BNZ Investments Ltd v Commissioner of Inland Revenue

[2007] NZCA 356

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA93/07
[2007] NZCA 356

BETWEENBNZ INVESTMENTS LIMITED

First Appellant

ANDBNZ INTERNATIONAL LIMITED

Second Appellant

ANDBNZI SECURITIES NO. 1 LIMITED

Third Appellant

ANDBNZI SECURITIES NO. 2 LIMITED

Fourth Appellant

ANDUDC FINANCE LIMITED

Second Appellants

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

CA272/06

AND BETWEEN             BNZ INVESTMENTS LIMITED

First Appellant

ANDBNZ INTERNATIONAL LIMITED

Second Appellant

ANDBNZI SECURITIES NO. 1 LIMITED

Third Appellant

ANDBNZI SECURITIES NO. 2 LIMITED

Fourth Appellant

ANDBANK OF NEW ZEALAND

Fifth Appellant

ANDBNZ CORPORATION LIMITED

Sixth Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

CA275/06

AND BETWEEN             BNZ INVESTMENTS LIMITED

First Appellant

ANDBANK OF NEW ZEALAND

Second Appellant

ANDBNZ CORPORATION LIMITED

Third Appellant

ANDBNZI SECURITIES NO. 1 LIMITED

Fourth Appellant

ANDBNZI SECURITIES NO. 2 LIMITED

Fifth Appellant

ANDBNZ INTERNATIONAL LIMITED

Sixth Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

CA276/06

AND BETWEEN             BNZ INVESTMENTS LIMITED

First Appellant

ANDBANK OF NEW ZEALAND

Second Appellant

ANDBNZ CORPORATION LIMITED

Third Appellant

ANDCUSTOM FLEET (NZ) LIMITED

Fourth Appellant

ANDNATIONAL AUSTRALIA LIMITED

Fifth Appellant

ANDBNZI SECURITIES NO. 1 LIMITED

Sixth Appellant

ANDBNZI SECURITIES NO. 2 LIMITED

Seventh Appellant

ANDNATIONAL NOMINEES LIMITED

Eighth Appellant

ANDBNZ EQUIPMENT LIMITED

Ninth Appellant

ANDNATIONAL AUSTRALIA GROUP (NZ) LIMITED

Tenth Appellant

ANDBNZ BRANCH PROPERTIES LIMITED

Eleventh Appellant

ANDBNZ INTERNATIONAL LIMITED

Twelfth Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

CA280/06

AND BETWEEN             ANZ NATIONAL BANK LIMITED

First Appellant

ANDUDC FINANCE LIMITED

Second Appellant

ANDTUI ENDEAVOUR LIMITED

Third Appellant

ANDTHE COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:8 May 2007

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

Counsel:A R Galbraith QC, A S Butler and J F Anderson for BNZ

J A Farmer QC, R A Green, R B Lange for Westpac
B W F Brown QC for  R J Ellis CIR in CA272/06 and CA276/06
RA Dobson QC and E J Norris for CIR in CA 93/06 and CA275/06
L McKay, S J Katz and L J Turner for ANZ in CA280/06
D J White QC and E J Norris for CIR in CA280/06

Judgment:21 August 2007 at 3 pm

JUDGMENT OF THE COURT

A        All appeals are dismissed.

BThe BNZ appellants, Westpac and the ANZ National appellants are each to pay the Commissioner $6,000 costs (ie a total of $18,000 collectively) and are jointly and severally ordered to pay usual disbursements.  We certify for second counsel.

REASONS OF THE COURT

(Given by William Young P)

Table of Contents

Para Nos

Introduction  [1]
Transaction structure and tax issues  [6]
The appeals before us   [9]
CA272/06 and 275/06  [9]
         CA280/06  [17]
         CA276/06  [21]
         CA93/07  [24]
The correct judicial response to complaints of over-discovery  [26]
Overview  [26]
         Complaints about under-discovery  [27]
         Orders limiting discovery  [30]
         Rule 305  [32]
         Is there a remedy for over-discovery other than in costs?  [34]
Are the other bank and other transaction documents “relevant” (or
arguably so) for discovery purposes?  [36]
Is it otherwise an abuse of process for the other bank and other
transaction documents to be discovered?  [54]
Does s 81 of the TAA prevent the Commissioner discovering documents
obtained in relation to the audit of one bank in litigation involving other
banks?  [60]
         The language of s 81  [60]
         Knight v Commissioner of Inland Revenue   [62]
         Commissioner of Inland Revenue v E R Squibb & Sons NZ Ltd                 [63]
         Fay Richwhite & Co Ltd v Davison  [66]
         Conclusion as to s 81  [71]
Are documents obtained in relation to the audit of one bank privileged
from discovery in litigation involving other banks?  [72]
         A little more context  [72]
         The argument for the banks  [79]
         The correct approach to the public interest immunity asserted                  [81]
         Applying the principles to the facts  [89]
The outcome of the specific appeals  [94]
         CA272/06 and 275/06  [94]
         CA280/06  [96]
         CA276/06  [98]
         CA93/07  [101]
         Formal orders  [102]

Introduction

[1]       The Commissioner of Inland Revenue is challenging on grounds of sham and illegitimate tax avoidance a number of structured financing arrangements entered into by seven banks: BNZ, Westpac, ANZ, National Bank, ASB, Deutschbank, and Rabobank.  (There are now six banks involved in the litigation as a result of the merger of the ANZ and National banks as ANZ National).  The arrangements in issue are known in the industry as “repo deals” and were between subsidiaries of the banks and overseas counter-parties.  The appeals before us are primarily associated with the BNZ litigation and we will explain shortly the key features of the BNZ transactions.  There is a fair amount of money at stake - $1.7b core tax in total of which $415m is tied up in the BNZ litigation.

[2]       The present appeals primarily arise out of major differences between the banks on one side and the Commissioner on the other as to how the litigation should proceed.  The preference of the banks is for their challenges to be dealt with as far as possible on a transaction by transaction basis, and particularly without regard to the transactions entered into by other banks (and, in the case of the BNZ, without regard to other transactions of a similar character which it entered into with other counter-parties).

[3]       The Commissioner, however, prefers to conduct the litigation on a broader basis.  While he does not seek to consolidate proceedings involving different banks, he is unenthusiastic about the prospect of any further segmentation of the cases.  More importantly for present purposes, in relation to each bank, the Commissioner wishes to be able to rely on documents associated with similar transactions entered into by other banks.  We will refer to such documents as “other bank documents”.  We use this expression to cover all documents associated with such transactions (including those generated by counter-parties and third parties) and not merely those obtained directly from the other banks. In the case of the BNZ, the Commissioner maintains that he may rely on documents generated in relation to other transactions of a similar character, which the BNZ entered into with other counter-parties (to which we will refer to as “other transaction documents”).

[4]       The major (although not the only) issue in these appeals is whether the banks can prevent the Commissioner discovering other bank documents against the BNZ.  The banks maintain that: the Commissioner is engaging in a process of over-discovery;  the other bank documents are irrelevant and that their discovery is oppressive and unfair; and discovery will breach s 81 of the Tax Administration Act 1994 (“the TAA”) and associated principles of public interest immunity.  There are some closely related issues relating to other transaction documents.  As well, the appeals raise largely down-stream issues associated with consolidation and stay arguments.

[5]       In this judgment we propose to address all the present appeals and do so by reference to the following headings:

(a)Transaction structure and tax issues.

