Avowal Administrative Attorneys Ltd v District Court at North Shore HC Auckland CIV 2006-404-7264

[2007] NZHC 817

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-7264

BETWEEN  AVOWAL ADMINISTRATIVE ATTORNEYS LIMITED

First Applicant

AND  J B LLOYD CHARTERED ACCOUNTANTS LIMITED Second Applicant

AND  PETER JAMES BLOOMFIELD AND NORMA RAE CLARK

Third Applicants

Continued

Hearing:         20 February, 15 May and 20 August 2007

Counsel:        J R Billington QC, J L Land and G R Nicholson for Applicants

J Pike and P Courtney for Second Respondent

Judgment:      21 August 2007

INTERIM JUDGMENT OF BARAGWANATH J

This judgment was delivered by Justice Baragwanath on 21 August 2007 at 4 pm pursuant to Rule 540(4) of the High Court Rules

Registrar/Deputy Registrar

Date:………………………

Solicitors:
Kensington Swan, Auckland
Crown Law Office, Wellington

Counsel:

J R Billington QC, Auckland

AVOWAL ADMINISTRATIVE ATTORNEYS LTD AND ORS V THE DISTRICT COURT AT NORTH SHORE AND ANOR HC AK CIV-2006-404-7264  21 August 2007

AND  AMANDA JANE CHISNALL AND IAN ANDREW FLEMMING

Fourth Applicants

AND  DENISE ANNE CLARK Fifth Applicant

AND  WENDY CAROLINE VOOGHT Sixth Applicant

AND  LISA CHERRIE WATKINS AND WILLIAM DAVID WATKINS Seventh Applicants

AND  NIKYTAS NICHOLAS PETROULIAS Eighth Applicant

AND  THE DISTRICT COURT AT NORTH SHORE

First Respondent

AND  THE COMMISSIONER OF INLAND REVENUE

Second Respondent

Table of Contents

Para No.

Introduction and result  [1] The search and the applicants’ claim  [3] The Commissioner’s response  [4] Procedures to date  [5] Article 26 and the legislation  [9] The arguments  [14] Discussion  [17]

Legal background: Government of India v Taylor and the

OECD draft DTA  [19] Discovery principles  [22] Presumptive right  [24] The decision in Squibb  [27] The effect of Squibb  [28] The topic of relevance  [38]

Decision  [43]

Introduction and result

[1]      The applicants have challenged by application for judicial review the legality of searches of their private and commercial properties performed by the Commissioner of Inland Revenue.  In preparation for the forthcoming trial they have applied for discovery against the Commissioner of certain requests by the Australian Tax Office said to be directed at securing information to assist its own tax-gathering function for which it performed concurrent searches of related parties’ premises in Australia.

[2]      Among the issues raised is a question of law which this interim judgment answers.  It accepts the Commissioner’s contention that this Court is bound by the decision of the Court of Appeal in Commissioner of Inland Revenue v ER Squibb & Sons  Ltd  (1992)  14  NZTC  9,146  to   hold   that   Article   26   of  the   Double Tax Agreement  between  New  Zealand  and  Australia  prevents  discovery  of  the documents.  It also touches on but does not deal finally with the issue of relevance of

such documents to the trial in the event that Squibb is revisited by an appellate court. Judgment on further contentions by the Commissioner has been deferred pending the trial but with liberty to apply.

The search and the applicants’ claim

[3]        On  8 November  2006  the  Commissioner,  claiming  to  act  under  search warrants and his powers conferred by ss 16(1) and 16D of the Tax Administration Act 1994, performed a search on private and commercial properties of the applicants. The lawfulness of the Commissioner’s searches and the removal of documents and computer records found during them is challenged by the substantive application for review.  In support of a pleading that the searches were performed for an allegedly unlawful purpose of providing information or evidence to the Australian Tax Office, which is claimed to be outside the authority of the TAA and Article 26 of the Double Tax Agreement between Australia and New Zealand, the applicants seek discovery by  the  Commissioner.     The  documents  in  issue  are  ones  supplied  to  the Commissioner by the Australian Tax Office pursuant to the DTA.  They are known as category A.

