] FCAFC 274, (2004) 139 FCR 53.

[19]     The full Court said, however:[6]

One problem which confronted the officers when conducting the searches 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 the documents to be examined and their location.

[6] At [27].

[20] The Court determined that where documents were copied without any prior scrutiny for relevance, the copying was unlawful. On the other hand, where some screening was done for relevance, albeit at a very generic level, there was compliance with s 263 and the search was lawful.

[21]     As mentioned earlier, there was no appeal against the preliminary decision.  It is not therefore strictly necessary for us to address it.  However, we observe that, as the Full Federal Court said in J M A Accounting, the obligation is to act reasonably and that depends on the circumstances of the case.  The reasonableness obligation in New Zealand is founded on s 21 of the New Zealand Bill of Rights Act 1990.  As this Court has observed in many cases dealing with s 21, reasonableness must be assessed having regard to the time, place and circumstances in which the search occurs.[7] 

[7]      See, for example, R v Smith (Malcolm) [2000] 3 NZLR 656 at 667.

[22]     The access and inspection power under s 16(1) is expressed in broad terms.  It is not analogous to the search and seizure power in provisions like s 198 of the Summary Proceedings Act 1957.  That means that cases ruling against unspecific search warrants like A Firm of Solicitors and Tranz Rail Ltd v Wellington District Court[8] are not directly on point.  The circumstances in which tax investigations occur differ from criminal investigations and the Commissioner’s powers under s 16 are necessarily broad given the complexity that is often inherent in tax investigations.  We see no need to read down the plain words of s 16.  But, despite the initial words of s 16(1), the Commissioner’s powers are subject to s 21 of the New Zealand Bill of Rights Act, as Mr Pike accepted.  Like all public officials with intrusive powers of this type, he must exercise the power in a manner that conforms with the reasonableness requirement of s 21.

[8]      Tranz Rail Limited v Wellington District Court [2002] 3 NZLR 780 (CA).

[23]     Given the over-arching impact of s 21, the inquiry about the legality of the Commissioner’s exercise of the s 16 powers needs to focus on reasonableness in the circumstances.  While a preliminary screening of the kind envisaged in J M A Accounting and in the preliminary decision is undoubtedly good practice, we do not see it as necessarily a prerequisite to a reasonable search or to a reasonable access

operation under s 16 of the TAA.  For example, it may be that the investigation made by the Commissioner prior to the s 16 operation provides him with sufficient information to consider that it is “necessary” that a computer hard drive belonging to a particular person is inspected and/or copied, without a preliminary screening on site.  In the present case, the information disclosed in the affidavit supporting the application for the s 16(4) warrants (of which an unredacted version was provided to us in confidence) suggests that the Commissioner had a basis for considering inspection to be necessary without a preliminary screening, at least in some instances.

Interim decision

[24]     The second judgment of Baragwanath J was an interim judgment[9] which followed five days of hearings spread over a five month period.  It dealt with a number of issues (and a number of searches) which are no longer in dispute.  The Judge found that:

(a)section 16 could be used without having first attempted to obtain information by the use of notices requiring the production of documents under s 17 of the TAA;

(b)the Commissioner was entitled to use the s 16 powers even if the purpose of the exercise of those powers had been purely to assist the ATO, but one of the purposes was, in fact, referable to New Zealand tax concerns;

(c)the warrants issued under s 16(4) (including that relating to Motueka) were not expressed too broadly. 

[9]Avowal Administrative Attorneys Ltd v The District Court of North Shore HC Auckland CIV-2006-404-7264, 26 February 2008.

[25]     Baragwanath J dealt with a number of other issues which were not finally resolved.  As he was then appointed to this Court, the file was transferred to Venning J, who issued the third High Court judgment.[10] 

Venning J’s decision

[10]Avowal Administrative Attorneys Ltd v The District Court at North Shore (2009) 24 NZTC 23,252 (HC).