(b)The appeals before us.

(c)The correct judicial response to complaints of over-discovery.

(d)Are the other bank and other transaction documents “relevant” (or arguably so) for discovery purposes?

(e)Is it otherwise an abuse of process for the Commissioner to discover and produce other bank and other transaction documents?

(f)Does s 81 of the TAA prevent the Commissioner discovering and producing for inspection other bank documents?

(g)Is there a principle of public interest immunity which prevents the Commissioner producing other bank documents whether at all or in unredacted form?

(h)The outcome of the specific appeals.

Transaction structure and tax issues

[6]       As the current appeals are primarily focused on the BNZ tax dispute, it is sufficient for present purposes to explain the way the transactions worked by reference to those involving the BNZ. 

[7]       These transactions were structured broadly as follows:

(a)A subsidiary of the BNZ (“the BNZ subsidiary”) would acquire from a counter-party an equity or trust interest in an overseas entity (“the issuer”) on the basis that the counter-party would repurchase that interest (at the same price, subject to adjustments) at a specified time (usually 5 years) with the counter-party’s parent company guaranteeing performance.  In economic substance, the BNZ subsidiary was thus providing funding to the counter-party.  The BNZ’s subsidiary’s initial return was in the form of distributions from the issuer.

(b)The return to the BNZ group and the overall balance of advantage between the bank and the counter-party is a function of the agreed distribution to be made by the issuer to the BNZ subsidiary, the interest rate swap arrangement, the guarantee procurement fee (at 2.95% of the purchase price) paid by the BNZ subsidiary for procuring the performance guarantee from the parent company of the counter-party (“GPF”), and the bank’s borrowing costs.

(c)The BNZ group would deduct its cost of borrowing, the GPF and the net cost of the interest rate swap and treat distributions from the issuer as either: (i) exempt from tax on the basis that the distributions were received by an overseas owned company (as the BNZ subsidiary) from an overseas company (as the issuer would be) under the “conduit” tax relief rules; or (ii) relieved from tax under the foreign tax credit rules on the basis a foreign tax credit was available for foreign tax paid by an overseas company (being the issuer) resulting in a full credit claimed under the foreign tax credit provisions.

[8]       The Commissioner’s case is that the repo deals were devoid of commercial purpose other than the exploitation of the tax asymmetry just discussed and that they provided a mechanism by which the economic benefits of that exploitation could be divided up between the bank and counter-parties.  So the Commissioner claims that the repo deals are subject to s BG 1 of the Income Tax Act 1994.  As well, the Commissioner maintains that some at least of the GPF arrangements were shams.

The appeals before us

CA272/06 and 275/06

[9]       These appeals by BNZ and Westpac challenge a judgment of Wild J delivered on 22 November 2006 in the BNZ proceedings: BNZ Investments Ltd v Commissioner of Inland Revenue (2006) 23 NZTC 21,045.  In issue are six repo deals.  The first three are known as Gen Re 1, CSFB and Gen Re 2.  According to the Commissioner, these transactions were unwound (or brought to a premature end) early to enable the BNZ to enter into three replacement transactions known as Rabo 1, Rabo 2 and Lehmans, which, on the Commissioner’s case, gave the BNZ a bigger share of the tax advantages. We will use the expression “other transaction documents” to refer to the documents generated in relation to the Rabo 1, Rabo 2 and Lehmans repo deals which the Commissioner wishes to rely on in support of his treatment of the Gen Re 1, CSFB and Gen Re 2 arrangements.

[10]     In issue before Wild J were interlocutory applications by the BNZ plaintiffs seeking orders as to the relevance of other bank and other transaction documents (which had been discovered in general terms by the Commissioner) and for confidentiality orders.

[11]     The BNZ sought orders that:

(a)The other bank and other transaction documents not be discovered on grounds of irrelevance.

(b)In the alternative, that the names and other identifiers of persons other than the parties to the Gen Re 1, CSFB and Gen Re 2 transactions to be removed or redacted from the other bank documents.  In this respect the BNZ relied essentially on s 81 of the TAA and the principle of public interest immunity as discussed in the judgment of this Court in Commissioner of Inland Revenue v E R Squibb & Sons (NZ) Ltd (1992) 14 NZTC 9,146.

We note that s 81 of the TAA is set out later in this judgment, at [60] below.

[12]     At the hearing before Wild J which led to his 22 November 2006 judgment, Westpac appeared in support of the BNZ arguments and in particular to oppose the discovery (and production) in the BNZ litigation of documents related to the repo deals which Westpac entered into.

[13]     In his judgment, Wild J concluded that the BNZ was inappropriately (ie prematurely) attempting to prevent the Commissioner relying at trial on other transaction and other bank documents. He considered that it was for the Commissioner, as a litigant, to decide what documents were relevant and to discover them.  He accepted that the High Court was entitled to address over-discovery complaints but took the view that it should do so only where satisfied that the approach taken by the discovering party was “plainly wrong”.  He was not satisfied that the Commissioner was plainly wrong in the approach he had taken to discovery.

[14]     Wild J held that in defending the challenge proceedings, the Commissioner was carrying into effect the Inland Revenue Acts and that accordingly s 81(1) of the TAA did not prevent the Commissioner discovering unredacted documents.  As well, he did not accept that Squibb has the effect that only redacted documents could be discovered.

[15]     He made awards of costs against the BNZ and Westpac.

[16]     The BNZ and Westpac now appeal.

CA280/06

[17]     This appeal arises out of proceedings brought by ANZ National against the Commissioner seeking judicial review and/or declarations associated with the discovery and production by the Commissioner in the BNZ and Westpac tax litigation of documents obtained from ANZ National.  The proceedings were dismissed by Wild J in a judgment of 22 November 2006: ANZ National Bank Ltd v Commissioner of Inland Revenue (2006) 23 NZTC 21,032.

[18]     ANZ National had been offered the opportunity to intervene in the BNZ case which led to the judgment of Wild J which is under appeal in CA272/06 and CA275/06 but had, instead, issued its own proceedings challenging the conduct of the Commissioner in the BNZ and Westpac litigation.

[19]     Wild J found against ANZ National on the following grounds:

(a)When the Commissioner went through the discovery process in the BNZ and Westpac litigation, he was not exercising a statutory power of decision but was simply complying with his discovery obligations under the High Court Rules.   So judicial review was not available.

(b)A declaration under the Declaratory Judgments Act 1908 was not available because, in the form in which it was ultimately sought, it did not accurately state the effect of s 81 of the TAA.

(c)Further, there was no principle of law which precluded the Commissioner discovering and producing documents obtained from ANZ National in the BNZ and Westpac tax litigation.

(d)As well, it could not be said that the ANZ National’s documents were necessarily irrelevant in the BNZ and Westpac litigation.

[20]     ANZ National appeals.

CA276/06

[21]     The litigation between the Commissioner and the BNZ involve three separate proceedings (commenced in 2004, 2005 and 2006) which relate to three tax years, and, as we have noted, six separate transactions.