The Commissioner’s response

[4]      The Commissioner opposes the application for discovery.  He pleads that the access operations were carried out lawfully for the purposes of the Inland Revenue Acts, contending that the searches were undertaken with a view to finding evidence relevant to two functions (s 16(1) TAA):

[a]       of collecting tax or duty under the New Zealand Inland Revenue

Acts; and

[b]       for the purpose of carrying out an[other] function, lawfully conferred on the Commissioner [namely the exchange of information under article 26 of an agreement between the governments of New Zealand and Australia which is scheduled to the Double Taxation Relief (Australia) Order 1995 made as an Order in Council under s 294 of the Income Tax Act 1976]

…

Procedures to date

[5]      I directed that the category A documents be provided on an ex parte basis to the Court.

[6]      Having read that  material, by  minute of 28  March 2007  I  expressed  the provisional view  that  there was a clear  public  interest  in terms  of the  DTA  to maintain strict confidentiality but that other issues and particularly the true construction of ss 16 and 16B of the TAA warranted more urgent consideration. On 11 May 2007 I heard argument on that issue, on which judgment was delivered on 27 July 2007.  In the meantime, on 15 May 2007, counsel for the Commissioner advised that a ruling was sought in relation to the category A documents.  I invited counsel to provide further submissions which have now been received.

[7]      On 2 August 2007 I conducted an ex parte conference with Ms Courtney to enquire whether  counsel for  the Commissioner  might  provide  in  relation  to  the category  A  documents  for  which  confidentiality  was  claimed  the  same  kind  of helpful ex parte memorandum as was filed in relation to those in another category (C) which had provided a discriminating analysis of each document and had led to a redacted version which was supplied to applicants’ counsel.   In the event I have considered that material without further assistance. Because of the course proposed that will not prejudice either party.

[8]      Following that conference I issued an inter partes minute stating that, having considered the successive written submissions of counsel, I saw the Commissioner’s arguments as layered.  At their forefront is the contention that all 41 documents in category A fall within the double tax agreement with Australia and in accordance with the ratio of the judgment of Richardson J in Commissioner of Inland Revenue v ER Squibb, with which other members of the Court agreed, the Commissioner is protected from discovery.  In the event that such argument does not succeed there lie behind it potential further contentions as to public interest immunity which could require close scrutiny of the documents.  It seemed that the convenient course might be to issue an interim judgment confined to the Article 26 double tax agreement

issue.    For the reasons that follow I have decided in addition to offer provisional comment on the issue of relevance.

Article 26 and the legislation

[9]      The Income Tax Act 2004 now states:

BH 1   Double tax agreements

…

Purposes

(2)      The following are the purposes for which a double tax agreement may be negotiated:

…

(g)       to facilitate the exchange of information:

…

[10]     Section BH1(4) provides that double taxation agreements override legislation in relation to certain matters, in particular:

Despite anything in this Act [the Income Tax Act]… or in any other… Act…

a double tax agreement has effect in relation to—

…

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

[11]     Prior to its repeal with effect from 1 April 1995, when it was replaced by s BB 11 of the Income Tax Act 1994, s 294 of the Income Tax Act 1976 empowered the Governor-General by Order in Council to declare that arrangements made with the government of another state with a view to affording relief from double taxation should,  notwithstanding anything  in any enactment,  have effect  according  to  its tenor. It permitted the arrangements to contain provision:

…for charging the income derived from any sources in New Zealand to persons not resident in New Zealand…

In doing so it departed materially from Government of India v Taylor.   It further provided that where any arrangements had effect under that section:

…the obligation as to secrecy imposed by any enactment… shall not prevent the Commissioner…from disclosing to any authorised officer of the Government with which the arrangements are made such information as is required to be disclosed under such arrangements.

[12]     The 1994  Act  empowered  the  Governor-General by Order  in Council to declare that arrangements made with the government of another state with a view to affording relief from double taxation or exchanging information should have effect notwithstanding anything in any enactment.   Section BH1 of the Income Tax Act

2004 now provides similar authority.