[26]     Venning J dealt with the matters which had been left unresolved in the interim judgment of Baragwanath J.  He decided the following matters, which remain in contention in this appeal:

(a)computer hard drives came within the definition of “books and documents” in s 3 of the TAA;

(b)because a blanket claim for privilege had been made over all information contained on the computer hard drives at the Auckland site, it was reasonable for the IRD officers to clone the hard drives without a prior preliminary screening;

(c)Ms Chisnall had consented to the IRD officers removing computer hard drives from the Auckland site to the IRD offices for copying on the basis that the clones would be placed in the control of the District Court to allow for resolution of the privilege claims;

(d)the computer hard drives found at the Motueka site were copied without a preliminary screening having taken place.  However, in relation to some of those hard drives, the IRD officers had established that encryption technology had been employed.  Cloning of the hard drives where there was no indication of encryption technology being employed was unlawful (following the preliminary decision in that regard).[11]  However, where there was evidence of encryption technology being used, the preliminary screening process would not have been effective and it was reasonable for cloning to take place without having first undertaken the preliminary screening.

[11] See [15] above.

[27]     We now turn to the grounds of appeal.

Ground 1: Was a preliminary screening required?

Auckland site

[28]     It was common ground that the IRD officers who were involved in the operation at the Auckland site intended to undertake a preliminary screening process to sift out irrelevant material and material in respect of which privilege could be claimed.  That, of course, would have been consistent with the approach outlined in
J M A Accounting and in the preliminary decision of Baragwanath J.  However, before the preliminary screening process could begin, Avowal’s representative on the site, Ms Chisnall, claimed a blanket privilege of everything on the computer hard drives.  She was supported in this by Avowal’s lawyer, Mr Speakman of Kensington Swan, who was at the scene.

[29]     Once the privilege claim was made, the IRD officers at the site sought further instructions from their superiors and ultimately were directed to copy the data on the hard drives and seal the copies to preserve the privilege which had been claimed, allowing the privilege claim to be resolved later in the manner prescribed in s 20(5) of the TAA.

[30]     Mr Clews argued that the IRD officers had been wrong to abandon the intended course of undertaking the preliminary screening and, notwithstanding the privilege claim, their failure to undertake the preliminary screening meant they had acted in a way that was outside the powers of the Commissioner under s 16.

[31]     Venning J rejected this argument in the High Court.  He referred to s 20(5), which provides for privilege claims to be resolved in the District Court[12] and commented that it would have been a bold IRD officer to have insisted on carrying out the preliminary screening in spite of the privilege claim,[13] particularly as Mr Speakman had said that he did not consider that the IRD officers were permitted to look at the documents once privilege had been claimed.  He then said:[14]

The purpose of the key word search was to protect Avowal’s rights against unreasonable search, to ensure the search was directed at relevant material and to ensure that it was conducted reasonably.  Avowal asserted another important right, that of privilege.  The IRD officers chose to accept that claim, give practical recognition to the right to claim privilege and acted accordingly.  The IRD officers were obliged to respect the claim of privilege.  It can hardly be said to have been unreasonable on their part to have accepted the claim to privilege and, rather than insisting on pursuing a key word search, to have dealt with the matter in a manner consistent with s 20(5) that preserved the claim to privilege and secured the information for consideration at a later date.

[12] At [48].

[13] At [49].

[14] At [51].

[32]     He concluded that, in the circumstances, the claim of privilege meant that the IRD officers were not required to undertake a preliminary screening and were entitled to copy the hard drives and to secure those copies to maintain Avowal’s claim to privilege.[15]  He also found that the IRD officers were, given the claim to privilege, entitled under s 16B to remove the hard drives which they were not able to copy on site for later copying without first conducting a preliminary screening.[16]

[15] At [52].

[16] Ibid.