[22]     In a judgment delivered on 6 December 2006 (BNZ Investments Ltd v Commissioner of Inland Revenue (2006) 23 NZTC 21,069), Wild J consolidated the three sets of proceedings.  It was not really in dispute that the 2004 and 2005 proceedings should be heard together and the real issue was whether the 2006 proceedings should be heard at the same time.  He took the view that his 22 November 2006 judgment in the BNZ proceedings favoured consolidation.  Further, the Gen Re 1, CSFB and Gen Re 2 deals were the subject of all three sets of proceedings (as they continued into the tax year covered by 2006 proceedings) and the Rabo 1 transaction commenced in a tax year which is the subject of the 2005 litigation.  On the other hand, it could not be said with certainty that the 2004 and 2005 litigation would resolve the issues involved in the 2006 litigation.  In the event that there was a need to hear the 2006 litigation separately, the associated delays would far outweigh the delay and expense involved in getting the 2006 litigation ready to be heard with the more advanced 2004 and 2005 litigation.  Further, if consolidation was not ordered, this would or might compromise the ability of the Commissioner to conduct the litigation as he considers appropriate whereas ordering consolidation would not affect the ability of the BNZ to argue its case effectively.

[23]     The BNZ now appeals.

CA93/07

[24]     In a judgment delivered on 15 February 2007 (BNZ Investments Limited v Commissioner of Inland Revenue (2007) 23 NZTC 21,222), Wild J declined to stay the proceedings in the BNZ tax litigation pending the determination of the BNZ’s challenges to his 22 November and 6 December 2006 judgments.

[25]     Again the BNZ appeals.

The correct judicial response to complaints of over‑discovery

Overview

[26]     An unusual feature of this case is that it concerns an allegation of over‑discovery.  Counsel were not able to cite to us a case where a party has successfully challenged an opponent’s discovery on the ground that too many documents have been discovered.

Complaints about under-discovery

[27]     In the late nineteenth century it was held that an affidavit of documents was conclusive against the party seeking discovery unless it could be shown from the affidavit itself, documents referred to in it or admissions in the pleadings that there were other relevant and material documents in the possession of the party making discovery.  This stringent rule was laid down in Jones v Monte Video Gas Co (1880) 5 QBD 556 (CA), a case which primarily concerned relevance issues. The reasons for this rule, as explained by Thesiger LJ (at 559), were pragmatic to say the least, “costs of interlocutory proceedings ought to be kept down”.

[28]     The approach taken in Monte Video Gas Co was soon ameliorated, see White v Spafford & Co [1901] 2 KB 241 (CA). And r 300 of the High Court Rules now permits an order for particular (ie additional) discovery if:

… at any stage of the proceeding it appears to the Court from evidence or from the nature or circumstances of the case or from any document filed in the proceeding that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered … .

There is the further restriction that such an order may not be made unless the Court is satisfied that the order is “necessary” at the time it is made.  So while the rigour of the Monte Video Gas Co has been relaxed, the discovery process still starts with a process of self-assessment by litigants and that assessment will not be disturbed without reason being shown.

[29]     In Powerco Ltd v Commerce Commission HC WN CIV 2005-485-1006 and — 1220 10 March 2006, the Commission had declined to discover particular documents in its possession, a refusal based on its contention that the documents were irrelevant.  This contention was challenged by the plaintiffs which led to the question how the relevance issue should be determined, a question which MacKenzie J addressed in this way:

[20]     I have some doubts whether it is sufficient, in a case such as this, where what is in issue is the relevance of documents whose existence is not disputed, for an applicant for further discovery simply to assert a different view as to relevance, so as to require the Court to form its own view. I incline to the view that the threshold which an applicant must meet is higher: that it must persuade the Court that the view as to relevance taken by the party giving discovery is plainly wrong. However, I propose to deal with the matter by considering for myself, so far as that is possible without inspection of the documents themselves, and dealing with them only by description of their type, whether I am persuaded that the proposition that the documents are both relevant and necessary has been made out.

In his 22 November 2006 judgment, Wild J took his “plainly wrong” test from this part of MacKenzie J’s judgment.  It is right to recognise, as counsel for the banks argued, that the “plainly wrong” test is not otherwise supported by authority, that complaints as to under-discovery are not necessarily appropriately subject to the same test as complaints about over-discovery and that, in any event, MacKenzie J in the end undertook a full and unconstrained merits review on the issues whether the documents were relevant and their discovery was necessary.

Orders limiting discovery

[30]     It is possible for discovery to be limited, something which is specifically contemplated by rr 293 and 295.  Thus it would be open to the banks to seek orders from the High Court limiting the discovery obligations of the Commissioner so as to exempt the Commissioner from the obligation to discover other bank and other transaction documents.  We note in passing that the same practical result could be achieved by the banks not seeking to inspect other bank and other transaction documents discovered by the Commissioner.  If either course were taken, that would obviate the need for what Mr Galbraith QC for the BNZ referred to as a “document dump” and would defer until trial all arguments about admissibility of those documents. 

[31]     Neither course of action would appear to have any appeal for the banks.  This is understandable. If other bank and other transaction documents are likely to be produced at trial, the banks naturally wish to have advance notice.  On the other hand,  their stance emphasises the reality that the banks are in effect seeking a ruling on admissibility well ahead of trial and at a time when neither the High Court nor this Court has sufficient grasp of the issues and evidential context to be well placed to give such a ruling.

Rule 305

[32]     In recent years some dissatisfaction has been expressed in a number of jurisdictions about the broad discovery requirements established in Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1883) 11 QBD 55 (CA); this is because the rule can bring into the discovery net too many documents, with associated unnecessary expense for both discovering and inspecting parties and the risk that the odd relevant needle may become lost in haystacks of irrelevancies. But experience has shown that it easier to criticise the Peruvian Guano rule than to come up with a better one. 

[33]     Reconsideration of the Peruvian Guano approach in New Zealand has resulted in only limited reform. The Rules Committee put out a consultation draft paper which suggested more limited discovery obligations.  But, having received submissions from interested parties, the Committee, in the end, resolved to retain the Peruvian Guano approach.  The Committee did, however, adopt one reform recommended by The New Zealand Law Commission report on Discovery (NZLC R78 2002) at [25]:

As to the practice of “swamping”, of discovering an excessive number of documents, we recommend an express provision to the effect that where the court is satisfied that a list contains documents substantially in excess of the list-maker's obligation, the list-maker should be liable to be penalised in costs.

This resulted in r 305 of the High Court Rules which provides:

Where process impeded by discovery of irrelevant documents

If the Court considers that a party has impeded the process of discovery and inspection by including documents in an affidavit that are not required to be included, the Court may order the party to pay costs to a party or parties specified in the order.

This is the only rule which specifically deals with over-discovery, and it does so in a way which provides no direct assistance for the banks in the present context.

Is there a remedy for over-discovery other than in costs?

[34]     We consider that the only firm jurisprudential foundation for any orders which might be made to limit discovery and production (in the sense contended for by the banks) of documents is to be found in the principles of abuse of process.  This necessarily postulates a reasonably high threshold for intervention which is consistent with:

(a)Appropriate deference to party autonomy (including in this case the right of the Commissioner to advance the case he wishes to rely on rather than a case the banks would prefer to meet);

(b)The stage in the proceedings when discovery issues arise (which will usually be too early for definitive rulings as to relevance); and

(c)The long stop provided for by r 305 which can be applied once all the facts are known.

[35]     Although an abuse of process test differs in formulation from the “plainly wrong” approach proposed by MacKenzie J in Powerco, and adopted by Wild J, the practical difference is limited.

Are the other bank and other transaction documents “relevant” (or arguably so) for discovery purposes?