[13]     The   Double   Taxation   Relief   (Australia)   Order   1995   was   made   on

20 February 1995 by Order in Council under the 1976 Act, shortly prior to its repeal. The Order was amended with effect from 22 January 2007. Its terms were taken from an OECD draft form and are as follows (the passages replaced by the 2007 amendment following a change in the OECD draft are underlined, the additions by that amendment shown in bold, and emphasis in italics has been added to passages of particular relevance):

Article 1

PERSONAL SCOPE

This Agreement shall apply to persons who are residents of one or both of

[New Zealand] and [Australia]

Article 26

EXCHANGE OF INFORMATION

1.   The  competent  authorities  of  the  Contracting  States shall exchange such information as is necessary [foreseeably relevant] for carrying out the provisions of this Agreement or [to the administration or enforcement] of the domestic law of the Contracting States concerning the taxes to which this Agreement applies [concerning taxes referred to  in Article 2,] insofar as the taxation under that law thereunder is not contrary to this Agreement.    The exchange of information is not restricted by Article 1.

[2.] Any information received [under paragraph 1] 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 [referred to in paragraph 1, or the oversight of the above].   Such persons or authorities shall use the information only for such purposes. [They may disclose the information in public court proceedings or in judicial decisions.]

2[3] In no case shall the provisions of paragraph[s] 1 [and 2] 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;

(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.

[4    If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the  requested  information,  even  though  that other State may not need such information for its own tax purposes.   The obligation contained in the preceding  sentence  is  subject to  the limitations  of paragraph 3 but in no case shall such limitations be construed to permit a contracting State to decline to supply information solely because it has no domestic interest in such information.

[5    [not reproduced]]

The arguments

[14]     The applicants propose to contend at trial that, at least until the DTA was subsequently altered, it was unlawful for the New Zealand Commissioner to make use of his powers in order to obtain information for the purposes of the ATO.  Under Australian law there is no power to remove and copy documents even for use against

Australian taxpayers.   There is Victorian authority that the ATO’s search powers may not be employed for use against taxpayers in states with which Australia has a DTA.   The OECD material shows that the operation of a DTA  is premised on reciprocity which it is said does not exist in this case.

[15]     In support of the discovery application counsel for the applicants submitted that the ATO requests should be produced so that they can properly assess and analyse at trial the validity of the searches carried out on 8 November 2006.  They argued:

a)       Crown   witnesses   Mr   Geldenhuys,   Team Leader,   Investigations, Takapuna of the Inland Revenue Department and Ms Edwards, Senior Investigator of the Department, confirmed that ATO requests led to the searches and that information was to be obtained by the Commissioner  for exchange with the ATO. A party affected by a search warrant must be able to inspect the warrant and the information on which it is based: Realty Renovations Ltd v A-G for Alberta {1978)

44 CCC (2d) 249; A-G Nova Scotia v MacIntyre (1982) 132 DLR (3d)

385 (SCC), 398; s 27 New Zealand Bill of Rights Act 1990.

b)      In its relevant (pre-amendment) form the DTA allowed only for “exchange” of documentation, without the ability to “obtain”. In other words (as I understand the argument) the New Zealand Commissioner was empowered to provide the ATO only with information already in his possession for New Zealand tax purposes and he was not empowered to use his statutory powers, including ss 16(1) and 16B, where recovery of Australian tax was the dominant purpose.   The addition of “obtain” in the new subclause (4) demonstrates that the Commissioner’s powers have  been extended  from what  they were previously.

c)       Australian  authority  relating  to  the  DTA  in  its  original  form  has decided that the tax office of one jurisdiction cannot use its powers of inspection or interview to collect information for the tax office of the

other jurisdiction: Currie v Deputy Commissioner of Taxation Federal Court of Australia V 724 of 2000 4 October 2000 Finkelstein J.   That authority is consistent with the OECD Commentary.    If the purpose of the search was to obtain information for the ATO (which purpose was not provided for by the DTA in its unamended form) the search was  in  excess  of  the  s  16  authority  and  had  no  lawful  basis. Discovery is required to discern whether that has occurred.