[33]     We have already indicated that we are not convinced that preliminary screening is required in all cases in order to render the Commissioner’s actions under s 16 reasonable in terms of s 21 of the Bill of Rights.  It may well be that the information which the Commissioner already had before the operation began was sufficient to provide a basis for a claim that all the hard drives which were copied were ones which the Commissioner considered it was necessary to inspect.  The information contained in the application for search warrants provides some support for that proposition.  But neither Venning J nor we heard argument on that, so we do not make a finding that that was, in fact, the case.

[34]     Given there is no appeal against the preliminary decision, we are content to deal with the matter on the same basis as Venning J did.  We agree that the IRD officers acted reasonably in relation to the Auckland site.  Avowal’s case is essentially that its lawyer believed at the time that it was not permissible for a preliminary screening to be undertaken once a blanket privilege claim had been made but now a different lawyer, acting on its behalf, argues precisely the opposite.  We are asked to accept the latter and find the IRD officers’ actions to be unreasonable because they acted consistently with the former.  One only needs to state that proposition to see how unattractive it is.

[35]     As noted earlier, some hard drives were copied on the premises while others were removed for copying.  Putting to one side for present purposes whether Ms Chisnall agreed to the removal of these hard drives for copying (we return to this issue later) the issue is whether the power to remove documents for copying under s 16B is engaged in this case.  Section 16B says that the Commissioner “may remove books or documents accessed under s 16 to make copies”.  Mr Clews said that the only books or documents which could be removed were those which the Commissioner considered necessary or relevant for the purpose of tax collection or other lawful functions, or considered likely to provide information otherwise required for those functions. 

[36]     But it is not apparent to us that s 16B needs to be read down in that way.  It is a little oblique in its terminology because there are two categories of “books and documents” in s 16(1):  first there are books and documents to which the Commissioner has full and free access, and secondly, there are those books and documents which the Commissioner considers necessary, relevant or likely to provide information (and which may therefore be inspected).  On its face, s 16B(1) refers to the former category, because it provides for copying of “books or documents accessed” rather than “books or documents which may be inspected”.  As noted earlier, a new s 16C has now been inserted into the TAA providing expressly for the removal of books or documents for inspection or copying. Section 16C refers to the removal of “books or documents from a place accessed under s 16” which is clearly not limited to books or documents which the Commissioner considers necessary, or relevant, or likely to provide information.  But the phrase “books or documents from a place accessed under 16” in s 16C does not provide guidance as to what s 16B(1) means.

[37]     However s 16B is interpreted, it will, like s 16, be subject to the over-arching requirement of reasonableness in s 21 of the Bill of Rights.  Our comments in relation to s 16 in that regard[17] apply equally to s 16B.

[17] See [21] - [23] above.

[38]     Even if s 16B(1) is interpreted as Mr Clews suggests, to refer only to books or documents meeting the “necessary or relevant” or the “likely to provide information” criteria, we consider that test is met in this case.  Once the claim of privilege was made, preventing the Commissioner from undertaking the preliminary screening, it was open to the Commissioner to conclude that it was necessary for him to inspect the files at a later time once the privilege claims had been dealt with by the District Court under s 20(5) since the claim of privilege was a blanket claim over all information on the hard drives.

[39]     Mr Clews also argued that the Commissioner was not entitled to remove the cloned hard drives to the District Court for the purposes of s 20(5).  That provision allows the Commissioner to apply to the District Court for an order determining whether a privilege claim is valid and provides that a District Court Judge may, for the purposes of determining such application, require that the information or book or document be produced.  We do not see that as limiting the Commissioner’s power to remove the document and place it in the custody of the District Court for the purpose of an application under s 20(5). 

[40]     In this case, the Commissioner had already commenced a proceeding in the District Court in anticipation of privilege claims and in our view what the Commissioner did in this case was a pragmatic and sensible method of ensuring that privilege claims were respected without prejudicing the purpose and conduct of the access operation under s 16.  The fact that s 20(5) gives a District Court Judge power to require that a book or document to which a privilege claim relates be produced, does not restrict the ability of a party to the proceeding, including the Commissioner, from lodging the book or document voluntarily.