[36]     Given the abuse of process principles which we see as governing this aspect of the case, the easiest way for the banks to succeed is if they can show that the other bank and other transaction documents are not relevant.  Conversely, if those documents are relevant (or arguably relevant), then establishing abuse of process on the part of the Commissioner will be rather difficult.

[37]     It is common ground that the other bank and other transaction documents should not be discovered if they are not relevant to what is in issue between the parties, see M v L [1999] 1 NZLR 747 at 750 (CA) per Tipping J. What is in issue between the parties is defined by the pleadings. Further, it is common ground that documents may be relevant even though inadmissible: Peruvian Guano at 62 per Brett LJ. On the other hand, where, as here, a party discovers documents so as to set the scene for later producing them in evidence, admissibility is likely to be an important consideration and perhaps even decisive.

[38]     The banks maintain that the issue of tax avoidance should (and indeed can only be) addressed on a transaction by transaction basis with the outcome in each case depending on an objective interpretation of the terms of each transaction.  What is important is not the motives of the parties but rather the purpose and effect of the arrangement, cf Newton v Commissioner of Taxation [1958] AC 450 (PC). The other bank and other transaction documents are therefore irrelevant to ascertaining the purpose and effect of the BNZ transactions in question. There is no scope for similar fact arguments, particularly an argument along the lines that all the banks were up to no good, cf Gamini Bus Co Ltd v Commissioner of Income Tax [1952] AC 571 at 580 (PC). According to Mr Galbraith, there is nothing in the pleadings of the Commissioner in the BNZ litigation to suggest that other bank or other transaction documents are material to the issues between the BNZ and the Commissioner.

[39]     We reject these arguments for the following reasons.

[40]     The pleadings in the BNZ litigation make it clear that the applicability of s BG 1 is in issue and, in one set of proceedings at least, that the genuineness of the GPF component of the repo deals is disputed.  There is no need for the pleadings to specify the evidence which the parties intend to adduce.  Providing other bank documents are material to the s BG 1 and sham issues, they are within the scope of the pleadings.

[41]     We consider it premature for the Court to give definitive rulings on admissibility.  Such rulings will be for the trial judge.  We were not referred to any reported cases in which a court has been prevailed upon to give such a ruling as a basis for restricting a party’s discovery.  On the other hand, as already indicated, we accept that if it were possible to say with confidence that the other bank and other transaction documents would necessarily be inadmissible at trial, that would provide a reasonably firm foundation for a conclusion that their discovery is an abuse of process.

[42]     We are far from satisfied that the other bank and other transaction documents would necessarily be inadmissible at trial.

[43]     It is important to recognise that while the Newton approach to tax avoidance (which was heavily relied on by counsel for the banks) is relevant to determining whether a particular scheme is within the letter of s BG 1, it is not exhaustive of all relevant considerations.  Assuming that the courts were to hold that the repo deals are within the letter of s BG 1, there would remain the question whether s BG 1 should apply to them in priority to the specific rules which the banks rely on, in particular the “conduit” tax relief rules and the foreign tax credit rules.  A corresponding issue was discussed in our judgment in Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 230 at [109] et seq. The current test involves a perhaps impressionistic and open-textured approach which may turn on evaluative judgments, for instance as to the degree of contrivance and artificiality and/or whether a line has been crossed. What is perfectly clear is that the Commissioner’s case against the BNZ is not confined to the interpretation of the transaction documents.

[44]     The Commissioner’s case is that the repo deals were executed on a template (this notwithstanding some variation between the transactions).  Indeed the Commissioner maintains that they are examples of “mass-marketed tax technology” and thus replicable by the banks depending on their “tax capacity” and what they regarded as an acceptable amount of tax to pay.  We recognise that there may be some hyperbole in the Commissioner’s use of the phrase “mass-marketed” as the marketing of repo deal technology (assuming it occurred) must have been confined to the limited number of banks operating in New Zealand.  On the other hand the strike rate would appear to have been high as all the main trading banks entered into such transactions. 

[45]     If a taxpayer picks up and implements what is independently established to be an off the peg tax scheme, that may be relevant under the Newton test.  This seems to us to render potentially relevant the other bank and other transaction documents.  For instance, if transaction A is looked at in isolation and only by reference to the documents generated in relation to it, it may not be apparent that it is the implementation of an off the peg tax scheme and thus that the purpose of the underlying structure (for the purposes of the Newton test) was to manage the bank’s tax capacity.  But these features of the arrangement may become established if other transaction documents associated with the same bank are examined.  The same may also apply in the case of other bank documents.  In this regard it is important to recognise that some of the counter-parties dealt with more than one bank and that some of the individuals involved worked on a number of transactions (sometimes for different counter-parties).

[46]     Very similar but perhaps even more cogent considerations apply to the second stage of the s BG 1 inquiry, as to contrivance, artificiality and line crossing.  If the template categorisation of the repo deals is right and they were indeed the implementation of off the peg tax schemes, similar transactions either with the same or other banks may enable the Court to identify elements of contrivance, artificiality and line crossing which may not be so readily discernible if each transaction is addressed entirely independently.

[47]     To put all of this another way, each transaction must be assessed in the relevant commercial context and it is difficult to see why that context should exclude the way in which such transactions were customarily entered into (which is the most direct context there is).

[48]     That is looking at the issue very broadly.  But at a more specific level, elements of shared detail between the transactions might be of significance to the Commissioner’s case. 

[49]     On the Commissioner’s case, what happened in terms of the three later BNZ transactions throws light on the first three transactions.  Some of the counter-parties were involved in a number of transactions with different banks and there are commonalties in terms of the people involved.  Conceivably some of those people may be called to give evidence and counsel for the Commissioner may wish to cross‑examine them by reference to memoranda, emails or letters they wrote about other similar transactions.  To give a hypothetical example, if Mr X from one of the BNZ’s counter-parties gives evidence to the effect that the GPF in the particular transaction under inquiry was negotiated on an arms length basis and was a genuine reflection of risk, counsel for the Commissioner might wish to put to him an email written by him in relation to another bank’s repo deal to the effect that the GPF was just a device for spreading tax benefits.  Although so stark a situation is unlikely to arise, the reality must be that many potential witnesses will have created substantial paper trails that may well assume some significance should they give evidence.

[50]     The documents may reveal that there were some communications between the banks about the repo deals.  If evidence of a communication between bank A and bank B was obtained on investigation from bank B, the Commissioner may well wish to employ that evidence in relation to bank A. 

[51]     In relation to the GPF component of the transactions, the Commissioner may be required to address the argument that the fee and its level were normal by reference to “market” practice.  Such a contention has been made by BNZ.  Given that this is a line of argument that has been specifically invoked, it is hard to see why the Commissioner should not be able to address the reasons why that practice had developed.  Before us Mr Galbraith indicated at least a qualified willingness on the part of the BNZ to abandon the market practice line of argument but the stance earlier taken by his client rather supports the view that the significance of the GPF component in each repo deal can hardly be assessed without some context.

[52]     The banks involved in these appeals, BNZ, ANZ National and Westpac agreed amongst themselves that they will not seek to inspect any documents discovered by the Commissioner in relation to transactions involving other banks without prior consent.  This might be thought to be a slightly unusual undertaking given that the BNZ and ANZ National have chosen to instruct the same solicitors. Although we mentioned this point to counsel for ANZ National, we did not receive any reason why something equivalent to the sort of Chinese wall arrangement which may exist within that firm could not be agreed so that counsel at least could have access to the relevant documents.  For present purposes, what is significant is that this arrangement necessarily meant that the arguments before us as to relevance were strictured with counsel for the banks preferring to address their arguments at a high level rather than descending to the level of detail which would be required to address individual documents.