d)The requests are relevant as tending to establish whether the searches were  performed  in  whole  or  in  part  for  an  unlawful  purpose. The applicants contend that unlawful purposes would include seeking information relating to a criminal proceeding against the eighth applicant Mr Petroulias; or relating to companies and entities which have either operated only in Australia and not in New Zealand or have not operated or are not residents of either state.  For example, in the case of New  Zealand  Foreign Trusts, which  have a  New  Zealand trustee but no New Zealand settlor, under s HH4(3B) of the Income Tax Act 2004 the trustee’s income is exempt from tax.  In Australia, by contrast, tax liability results from Australian residency of the trustee.  So a “New Zealand Foreign Trust” may be established which is not liable for Australian tax (because it has no Australian resident trustee) and is not liable for New Zealand tax (because there is no New Zealand resident settlor).  Such trusts are said to be commonly used  by  Australian residents.    Under the  DTA  if an entity is  not resident in New Zealand or Australia it is not covered by the treaty.

e)       Squibb is distinguishable as it is the requests for information that the applicants   seek   rather   than   the   actual   information   exchanged. Article 20 in its original form does not impose secrecy obligations on requests  but  only on  information  exchanged  pursuant  to  requests. Counsel for the applicants proposed that any “information” contained in the requests be redacted, as has occurred on discovery of category C documents.

f)        Since the Crown is required by s 81(3) to provide documents to the Court, which is for the wider purpose of carrying into effect the Inland Revenue Acts, natural justice requires that they be seen also by at least  counsel  for  the  applicants  and  s  81  provides  no  bar  to  that course: Knight v Commissioner of Inland Revenue.

[16]     Crown counsel submitted in opposition:

a)        This Court is bound by Commissioner of Inland Revenue v ER Squibb to determine that under Article 26 the material received from the ATO must be withheld from discovery.

b)       The suggested distinction between requests and  information is one without a difference.

c)       There  is  in  fact  nothing  in the  documents that  would  support the contention of improper purpose.  Other authority supports the ability under a DTA of the tax authorities in one state to secure information for use by the authorities in another state; the OECD Commentary is consistent with that conclusion.

d)The category A material is irrelevant because the New Zealand Commissioner is entitled to access to information about New Zealand Foreign Trusts.

e)       While by s 81(3) of the TAA the Commissioner must produce to the Court all exchanges carried out under the DTA, if the documents are prima facie disclosable, it is the duty of the Commissioner to claim public interest privilege (Air Canada v Secretary of State for Trade [1983] 2 AC 394 (HL) at 436 per Lord Fraser and at 446 per Lord Scarman). The Court should carry out a balancing exercise to determine whether the public interest in immunity is outweighed by the public interest in disclosing documents required on an application of the Tweed test.  On such balancing the Court will give very great

weight to preserving confidentiality and will override it only if the applicant shows strong grounds for concluding that the public interest in the administration of justice outweighs the public interest in preserving confidentiality: Lonrho plc v Fayed (No 4) [1994] QB 775,

788.

Discussion

[17]     The DTA provides in part that:

The competent authorities  of the Contracting States  shall  exchange such information as is necessary for carrying out the purpose of this Agreement…

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 purposes.

(Emphasis added)

Information obtained under the New Zealand tax legislation is protected by s 81 of the Tax Administration Act 1994 and may not be disclosed:

…except when it is necessary to do so for the purpose of:

(a) Carrying into effect… the Inland Revenue Acts…

Section 294 of the 1976 Act and the Order in Council establishing the DTA are within that category.