Motueka site

[41]     The Commissioner carried out the search of the Motueka premises pursuant to a warrant obtained under s 16(4) of the TAA.  The warrant permits the Commissioner to use his inspection function pursuant to s 16(1).[18]  Thus we will precede on the basis that the law is materially the same for the Motueka site as for the Auckland site. 

[18]      Tax Administration (Form of Warrant) Regulations 2003, reg 4 and schedule 1, cl 2.

[42]     At the Motueka site, the cloning of the computer hard drives happened without a preliminary screening having taken place.  Venning J, following the preliminary decision, decided that this made the search unlawful, except in cases where the IRD officer involved had discovered encryption on the hard drive.  In cases where indications of encryption software were present, Venning J considered it was reasonable for copying to take place without a preliminary screening having first occurred, because the presence of encryption software indicated that a preliminary screening would be ineffective, or only partially effective.

[43]     Venning J accepted the evidence of the IRD officer who swore the affidavit supporting the application for the s 16(4) warrant relating to the Motueka premises that it was intended that key word searches would be undertaken, but that this was not possible because of the presence of encryption on the hard drives.  Venning J concluded that, given the background knowledge the Commission’s officers had as to the investigation into the affairs of Mr Petroulias and the fact that the computers under the control of Mr Petroulias had encryption software, it was reasonable for the IRD officers to conclude that the computers were likely to provide information, once unencrypted, that was relevant for the purposes of the investigation.[19]  In those circumstances, he accepted that, where the files were encrypted, it was reasonable and open to the IRD officers to take copies of them on site or, if necessary, to remove them under s 16B.[20]

[19] At [136].

[20] Ibid.

[44]     Mr Clews argued that the Venning J was wrong to conclude that the IRD officers intended to undertake relevant searches, and that he was wrong to conclude that the encryption software on the computers was “supported” or operative and the IRD officers ought to have first asked Mr Petroulias to unencrypt the relevant computer hard drives before making a judgment as to their relevance.

[45]     Again, for much the same reasons as were given by Venning J, we reject these contentions.  Having considered the evidence before the Judge, we agree with his conclusion that the intention of the IRD officers was to undertake preliminary screening, unless encryption rendered this futile.  We agree with Venning J that, given what the IRD officers already knew about Mr Petroulias and his activities, it was a reasonable conclusion for the officers to conclude that computer hard drives on which encryption software was employed which were found in the premises occupied by Mr Petroulias were likely to provide information or that it was necessary to inspect them.  That satisfies the requirement of s 16(1).  We also agree that it was not incumbent on the IRD officers to seek assistance from Mr Petroulias under s 16(2).  Given what they knew about his activities, they were entitled to be sceptical about the outcome of any request and, in any event, entitled to ensure that efforts made to deactivate the encryption did not alter the data held on the computer or change the metadata.  Mr Pike emphasised the importance of ensuring that metadata (indicating details such as when and by whom a document was created, when and by whom it was last changed) was not lost or altered in the course of the search process.

[46]     We are also satisfied that the Judge’s finding as to the presence of encryption software on the hard drives was correct.  The fact that it had not been supported for some time was not an indication that it was necessarily ineffective, and there was nothing before the Judge to establish that it was.

[47]     We uphold the finding of Venning J on this aspect of the case.

Ground 2: Double tax agreement

[48]     This ground of appeal relates to a finding made by Baragwanath J in the interim injunction and also raises an argument put to neither Baragwanath J nor Venning J.

[49]     The argument for the appellant is, in essence:

(a)the s 16 operations were undertaken for the sole purpose of assisting the ATO in its investigation;

(b)the exchange of information by the Commissioner and the ATO is governed by art 26 of the DTA.