[53]     The upshot is that we are not persuaded that the other bank and other transaction documents in issue are irrelevant or inadmissible.

Is it otherwise an abuse of process for the other bank and other transaction documents to be discovered?

[54]     We agree with Mr Galbraith that relevance is a relative concept and we are also prepare to accept, at least for the sake of the present argument, that a low level of relevance might not justify what he described as “a document dump” of tens of thousands of documents.  We were much pressed with the alleged inconvenience, unfairness and indeed oppression which would result if the Commissioner is permitted to discover other bank documents.

[55]     The elements of this argument were:

(a)The volume of the material likely to be produced;

(b)The risk for the banks if they permitted or went along with limited production of other bank documents which would be selected by the Commissioner and not necessarily representative of the all the other bank documents held by the Commissioner; and

(c)The likely need for the banks to seek discovery of all material held by the other banks.

[56]     In the case of other transaction documents, these arguments seem to us to be of little moment and they were not much pressed by Mr Galbraith.  One way or another, and sooner or later, the BNZ will have to deal with all documents generated in relation to all the transactions to which it was a party.

[57]     Because of the refusal of counsel for the banks to look at other bank documents, they simply have not engaged with the mechanics by which discovery and production can be effected.  As a result of this lack of engagement, counsel for the banks did not appreciate that the other bank documents which the Commissioner proposes to rely on number in the hundreds rather than the tens of thousands or hundreds of thousands.  Counsel for the banks complained that the Commissioner might be unfairly selective in the other bank documents to be produced and that the banks could not detect this without analysis of all the other bank documents which had been produced.  Given the context of the case as a whole, we see this risk as more apparent than real.  In our opinion, the overwhelming majority of other bank documents will be completely irrelevant and we simply do not accept that it was beyond the ability of counsel to come up with a sensible mechanism for avoiding the risk of unfairly selective discovery and production.

[58]     The Commissioner has in fact offered a number of suggestions as to how the other bank documents he regards as relevant might be discovered and produced in a way which would make the process manageable.  Given the refusal of counsel for the banks to engage with the Commissioner over process, we could not sensibly conclude that there is any serious inconvenience (let alone inconvenience not commensurate with the scale of the litigation), unfairness or oppression in what the Commissioner proposes as to discovery and production.

[59]     In saying this we do not wish to exaggerate the significance of the other bank documents and the role they will play at trial.  We suspect that at trial such documents will not assume anything like decisive significance.  Instead they are likely to provide what in the end will be a largely agreed context and otherwise perhaps help to fill in some gaps or, in respect of particular documents, be used to cross-examine witnesses who were parties to them.  That, however, is not to say that their relevance will necessarily be slight.  Given the amount of money involved in the litigation we do not see the costs associated with their discovery and production as disproportionate to their likely relevance.

Does s 81 of the TAA prevent the Commissioner discovering documents obtained in relation to the audit of one bank in litigation involving other banks?

The language of s 81

[60]     Section 81 of the TAA provides:

81       Officers to maintain secrecy

(1)       Every officer of the Department—

(a)       Shall maintain and aid in maintaining the secrecy of all matters relating to—

(i)       the Inland Revenue Acts, including all Acts (whether repealed or not) at any time administered by or in the Department;

…

which come to the officer's knowledge, and shall not, either while the officer is or after the officer ceases to be an officer of the Department, communicate any such matters to any person except for the purpose of carrying into effect the Acts … .

(3)       Without limiting the generality of subsection (1), no officer of the Department shall be required to produce in any Court or tribunal any book or document or to divulge or communicate to any Court or tribunal any matter or thing coming under the officer's notice in the performance of the officer's duties as an officer of the Department, except when it is necessary to do so for the purpose of—

(a)       carrying into effect—

(i)       the Inland Revenue Acts …

We note a slight shift in language between s 81(1) “for the purpose of carrying into effect” and s 81(3) “when it is necessary to do so for the purpose of carrying into effect …”.  We consider that nothing turns on this difference.

[61]     This section (and its similarly expressed precursor, s 13 of the Inland Revenue Department Act 1974) have been the subject of four previous decisions of this Court: Knight v Commissioner of Inland Revenue [1991] 2 NZLR 30, Squibb, Fay, Richwhite & Co Ltd v Davison [1995] 1 NZLR 517 and R v Morris [2005] 2 NZLR 684. Morris is of little moment in this context (save that it establishes that s 81(3) exemplifies but does not limit s 81(1)), but the three other cases require more detailed consideration.

Knight v Commissioner of Inland Revenue

[62]     Knight essentially involved the question whether the Commissioner was required to discover to the taxpayer information relating to his own affairs.  At 35 Cooke P observed:

The carrying into effect of the Inland Revenue Acts must include their proper implementation or administration. When the Commissioner is properly a party to litigation, whether as a claimant or as a defendant, it seems to me that in the natural and ordinary use of language the conduct of the litigation by him is activity in the carrying into effect or implementation or administration of the Acts. In such a case it can reasonably be said to be necessary that, subject to any justified claim of public interest immunity, he should comply with the ordinary obligations of a litigant to make discovery of relevant documents. I accept that the public interest would debar him from disclosing confidential information about other taxpayers; as Lord Wilberforce said in R v Inland Revenue Commissioners, ex parte National Federation of Self-Employed and Small Businesses Ltd [1982] AC 627, 633 "The total confidentiality of assessments and of negotiations between individuals and the revenue is a vital element in the working of the system". But no question of violation of that principle arises here.

(Emphasis added)

It is the last part of this passage which was relied on by counsel for the banks.  This case, of course, did not concern third party taxpayer information, nor indeed is it addressed to the statutory restriction but rather to principles of public interest immunity.

Commissioner of Inland Revenue v ER Squibb & Sons NZ Ltd

[63]     In Squibb issues associated with third party taxpayer information arose.  The leading judgment on this point was delivered by Richardson J.  The relevant passage is reasonably lengthy but it was so heavily relied on by counsel for the banks that it is right to set it out in full (at 9,159 – 9,160):

There are two public interest considerations underlying the income tax legislation which call for the use by the Commissioner of such information and require that the identity of the other taxpayers not be disclosed to a litigant taxpayer. One is the public interest in the Commissioner's continuing ability to have resort to third party taxpayer information as an important independent source of objective material from which to carry out independent investigations to verify the correctness of returns of taxpayers and, where appropriate, to make re-assessments.

The other is the public interest in ensuring that the Department will preserve the secrecy of taxpayers' affairs. The Commissioner acts in the quantification of the liability for income tax which is imposed by the Income Tax Act. In discharging the obligation to see that every taxpayer is assessed to tax the Commissioner cannot always and simply rely on the taxpayer's returns. The Commissioner must often have regard to any other sources of information including data derived from the records of other taxpayers and other information obtained from other taxpayers or third parties. The Commissioner is not entitled to ignore or disregard confidential third party information because of a concern that the taxpayer litigant might seek access to it. Section 13(1) imposes absolute secrecy obligations on all Departmental officers. Section 13(4) carefully defines and limits the outside bodies to which information may be disclosed and sec 13(3) reinforces the general obligation under sec 13(1) by excusing officers from obligations to disclose documents or information in court proceedings where, but for the statute, disclosure might be compelled.