[18]     The substantive case and, to a degree, this interlocutory application, concern the interface among four public interests:

a)       the protection of New Zealand’s tax base by exercise of the powers of the Commissioner under the Inland Revenue Acts to identify potential sources of taxable income;

b)       the  Commissioner’s  further  function  of  assisting  the  Australian Tax Authority  under  the  DTA  which  by  Order  in  Council  under New Zealand legislation forms part of New Zealand law;

c)       the right of persons whose properties have been compulsory searched to test the legality of the Commissioner’s conduct;

d)the public interest in maintaining mutual confidence with Australian and other state authorities by preserving the secrecy promised under the DTA.

Legal background: Government of India v Taylor and the OECD draft DTA

[19]     The principle of international law that one state will not assist to enforce the tax regime of another was stated in Government of India v Taylor [1955] AC 491 (HL). It arose from the concept of state autonomy dominant since the Treaty of Westphalia which in 1648 ended the Thirty Years War. But the practical problems presented by a globalised economy required a new response. The OECD Double Taxation Conventions on Income and Capital of 1963 and 1977 resulted in a draft model DTA which has been adopted in a great number of bilateral treaties including the present DTA. In Commissioner of Inland Revenue v United Dominions Trust Ltd [1973] 2 NZLR 555 (CA) at 558, in construing a DTA between New Zealand and the United Kingdom, McCarthy P adopted the statement by Lord Macmillan in Stag Line Ltd v Foscolo, Mango and Co [1932] AC 328, 350:

It is important to remember that the [DTA] was the outcome of an International Conference [which created the OECD draft] and that the [clauses] have an international currency.  As these rules must come under the consideration of foreign courts it is desirable in the interests of uniformity that that their interpretation should not be rigidly controlled by domestic precedents… but rather that the language of the rules should be construed on broad principles of general acceptation.

[20]     A 2003 Commentary on the OECD Model Convention records that:

The increasing economic interdependence and co-operation of the Member countries of the OECD in the post-war period showed increasingly clearly the importance of  measures  for  preventing  international  double taxation.

The need was recognised for extending the network of bilateral tax conventions to all Member countries of the OECD…

It was against this background that the Fiscal Committee set to work in 1956 to establish a draft convention that  would effectively resolve the double taxation problems existing between OECD Member countries and that would be acceptable to all Member countries…

This resulted in the publication in 1977 of a new Model Convention and

Commentaries…

In 1991… the Committee on Fiscal Affairs adopted the concept of an ambulatory   Model   Convention   providing   periodic   and   more   timely updates…

This led to the publication in 1992 of the Model Convention in a loose-leaf format…

The world-wide recognition of the provisions of the Model Convention and their incorporation into a majority of bilateral conventions have helped make the Commentaries on the provisions of the Model Convention a widely- accepted  guide to the interpretation and application of the provisions  of existing bilateral conventions.  This has facilitated the interpretation and the enforcement of these bilateral conventions along common lines.    As  the network of tax conventions continues to expand, the importance of such a generally accepted guide becomes all the greater…

…the Model Convention does not deal exclusively with the elimination of double taxation but also addresses other issues, such as the prevention of tax evasion…

The  Commentary  also  discusses  issues  of  construction  of  the  DTA  which  will require determination at the trial.

[21]     It  is  plain  that,  at  least  where  a  bilateral  DTA  exists,  the  narrowly nationalistic regime, recorded in the 1955 report of Government of India v Taylor, has been substantially affected by the OECD work which began the following year. A regime of obstruction has been replaced by one containing a large element of cross-border co-operation.  The central question is how far that co-operation extends.

Discovery principles

[22]     Unless there is an inconsistent  legislative provision,  normally in order to determine the issue of discovery it is necessary first to determine the issues in the substantive proceeding so that the Court may determine:

…whether… disclosure appears to be necessary to resolve the matter fairly and honestly…

on an application of “basic tests of relevance and necessity”: see the judicial review decision Tweed v Parades Commission [2007] 2 WLR 1; [2007] 2 All ER 46 (HL) at paras [3] per Lord Bingham and [29]-[32] per Lord Carswell.