(c)Under art 26(2)(b), New Zealand is not under an obligation to supply information to Australia which is not obtainable under the law or in the normal course of administration in New Zealand or Australia;

(c)because the IRD officers did not undertake preliminary screening, their actions did not conform with Australian law or practice, as evidenced by the J M A Accounting decision, so the search became unlawful;

(d)even if the search was lawful, neither the Commissioner nor any other IRD officer is permitted to supply information obtained from the s 16 operations to the ATO because:

(i)under s 81 of the TAA they must maintain the secrecy of the information derived from the search;

(ii)the exception is that the obligation in s 88 of the TAA permits supply of information under a DTA only of “information … required to be disclosed” under the DTA;

(iii)under art 26(2)(b) of the DTA, there is no obligation or requirement to supply information to the ATO if the information is not obtainable under the law and practice of Australia;

(iv)so s 81 prohibits the supply of information to the ATO in this case.

[50]     The statutory authority for entering into double tax agreements is to be found in s BH1 of the Income Tax Act 2004 (ITA).  Section BH1(4) provides, as relevant:

(4)       Despite anything in this Act, … or in any other Inland Revenue Act [this encompasses the TAA] …, a double tax agreement has effect in relation to –

…

(c)       the exchange of information that relates to a tax …

[51]     The DTA was brought into effect in New Zealand by an order in council.[21]  The operative provision declares that the arrangements specified in the DTA “have effect according to the tenor of the [DTA]”.[22]

[21]      The Double Taxation Relief (Australia) Order 1995.

[22]      Clause 2.

[52]     Article 26 of the DTA is the key provision for present purposes.  It provides:

Exchange of Information

1.        The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement or of the domestic law of the Contracting States concerning the taxes to which this Agreement applies insofar as the taxation under the law is not contrary to this Agreement.  The exchange of information is not restricted by Article 1.  Any information received by the competent authority of a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes to which this Agreement applies.  Such persons or authorities shall use the information only for such purpose.

2.        In no case shall the provisions of paragraph 1 be construed so as to impose on the competent authority of a Contracting State the obligation:

(a)to carry out administrative measures at variance with the law or administrative practice of that or of the other Contracting State;

(b)to supply information which is not obtainable under the law or in the normal course of the administration of that or of the other Contracting State; or

(c)to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or to supply information the disclosure of which would be contrary to public policy.

[53]     As indicated earlier, s 81(1) of the TAA requires IRD officers to maintain secrecy in relation to tax information.  This is subject to a number of exceptions.

[54]     The exception that is relevant for present purposes is s 88 of the TAA which provides:

88Secrecy obligations not to prevent disclosure in arrangements for relief from double taxation and exchange of information

Notwithstanding any obligation of secrecy imposed by any enactment, the Commissioner may disclose such information as is required to be disclosed under a double tax agreement or tax recovery agreement to a person authorised to receive such information under the law of the territory in relation to which the double tax agreement or tax recovery agreement has been made.

[55]     The first issue raised in relation to this ground of appeal is whether the s 16 operations were undertaken solely for the purpose of obtaining information to provide to the ATO to assist with its inquiry.  In the interim judgment, Baragwanath J found that the information provided in support of the s 16(4) warrants indicated that the s 16 operations were not only to provide information to the ATO but also to investigate “the apparent operation in New Zealand of a large-scale tax mitigation scheme”.[23]  In other words, the purpose of the s 16 operations was at least partly for the purposes of investigating conduct affecting the New Zealand tax base and the collection of tax in New Zealand. 

That conclusion is challenged on appeal but, in our view, it is unassailable.  The evidence before the High Court included an affidavit from Mr John Nash, who is the Competent Authority responsible for exchanges of information with New Zealand’s DTA partners.  He recounted that the ATO had initiated an exchange of information process in November 2004, but said that the investigations which followed in New Zealand in the two years up to the time of the s 16 operations revealed that “there were major tax compliance issues not only in Australia but also in New Zealand”.  Similarly, the affidavit of another IRD officer, Mr Riaan Geldenhuys, was to similar effect.  We are satisfied that the s 16 power was used to obtain information which was necessary or relevant for the investigation of activities in New Zealand affecting tax liabilities in New Zealand.  Accordingly, the first premise of the argument on behalf of the appellant[24] is incorrect.  That means that the argument that the s 16 operations were unlawful because the IRD officers did not comply with Australian law and practice falls at the first hurdle.