In terms of sec 13(3) it is only where and to the extent that it is necessary for the purpose of carrying into effect the Inland Revenue Acts that disclosure of taxpayer information may be made to a Court or Tribunal. It was not suggested for Squibb that it would ever be necessary or proper for a taxpayer to delve into the tax files of its competitors. If that is correct the fact that the Commissioner has derived industry profit ratios and profit data from those records should not make the abstracted data or the original data accessible on discovery if that would or could lead to the identification of other taxpayers. If in either objection proceedings or judicial review proceedings the Commissioner claims to have had regard to industry data in making the assessment or relies on that data in support of the assessment, there could be no objection to the production, inspection or use of any documents which did not disclose information about other identified or identifiable taxpayers. No doubt in many cases the Commissioner may be able to prepare schedules expressing data in respect of the other taxpayers in terms of ratios or proportions and the like where to give sales and purchase and other revenue and expenditure figures for each taxpayer could reasonably lead to their identification. The Commissioner may be able to provide a sanitised schedule which provides reasonable detail while protecting the identity of individual taxpayers.

Against a claim by the Commissioner that he or she had regard to comparative industry data in making the assessment, would it ever be necessary for the purposes of carrying into effect the Inland Revenue Acts to compel disclosure of the identity of other taxpayers? To do so would inevitably undermine the integrity of the tax system which the stringent official secrecy provisions are designed to support. To compel disclosure of the identity of other taxpayers would be inimical to the carrying into effect of the Inland Revenue Acts. And resort to the device of allowing disclosure to the litigating taxpayer's advisers but not to the taxpayer, as was proposed to and accepted by the Chief Justice, is both inconsistent with the principle of non disclosure and a recognition of the gross unfairness to other taxpayers of disclosing their affairs to a business competitor.

The practical difficulty is to separate out information identifying the other taxpayer, leaving as disclosable relevant information as to its business operations which is useful for comparative purposes. Disclosure of that relevant information would not be barred by s 13 but the balancing of public interest immunity and fair trial considerations would in my view justify two restraints on the production of that material. The first is that disclosure does not require production in its existing form of the original raw or abstracted data without any adjustment or reorganisation designed to protect the identification of the taxpayer concerned. Covering up parts of documents in order to conceal identity is not unusual in practice and Nestle Australia Ltd v FC of T (1986) 86 ATC 4,499 at 4,504 is a recent example in judicial review proceedings. And where the data in the documents might readily lead to the identification of the taxpayer it is a sensible practice for the Commissioner to reorganise the data by expressing it in terms of ratios or proportions and the like. The second is that the non disclosure of identity and the excision or exclusion of otherwise discernible information to the minimum extent required to prevent identification of the taxpayer is justifiable. Upholding the immunity against disclosure of that material is no more than is necessary in the public interest to recognise the high value attaching to maintaining and securing the secrecy of the affairs of taxpayers.

A taxpayer who is faced with a claim by the Commissioner that comparative industry data was taken into account in making the assessment, is always entitled to adduce evidence to support an argument that its own business has special features or that the industry is very diverse or that conclusions cannot safely be drawn from particular ratios (if supplied by the Commissioner). Evidence and arguments of that kind may affect the weight to be given to the claim by the Commissioner. Different and difficult questions may arise if the Commissioner decides to adduce further details of industry profitability which identify other taxpayers but, as noted earlier when referring to the Mobil Oil decision, we are not called on in this case to express any views as to the conduct of the hearing itself.

I would uphold the Commissioner's claim that the information relating to the taxpayers' affairs, disclosure of which could lead to the identification of the taxpayers concerned, should not be ordered.

(Emphasis added)

[64]     The other members of the Court agreed with this approach but Cooke P added this comment (at 9,149):

As to the affairs of other taxpayers, I would apply as a principle of public policy implicit in the income tax legislation the statement of Lord Wilberforce in IRC v National Federation of Self-Employed [1982] AC 617 at p 632: "Such assessments and all information regarding taxpayers' affairs are strictly confidential". The principle was recognised in this Court in Knight v C of IR [1991] 2 NZLR 30.

[65]     There is no doubt that Squibb suggests that third party taxpayer information is strictly confidential and the Commissioner cannot be compelled to disclose such information in a way which discloses the identity of the taxpayer, albeit that Richardson J did not seek to determine what might happen at the hearing, ie what evidence might be led. 

Fay Richwhite & Co Ltd v Davison

[66]     The Commissioner placed significant weight on Fay Richwhite, a case which concerned the Wine Box Inquiry.  It is important to note that this case was primarily concerned with whether evidence given by the Commissioner about the affairs of taxpayers should be given in public.  So the case was not primarily decided by reference to the statutory provisions albeit that s 13 of the Inland Revenue Act 1974 loomed large in both argument and the judgments.

[67]     Cooke P reviewed Knight and then went on:

In Knight the proceeding was between individual taxpayers and the Commissioner. It was in that context that there was recognition of the public interest in the confidentiality of the affairs of other taxpayers. What was said in that case was not directed to a situation like the present, where the context is much broader and other public interests fall to be weighed.

Similarly Commissioner of Inland Revenue v E R Squibb & Sons (NZ) Ltd (1992) 17 TRNZ 97 was a contest, by way of a judicial review proceeding, between an individual taxpayer and the Commissioner. It was held (so far as relevant for present purposes) that the principle of confidentiality was properly invoked by the Commissioner in declining to reveal the affairs of other taxpayers. The principle was referred to as implicit in the income tax legislation. Again no such broader issue as now arises was under consideration and no dictum was directed to any such issue. The judgments have to be read secundum subjectam materiam. The case will not bear the weight which counsel for the present applicant sought to place on it.

The validity of the present Commission of Inquiry is unquestioned. Nor is it in doubt that the Commission is a tribunal within the meaning of s 13. Self-evidently it is necessary for the Inquiry that the affairs of taxpayers concerned in the winebox transactions should, to the extent of those transactions, be investigated. Accordingly s 13 does not inhibit the giving of evidence or the production of relevant documents. Indeed it is essential for the accomplishment of the objects of the Inquiry, duly constituted pursuant to statute, for the Commissioner of Inland Revenue and his authorised officers to make full disclosure. The principle of public policy cannot be used to defeat the Inquiry.

(Emphasis added)

[68]     Hardie Boys J said at 527 – 528:

In this Court, Mr Curry … argued for an absolute and unqualified rule of law that an officer of the Inland Revenue Department cannot give evidence in a way that leads to the disclosure of the identity and the taxation affairs of one taxpayer to another taxpayer, let alone to the general public. The argument was founded on the public interest considerations that underlie s 13. These were discussed in the judgment of Richardson J in Commissioner of Inland Revenue v E R Squibb & Sons (NZ) Ltd (1992) 17 TRNZ 97 at p 109, and it was from that judgment that Mr Curry extracted the proposition for which he contended. As Richardson J pointed out, one of the underlying considerations is the need to maintain openness of disclosure by taxpayers. Another is the Commissioner's need to have resort to third party taxpayer information for verification purposes. Considerations such as these lie behind the prohibitions against disclosure in s 13 and more general policy statements such as that quoted by Cooke P in Squibb at p 114, emanating from Lord Wilberforce in Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd [1982] AC 617, 632: "Such assessments and all information regarding taxpayers' affairs are strictly confidential."