[23]     Discovery in judicial review is by leave under s 10(2)(i) of the Judicature Amendment Act 1972 rather than of right.  As will appear, in principle it is the right of the applicants to test whether the TAA and its common law overlay have been duly complied with so  that  they have  not  been  interfered  with  beyond  what  is authorised by law.     But that is subject to the true construction and application of Article 26 and the effect of decided authority.

Presumptive right

[24]     I accept the applicants’ submission, supported by the Canadian authorities, that in general the Court will strive to permit the legality of a compulsory search to be appraised by legal process.  The rule of law requires no less.  The reason for such development was stated in Mihos v Attorney-General HC AK CIV 2004-485-1399

7 June 2007 at [59]:

The exercise is the familiar one of the Court being called upon to determine the legality of executive conduct which is a conventional application of the rule of law.   As Secretary of State for the Foreign  and Commonwealth Affairs v R (Bancoult) [2007] EWCA Civ 498 23 May 2007 makes clear, save on grounds of non-justiciability, itself a narrowing concept, the Courts will not recognise any Alsatia where the Executive is permitted to act free of judicial review for illegality.

[25]   Nowadays disputed claims to privilege are often managed by ex parte examination by the Court.  In difficult cases it may be appropriate to appoint special counsel to examine the documents to ensure that the legality of the process is duly audited  on  behalf  of  the  person  searched  without  the  obligation  to  which  that person’s counsel is subject of advising  what  information has come to  counsel’s notice.

[26]     The issues as to the Commissioner’s purpose and whether it was lawful are matters for trial.    Given  the  undertakings  by  the  Commissioner  not  to  disclose information to the ATO prior to trial and by the prosecution in current criminal proceedings in Australia against Mr Petroulias, that no use will be made of material secured in the searches the subject of this proceeding, there can be no prejudice to the applicants from deferring final decision until then.

The decision in Squibb

[27]     At 9,155 of Squibb Richardson J stated for the Court of Appeal, in relation to a  provision  of a  double  taxation  agreement  with  Australia  materially indistinguishable from Article 26 ([13] above):

The deliberate use of the words “the taxes to which this Agreement applies” is significant.   It is not sufficient that a person is concerned with the assessment of income tax in a particular case only.   A single taxpayer is concerned with its own tax liability.  It cannot be said to be concerned with the assessment  of  the  taxes  to  which  the  agreement  applies.    It  is  not surprising that the paragraph should draw a distinction between those in authority concerned with the assessment and collection of the taxes on the one  hand  and  individual  taxpayers  on  the  other.     The  exchange  of information is to assist the competent authorities in carrying out their respective responsibilities – for carrying out the provisions of the Double Taxation Agreement or for the prevention of fraud or for the administration of statutory provisions against avoidance of the taxes to which the agreement applies.   None of that is the responsibility of a particular taxpayer even though that information may be used by the Commissioner in assessing that taxpayer or collecting taxes from that taxpayer.

At 9,156 he concluded:

…there  is  no  justification  in  the  language,  scheme  or  purpose  [of  an equivalent to the second half of Article 26] for diluting the confidentiality obligations under the Article and requiring information exchanged in confidence to be released in pre-trial discovery to a litigant in judicial review proceedings.  To do so would contravene the understanding reached with the Government  of  Australia  and  would  be  contrary  to  the  well-grounded express objection of the Australian Tax Office.

The effect of Squibb

[28]    The question for determination concerns the legal effect of the secrecy provisions of Article 26.  The short answer is that this Court is bound by the decision

of the Court of Appeal in Squibb, as the Commissioner contends.   It  is simply indistinguishable.   I accept his counsel’s submission that there is no material difference between requests and information: the latter must include the former.

[29]     This Court will not as a rule comment on whether an appellate decision by which it is bound might fall for reconsideration.   But the ultimate test is that of justice. I have decided that with a substantive fixture pending it is necessary to say more rather than simply leave that issue for consideration on appeal, conceivably by the Supreme Court.  That is because of the consequences if an appellate court were to decide that Squibb is outmoded and should be reversed because it was determined in an era when discovery against the Crown, and especially the Commissioner, was less readily ordered than is now the case since Knight and Tweed.   The applicants would argue on appeal that  they had  been denied  natural justice  by  having  the category A documents withheld at the discovery stage and seek a stay of provision of documents secured in the searches until the conclusion of all appeals.  This litigation must be brought to efficient conclusion, not least because the Commissioner faces the possibility of time bars.