[23] At [29].

[24] See [49](a) above.

[56]     However, that does not dispose of the argument that the supply of information obtained from the searches to the ATO is prohibited by s 81.[25]  Mr Clews’ argument on this point depends on our accepting that art 26(2)(b) means that the Commissioner has no obligation to supply information to the ATO unless the information in the hands of the Commissioner could have been obtained by the Federal Commissioner of Taxation in Australia by adopting precisely the same measures and taking precisely the same action as the Commissioner took in New Zealand.  We see no reason to strain the interpretation of the provision in that way.  In our view, it is clear that the provision simply provides that the Commissioner has no obligation to pass information to Australia that would not be accessible under Australia’s tax laws or administrative practices by a broadly analogous process.  In the present case, the Commissioner obtained the information in exercise of his s 16 powers for his own purposes as well as for the purpose of providing it to the ATO. 

[25] See [49](d) above.

[57] It would be an absurd result if the Commissioner was required to undertake a process which not only complied with s 16 but which also complied with s 263 of the Australian Act and with Australian court decisions and the guidelines relating to searches which are in operation in Australia. In some cases, the Commissioner may have obtained information under s 16 for his own purposes before an ATO request for information was received. It would not be possible to retrospectively comply with Australian law or practice. Mr Clews said in such a case the Commissioner would be prevented from supplying information to the ATO under the DTA. We put to Mr Clews that there could be cases where the requirements of Australia and New Zealand are contradictory so that compliance with both would be impossible. His answer was that, in those circumstances, the Commissioner would either be unable to utilise the s 16 powers or, alternatively, if he used them for New Zealand purposes, he would not be obliged to supply information to the ATO and, because he did not have such an obligation, he would be prevented by s 81 from doing so. We see no reason to interpret art 26(2)(b) to produce that result.

[58] We conclude that, for the purposes of art 26(2)(b), the information derived from the s 16 operations is information that is obtainable under the law of Australia so that the Commissioner is obliged by art 26(1) to supply the information to the ATO. We rely for that conclusion on the similarities between s 16 of the TAA and s 263 of the Australian Act. In our view, the difference in practice in Australia, exhibited by the existence of guidelines and the like, does not change this: art 26(2)(b) refers to law or practice, not law and practice. As long as the information is obtainable under the law of Australia it is of a kind which must be supplied under art 26. In our view that test is met in this case.

[59]     That disposes of the argument.

[60]     We record that the Commissioner also supported his position by arguing that art 26(2)(b) provided only that there was not an obligation to supply information coming within that provision, but did not prevent the Commission from doing so voluntarily.  We accept that that is so.  But that begs the issue raised by Mr Clews that s 81 would prevent such disclosure.  On the face of it, s 81(1) requires secrecy and s 88 applies only to information which the Commissioner is required to provide under the DTA, not to information which he chooses to provide voluntarily.  However, as our conclusion above makes it unnecessary for us to deal with this argument in detail, we express only these tentative views and do not deal with it further.

[61]     After the hearing, counsel for the Commissioner filed a memorandum drawing our attention to s 81(4)(k) of the TAA, which is also an exception to the secrecy obligation under s 81.  However, we do not consider it is relevant in the present circumstances.

Ground 3: “Books or documents”

[62]     The term “books or documents” is defined in s 3 of the TAA to mean:

All books, accounts, rules, records, registers, papers, and other documents and all photographic plates, microfilms, photostatic negatives, prints, tapes, discs, computer reels, perforated rolls or any other type of record whatsoever.

[63]     In the High Court it was argued that a computer hard drive did not come within this definition, and therefore the access power under s 16 and any warrant issued under s 16(4) did not permit the inspection of computer hard drives and s 16B did not permit the copying of computer hard drives (or cloning).