But these are considerations touching on public confidence in the integrity of the Commissioner. They bear upon public, not private interests. Section 13 is protective of the Inland Revenue Department rather than individual taxpayers. A taxpayer has no special right to confidentiality in his own taxation records. The Commissioner cannot be required to produce them, except for the limited purposes contemplated by s 13, but the taxpayer can be: see for example Lonrho plc v Fayed (No 4) [1994] 2 WLR 209, Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1989) 52 SASR 148.

Mr Curry's submission overlooked this distinction, just as it overlooked the critical distinction between the Squibb case and the present case. There were two issues in Squibb, one being disclosure of the identity of an informer, the other disclosure of the identity of other taxpayers from whose records the Commissioner had compiled data for purposes of comparison. The Squibb company sought production of those records on discovery, and the Commissioner claimed privilege, invoking both s 13 and more general public interest immunity. It is in that context that one must read the very short passage from Richardson J's judgment (in this respect the Court was unanimous) on which Mr Curry placed such great reliance. Richardson J said at p 109:

"In terms of s 13(3) it is only where and to the extent that it is necessary for the purpose of carrying into effect the Inland Revenue Acts that disclosure of taxpayer information may be made to a Court or Tribunal."

Relying on those words, Mr Curry submitted that there could be no necessity in the present case for disclosure of taxpayer information at the hearing to other participants or to the public at large.

I do not accept that the Squibb decision leads to such a result. It is only rarely that the words used in the context of a particular case can be translated into a universal truth applicable in every context. Squibb was dealing with a discovery question. What was said in it in relation to that question is of no precedential value in the present case where the issue is who should be present while evidence is given. Section 13 prescribes when confidential taxpayer evidence may be given or ordered to be given. It may be ordered only when it is necessary for the purposes of carrying the Inland Revenue Acts into effect. I am prepared to accept that as a necessary corollary, it may be ordered only to the extent that is necessary for that purpose. But the section goes no further than to allow the evidence to be given. It is silent as to the manner in which and the circumstances under which it is to be given. In the present case, it is now accepted that all evidence relevant to the winebox transactions is necessary in terms of s 13(3). The Commission's order that the evidence be given and the documents produced was thus within its jurisdiction. The order having been made, s 13 has become history; it is spent.

[69]     McKay J observed at 533 – 534

Mr Curry, for the applicant, referred to Knight and Squibb and to a number of other cases in Australia and England which have recognised the importance of the confidentiality of communications between a taxpayer and the Revenue authorities. That principle is recognised in s 13 itself, subject to the statutory exception. Squibb recognises that the exception applies only "when necessary" for the purpose of carrying into effect the tax Acts, and does not extend to permit disclosure beyond what is necessary. That much is incontrovertible, and in Squibb it was not necessary for the sources of the information to be identified. In this case, however, the information in question is at the very heart of the Inquiry and of its terms of reference. The integrity and competence of the Commissioner in reference to his dealing with the particular transactions is the subject-matter of the terms of reference. It is of the utmost importance to the effectiveness of the Department in the carrying out of its responsibilities, and to the public confidence on which that effectiveness must largely depend, that the Commission has placed before it all relevant information as to the Department's investigation of the winebox transactions, the conclusions reached and the actions if any taken.

Whether the evidence is to be made available to the media and to other parties of the Inquiry is not a matter falling within s 13. Section 13 applies only to officers of the Inland Revenue Department. Once it is established that they may properly disclose to the Commission of Inquiry what would otherwise be confidential information, the further disclosure is a matter for the Commission. The Commission, as Sir Ronald pointed out, is not within the terms of s 13, and is not bound by it. If the Commission rules that the evidence be given openly, this does not mean that in giving evidence to the Commission the Department's witnesses have ceased to act in carrying into effect the tax Acts.

[70]     We accept that Fay Richwhite is distinguishable from the present litigation.  In the first place it did not involve discovery.  Further, from the point of view of the taxpayers, the s 13 pass had been sold once it was acknowledged that the Commissioner’s staff could give evidence about taxpayer affairs.  The primary issue was whether the proceedings should be in public, an issue which was not controlled by s 13.  That said, the case establishes that what was said in Squibb cannot be taken literally but rather, as Cooke P observed, is to be read secundam subjectam materiam.  Further, Fay Richwhite demonstrates that there will be circumstances where the public interest in disclosure will outweigh the public interest in secrecy and as such it is proper for the Commissioner to disclose third party unredacted taxpayer information.

Conclusion as to s 81

[71]     We have already held that the material which the Commissioner wishes to discover and produce is arguably relevant and that his actions are not an abuse of process.  The Commissioner sees the other bank documents as relevant and wishes to use them for the purposes of the BNZ litigation. The word “purpose” in s 81(1) either refers to (or at least must include) the “purpose” of the Commissioner. To the extent that “purpose” refers to his subjective purpose, the use of the other bank and other transaction documents in that litigation is within the letter of s 81(1) of the TAA. We accept that it would be simplistic to treat the issue as depending upon whether it is the Commissioner who is seeking or resisting disclosure (albeit that this would be consistent with the outcomes of Squibb and Fay Richwhite). But if the stance of the Commissioner cannot sensibly be regarded as controlling, it is nonetheless a relevant consideration.  We see this as consistent with ss 6 and 6A which repose in the Commissioner the care and management of the tax system, including preservation of confidentiality. There is no reason to suppose that the Commissioner is acting irrationally or inappropriately in taking the view that the disclosure in question is for the required purpose.  Indeed, on our appreciation of the case as a whole we think it clear that the disclosure proposed is genuinely within s 81(1) as being “for the purpose of carrying into effect” the relevant statutes.  And we see nothing in Knight and Squibb, as applied in Fay Richwhite, as inconsistent with that view.

Are documents obtained in relation to the audit of one bank privileged from discovery in litigation involving other banks?

A little more context

[72]     The other bank documents were, as we understand it, largely obtained from the other banks (either by notice under s 17 of the TAA or pursuant to informal requests which noted that failure to provide information would result in the issue of such notices) or from the various off-shore counter-parties under co-operation arrangements with overseas revenue authorities and who had relied on powers of compulsion similar to those conferred by s 17.  That is not to say that income tax returns from other banks might not be relevant, at least to complete the circle in terms of the tax treatment of the transactions. But tax returns must form a comparatively minor component of the disputed documents.

[73]     Section 17(1) of the TAA provides:

17       Information to be furnished on request of Commissioner

(1)       Every person (including any officer employed in or in connection with any Department of the Government or by any public authority, and any other public officer) shall, when required by the Commissioner, furnish in writing any information and produce for inspection any books and documents which the Commissioner considers necessary or relevant for any purpose relating to the administration or enforcement of any of the Inland Revenue Acts or for any purpose relating to the administration or enforcement of any matter arising from or connected with any other function lawfully conferred on the Commissioner.

There is nothing in this section to prevent the Commissioner using information and documents obtained under it in relation to the affairs of a third party.  Indeed s 17 will often be invoked for that very purpose.  For instance, the Commissioner may issue a s 17 notice to a taxpayer’s bank to obtain all relevant banking records.  Where this has happened, the Commissioner can obviously use the banking information against the taxpayer; this despite the reality that the information obtained from the bank also discloses the bank’s own affairs (ie as to its banking relationship with the taxpayer).  So when the Commissioner was investigating the BNZ transactions, there would have been nothing to stop him obtaining information from other banks which he considered to be relevant to the BNZ investigation, providing he considered that such information was “necessary or relevant for any purpose relating to the administration or enforcement of any of the Inland Revenue Acts”.