[30]     The argument as to the status of Squibb may be summarised.  There has been a major shift in courts’ attitudes to discovery against the Crown.   The recognition in Corbett v Social Security Commission [1962] NZLR 878 (CA) of the Courts’ responsibility to override an unjustifiable Crown claim for privilege was a watershed. Certainly, as was decisive in Reckitt and Colman v Taxation Board of Review [1966] NZLR 1032 (CA), the Commissioner’s position is a special one, representing the whole body of taxpayers. But in Cates v Commissioner of Inland Revenue [1982] 1 NZLR 530 the liability of the Commissioner to discovery was put beyond doubt. Cooke J, delivering the leading judgment, referred to the discovery jurisdiction, then found only in s 27 of the Crown Proceedings Act 1950, as likely to be exercised only in rare cases. But the enactment of the Official Information Act

1982 and the Privacy Act 1993 and Cooke P’s judgment in Commissioner of Police v Ombudsman [1988] 1 NZLR 385 may be said to have altered the perspective in which such applications are viewed. The process was completed in Knight v Commissioner of Inland Revenue  [1991] 2 NZLR 30 (CA): in ordinary proceedings discovery as of right under R294 requires good reason to be established why the

Commissioner should not be exposed to the full discovery required by Peruvian Guano  (1882) 11 QBD 55 (CA). The passage at 9,156 of Squibb ([26] above) does not deal with the rule of law principle ([24] above) or meet the argument in Knight.

[31]     On the other side there is the argument the Court will take care not to intrude on the role of the Executive in relation to issues affecting New Zealand’s relations with other states.  There is a recent analysis of the principles in the Guantanamo Bay case R(Al Rawi) v Foreign Secretary [2007] 2 WLR 1219 (CA).

[32]     The importance of that high public interest was spelled out by Mr Nash, chief adviser   (international  audit)   at  the   National  Office   of  the   Inland   Revenue Department, who serves as Competent Authority for New Zealand responsible for the  resolution  of  double  taxation  disputes  and  exchanges  of  information  with New Zealand’s tax treaty partners under a network of double taxation agreements. Mr Nash has had considerable experience in the policy formulation behind Article 26 of the OECD Model Convention as a New Zealand delegate to the OECD Working Party Number 8 on Avoidance and Evasion. He said that, given the importance of Article 26  to  the  application  of  taxation  law  to  international  transactions,  the delegation of Competent Authority to exchange information was exercised only by senior officers in tax administrations.  He added:

There needs  to be sufficient  particularity and specificity in  a  request  to ensure an efficient and effective response may be made.

[33]     He said that over the past 12 years he has built very close relations with his counterparts  at  the  Australian  tax  office  and  during  that  period  the  senior ATO officers involved in the exchange of information process have displayed the utmost integrity.  While on occasion additional details have been required to clarify issues in general their requests are of the highest quality by international standards.

[34]     As to this case he stated:

The information exchanged in this case relates to an operation currently estimated to involve 355 interlinked entities and individuals, and ATO/IRD inquiries have identified approximately $50 million in cross border money flows   occurring   within   and   between   those   interlinked   entities   and individuals.  IRD investigations into this operation are still at a preliminary stage.   Definitive positions as to amended taxpayer assessments have not

been reached and the records in question will require considerable further analysis and inquiry before any adjustments are raised at which time any DTA material relied upon would become disclosable.

He said that in this case the ATO initiated the exchange of information process in November 2004.   He said that it soon became apparent that there were major tax compliance issues, not only in Australia but also in New Zealand.  Over the ensuing two years he had overseen and facilitated the exchange of information between the IRD and the ATO.  At no stage was it ever suggested by the ATO that information was collected for the purpose of the criminal trial of Mr Petroulias although the ATO had told him of the sensitivity of enquiries because of pending criminal proceedings.