[64]     Venning J rejected this argument.  He considered that the inclusion of “computer reels” indicated Parliament’s intention to include devices for storing electronic data.  Since technological developments had led to the same function now being done by computer hard drives, the concluding words “any other type of record whatsoever” should be interpreted to include a computer hard drive.

[65]     In this Court, Mr Clews argued that computer reels were different technologically from computer hard drives, and that the Judge was wrong to equate the two.  He said computer reels were now obsolete technology.  He also argued that it was wrong to classify a computer hard drive as a ‘record’.  He accepted that the Judge was entitled to regard the listed inclusions in the definition of “book or document” as media in which information is recorded, but said that a hard drive should not be regarded as such.  He accepted that a record may, in some contexts, be a medium on or in which information is stored, but argued that it is also the name for the item of information itself.  He said that in the context of computers, files or items that are held on a hard drive are more aptly regarded as records than the hard drive itself.  He supported this argument by reference to the amount of data that can stored on a hard drive and said that permitting searches of such vast amounts of data was inconsistent with the reasonableness obligation under s 21 of the Bill of Rights.

[66]     We agree with Mr Clews that “record” can denote both information which is recorded, as well as the medium in which the recording is made.  Once that concession is made, however, there is not, in our view, any room for argument that a computer hard drive does not come within the concept of “any other type of record whatsoever”.  It differs from media such as microfilms, tapes and discs only in the scale of the volume of material that can be recorded on it.  But even that distinction is not valid in relation to computer reels which could also record a vast amount of data.

[67]     Section 21 of the Bill of Rights requires that searches be reasonable, but does not provide any guidance as to the media which may be the subject to search.  We do not see it as informing the interpretation of the definition in s 3 of the TAA. 

[68]     If Mr Clews’ interpretation of “books and documents” were adopted, s 16 would be almost completely ineffective as an aid to uncovering matters relevant to tax investigations.  He accepted that that was so.  We can see no reason to restrict the obviously available meaning of “any other type of record whatsoever” to bring about that outcome.  There is nothing in the definition of books or documents to suggest that only records which are limited in the scale of the data they can record should be the subject of s 16 inspections.  Such an interpretation would also be inconsistent with the observations made in this Court in A Firm of Solicitors in which the cloning of computer hard drives was specifically addressed.[26]

[26]At [100]. See also, in a different context, Goodin v Department of Internal Affairs [2003] NZAR 434 (HC) at [30].

[69]     Much of the appellants’ argument on this topic reduced to the proposition that “books or documents” must be read down so that cloning of computer hard drives is not allowed to occur under ss 16 and 16B.  In our view that confuses the definition of what may be the subject of inspection and copying under those provisions and the reasonableness of the action taken by the IRD officers in undertaking the inspection and copying.  We have already found that the inspection and copying in the present case was reasonable.  There is no reason to essentially reverse that finding by a strained interpretation of the definition of “books or documents”.

Ground 4: Ms Chisnall’s consent

[70]     Venning J found that Ms Chisnall consented to the removal of computer hard drives from the Auckland site for cloning, on the basis that the clones would then be deposited with the District Court so that privilege claims could be resolved, with the actual hard drives being immediately returned to Avowal.  As he had already found that the removal of the hard drives for cloning was permitted without Ms Chisnall’s consent, this finding was not of great practical significance.  We have upheld Venning J’s finding that removal of the hard drives for cloning was permitted, even without consent.  So the same situation arises here.

[71]     Nevertheless, in case the litigation goes further, we should record our conclusions on this aspect of the case.  We have reviewed the evidence of Ms Chisnall, the IRD officers involved, Mr Speakman and the independent barrister who attended the Auckland operation, Mr Patatau.  Having done so, we agree with Venning J’s conclusion that Ms Chisnall consented to the removal of the computer hard drives for copying.