[35]     He stated that exchanges of information between New Zealand and Australia affect vitally the ability of both the IRD and the ATO to protect their respective revenue bases.  When the IRD responds to an ATO information request it does so on the basis that the information provided will be kept confidential unless it is required to be disclosed to the taxpayer or by court order.   The ATO operates on a similar expectation.  He said that if ATO or IRD failed to treat the information obtained in that way, it is likely that the flow of intelligence would be severely curtailed not just from Australia but from other OECD member countries with whom New Zealand has double taxation agreements. As to the reason for the public interest immunity claim, he states that the IRD must not disclose information it obtains from or about taxpayers except under the authority of the New Zealand Inland Revenue Acts and for the purposes of those Acts.   The Commissioner holds or has access to  very sensitive confidential information that must be strictly protected for the purposes of the enforcement of revenue law.

[36]     Mr Nash concluded:

11.      Within the information the public interest immunity claim relates to, and the Court is considering whether or not to order disclosure of, there will be:

11.1     Information about particular taxpayers who are a party to these proceedings;

11.2     Information that may be relevant to the tax affairs of any of the parties to these proceedings.

11.2     Information about other taxpayers who are not party to these proceedings;

11.3     …Revenue law enforcement information from IRD/ATO the disclosure of which would seriously damage information flows for the future.

[37]     This evidence potentially has a double relevance.   It may serve as factual matrix in determining the question of law whether Squibb should be sustained by an appellate court. Further, even if Squibb were held no longer to represent the law, before this Court could contemplate releasing the information received under the DTA it would need to hear Crown counsel, perhaps ex parte, on the topic of public interest immunity.

The topic of relevance

[38]     I have decided to express a tentative view rather than giving final judgment on the topic of relevance.  That is because the Court is always reluctant to determine a case finally on an ex parte basis, especially where another option is available. The classic words of Megarry J in John v Rees [1970] Ch 345, 402 give the reasons.

[39]     I  incline  to  the  view  that  on  their  face  the  category  A  documents  are consistent with the Commissioner’s evidence.  Certainly they confirm that there was a joint operation planned on both sides of the Tasman.  But I have seen nothing in them that leads me, with such experience as I have had in dealing with challenges to search warrants under the Summary Proceedings Act and the exercise of powers under the Serious Fraud Office Act, to conclude that they would so assist the applicants’ argument by adding to their present knowledge that their production is required to meet the test in Tweed.

[40]     The high point may be that in some instances further information from the applicants could possibly lead an  informed reader to  deduce that  information  is relevant  only to the ATO.  That  fact,  if such  it  be,  might  assist  the  applicants’ argument at substantive trial that to seek information for such purpose is unlawful and the fruits of the search should not be sent to Australia.  But I have no means of

knowing whether it would in fact  assist the applicants and potentially lead to a different result at trial.

[41]     I  am of the  provisional  view  that  such  possibility  is  best  dealt  with  by reserving leave to the applicants, if they are so advised, to apply for the appointment of special counsel as amicus, selected with the consent of the Crown, to be briefed by the applicants as to the theory of their case and therefore able to consider and advise the Court whether the documents are in fact material.    Such counsel would not  be  subject  to  the  normal  obligation  of  counsel  to  disclose  confidential information to the applicants. The submissions to the Court would, if necessary, be made on an ex parte basis.

[42]     Following receipt of a draft of this judgment counsel for the applicants advise that they do not at this point see need for the appointment of special counsel as amicus but ask that leave be reserved to  apply further should that  course prove necessary.  Mr Pike’s position for the Crown is that if such appointment is necessary to do justice it will not be opposed.  I record that it would of course be necessary to ensure that any counsel selected for that role must possess the confidence of both applicants and the Crown.

Decision

[43]      This Court is bound by Squibb to hold that the category A documents may not be the subject of an order for discovery against the Commissioner.

[44]     There will be leave to apply on short notice.

[45]     Costs are reserved.

W D Baragwanath J