Ground 5: Role of advising on law reform

[72]     In the interim judgment, Baragwanath J expressed the view that s 16(1) empowered the Commissioner to have access to buildings and books or documents in order to obtain information that might reasonably lead to advice to the Minister of Finance about law reform.[27]  He considered that the apparent operation in New Zealand of a large-scale tax mitigation scheme warranted the attention of the Commissioner, who was entitled to explore what financial activity was being performed in New Zealand.[28]

[27]At [26] – [28].

[28] At [29].

[73]     As Baragwanath J recorded, this was not a matter advanced on the Commissioner’s behalf and there was nothing in the application for the s 16(4) warrants which indicated that advice on law reform was a reason for the search.  In those circumstances, we accept Mr Clews’ argument that there was no evidential basis for the finding.  But we do not see that as having any impact on the outcome of the present appeal, because we have already found that the s 16 operations at both Auckland and Motueka were within the scope of the statutory power.

Ground 6: Contempt of New South Wales Court

[74]     This argument was raised for the first time in this Court.

[75]     At the time of the s 16 operations, Mr Petroulias was about to face trial on criminal charges in the Supreme Court on New South Wales.  It was to be his third trial.  There had been lengthy delays in bringing the proceedings to Court.  In those circumstances, as Mr Pike observed, it was not surprising that the investigations undertaken by the IRD and the ATO coincided with the criminal proceedings in a temporal sense.  Baragwanath J accepted that the sequence of events was “coincidental rather than contrived”.[29]  He noted that an undertaking had been given by the Federal Commissioner of Taxation not to communicate any information derived from the s 16 operations in New Zealand to anyone associated with the criminal prosecution, and that the Federal Court of Australia had rejected any improper purpose based on the temporal proximity of the s 16 operations and the equivalent operations in Australia to the criminal retrial which Mr Petroulias was about to face.  Baragwanath J said he agreed with the Federal Court finding.

[29] At [91].

[76]     There is nothing in the material before us which would lead us to differ from Baragwanath J on this point.  However, Mr Clews argued in this Court that, while there may have been a coincidence in the timing of the s 16 operations in New Zealand and the start of the retrial in New South Wales, that was not relevant to the issue of contempt.  He argued that the ATO ought not to have requested the Commissioner to exercise investigative powers in New Zealand because for the ATO to have used such powers in Australia would have been a contempt of court and impermissible.  That was because the exercise of such powers when a prosecution was underway poses a substantial risk of serious injustice in the New South Wales trial. 

[77] We find that puzzling, given that the s 16 operations in New Zealand occurred on the same day as equivalent operations under s 263 in Australia. We also find it difficult to see how this Court could find that there was a contempt of a New South Wales court when an Australian court found there was not.

[78]     Mr Clews argued that the decision of Dowsett J, in the Federal Court, accepting the undertaking of the ATO not to communicate information to the prosecution, did not deal with the contempt issue adequately.  If so, Mr Petroulias should have appealed.  And, if this point was to be seriously advanced in the New Zealand Courts, it ought to have been raised in the High Court and been the subject of a proper pleading.  The only possible basis for an allegation of contempt would be if there was evidence that information obtained from the New Zealand s 16 operations had been passed to the prosecutor in New South Wales.  In fact, the ATO gave an undertaking that this would not happen and Mr Pike told us that no information derived from the s 16 operations had been passed to the ATO by the time the trial took place.

[79]     Mr Clews said that, as a result of the IRD officers accessing and cloning the hard drive on the laptop belonging to Mr Petroulias during the Motueka operation, data which was on that hard drive and which related to Mr Petroulias’s defence in the New South Wales retrial was lost.  He said this also caused a contempt.  However, there is nothing to suggest that any loss which did occur was deliberate or negligent or even that there was a risk that it would occur.  It comes nowhere near a contempt.

Disposal

[80]     All the grounds of appeal advanced on behalf of the appellants fail.  We dismiss the appeal.

[81]     We award costs to the Commissioner on a band A basis for a complex appeal, and usual disbursements.  We certify for two counsel.

Solicitors:
Buddle Findlay, Auckland for Appellants
Crown Law Office, Wellington for Respondents