[74]     We were shown some information requests made of the BNZ (which referred to but did not specifically invoke s 17).  The form of these requests indicates that the information and documents requested were sought in relation to foreign tax credit claims made by the BNZ.  It seems likely that the same is true of requests and notices issued to the other banks and we are prepared to assume so for present purposes.  But say the requests and notices issued to other banks had made it clear that the information sought was in relation to a general inquiry by the Commissioner into all repo deals?  If that had been the case, it is difficult to see how either the BNZ or the other banks could credibly have asserted that public interest immunity operated to prevent the Commissioner deploying against the BNZ any documents so obtained.

[75]     There is no reason to doubt that the Commissioner would have been entitled to rely on other bank documents in relation to his assessments of BNZ.  Since the High Court in challenge proceedings has the power to make an assessment as the Commissioner (see s 138P(1)(b)), it would be a little odd if the High Court could not take into account the same information as the Commissioner, cf Mobil Oil Australia Pty Ltd v The Commissioner of Taxation (1963) 113 CLR 475.

[76]     An ordinary litigant may access third party documents for use in litigation through the third party discovery and the subpoena duces tecum procedures.  There is, of course, no inherent confidentiality in tax returns, see Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1989) 90 ALR 49 (SCSA), Lonhro Plc v Fayed and Ors (No. 4) [1994] 2 WLR 209 (CA) and Fay Richwhite at 528 per Hardie Boys J.  So if the Commissioner had the everyday rights of an ordinary litigant, he could ensure that the documents he wishes to rely on were before the Court at trial.  On the banks’ argument, the existence and/or use of s 17 means that the Commissioner is, in this respect, in a worse position than that of an ordinary litigant.  It is far from obvious to us why this should be so.  The submissions made on this point by counsel for the banks on this point seem to us to depend rather more on assertion than reason.

[77]     Counsel for the Commissioner rightly argued that there had been “a sea change” in the tax litigation which has occurred over the last 15 – 20 years.  Indicia of this sea change include:

(a)The increasing (and now routine) use of discovery, cf Cates v Commissioner of Inland Revenue [1982] 1 NZLR 530 at 533 (CA) per Cooke P, where the jurisdiction to order discovery was seen as one which would rarely be exercised and was appropriate only for “an occasional tax case”.

(b)The enactment of the care and management provisions of the TAA, ss 6 and 6A.

(c)A change in practice as to costs, cf Auckland Gas Co Ltd v Commissioner of Inland Revenue [1999] 2 NZLR 409 (CA).

(d)A recognition that the Commissioner is entitled to take a commercial approach to the settlement of tax litigation, see for instance Accent Management Ltd v Commissioner of Inland Revenue [2007] NZCA 231.

(e)An open justice approach to publicity in relation to the affairs of taxpayers who do litigate, cf Muir v Commissioner of Inland Revenue (2004) 17 PRNZ 365 (CA).

[78]     This sea change is significant for a number of reasons:

(a)It means that the general litigation context is not the same as it was when Knight and Squibb were decided.  This emphasises the need to treat what was said in those cases as being strictly referable to what was in issue, or, as Cooke P put it in Fay Richwhite, secundum subjectam materiam.

(b)As the Commissioner faces the usual burdens of those engaged in commercial litigation, particularly discovery and exposure to costs if unsuccessful, it would be going against the tide of events to hold that he is not entitled to exercise the rights of ordinary litigants, particularly third party discovery and the subpoena duces tecum procedures.

(c)Assuming that the other bank documents which the Commissioner wishes to use could be obtained by the Commissioner under the third party discovery or subpoena duces tecum procedures, it would be odd if he were required to go through those procedures to use such documents given that he has already legitimately obtained them — a consideration which casts something of a shadow over the public interest immunity arguments presented by the banks.

The argument for the banks

[79]     There was perhaps some lack of precision in the arguments presented on behalf of the banks and certainly some differences in emphasis in the way in which those arguments were presented by different counsel.  The lack of precision arose largely from a tendency to conflate arguments based on s 81 with those involving public interest immunity.  The differences in emphasis was as to the extent to which the alleged public interest immunity extended, with Mr McKay for ANZ National maintaining that there was a flat prohibition on the Commissioner using other bank documents at all whereas Mr Farmer QC for Westpac, founding his arguments more directly on what Richardson J said in Squibb, primarily sought redaction of all relevant indentifiers.  As the level of redaction sought by Mr Farmer would destroy the utility for the Commissioner of the other bank documents, this difference in emphasis may, in the end, not be particularly significant.

[80]     Essentially, counsel for the banks maintained that the Commissioner is prohibited from relying on what might be regarded as third party taxpayer information.  On Mr McKay’s argument, this is an absolute prohibition but on Mr Farmer’s argument the prohibition only applies to the extent that the information discloses the identity of the taxpayers concerned.  Initially Mr Farmer went as far as to say that this would prevent the effective use of the s 17 procedure in the sort of case postulated in [73] but, in the end, confined his argument to information obtained from a third party in its capacity as taxpayer.  His final proposition was put in these terms:

Non-party taxpayer documents that have come into the possession of the CIR through tax returns, requisitions, tax audit or use of section 17 notices may not be discovered, produced or put into evidence other than in redacted form that protects the non-party taxpayer’s identity and affairs.

On this formulation, it is not entirely clear why documents obtained from the counter-parties (who did not provide the documents as taxpayers) should be subject to redaction.

The correct approach to the public interest immunity asserted

[81]     The awkwardness in this case arises out of overlay of public interest immunity principles and what is now s 81 of the TAA.

[82]     There can be no doubt that legislature has recorded in s 81 the governing considerations:

(a)Confidentiality of all information held by the Commissioner but with specified exceptions; and

(b)The most important of those exceptions being disclosure “for the purpose of carrying into effect” the Inland Revenue Acts.

[83]     The difficulty exemplified by Squibb arose out of the elasticity implicit in what is within the purpose of carrying into effect the Inland Revenue Acts.  It would be easy for a taxpayer to argue along the lines that the relevant purpose necessarily includes tax litigation which the Commissioner is pursuing or defending, that litigants (including the Commissioner) must discover all relevant material and thus disclosure of third party taxpayer information can be required of the Commissioner if that information is relevant to the case.  The courts have simply not accepted this syllogism and, in doing so, have invoked the concept of public interest immunity.  It is fair to say, however, that it is not entirely easy to apply public interest immunity principles alongside (let alone over the top of) the scheme of s 81 given that s 81 addresses the same underlying concerns.

[84]     Whatever its scope, the relevant public interest immunity is plainly not absolute.  Fay Richwhite illustrates this.  It is quite clear that all the Judges in that case saw no absolute prohibition against the Commissioner disclosing unredacted taxpayer information if this is for the purpose of carrying into effect the Inland Revenue Acts. 

[85]     A second relevant factor, which flows directly from Fay Richwhite, is whether the Commissioner’s purpose of carrying into effect the Inland Revenue Acts can be fairly satisfied by anything short of the proposed disclosure which is in issue.  If redaction would destroy the utility of the documents for the purpose of carrying into effect the Inland Revenue Acts, it would be inconsistent with s 81 to require such redaction.

[86]     This immediately brings into play a third consideration.  Principles of public interest immunity must not be applied in a way which is inconsistent with the statutory scheme – a statutory scheme which provides for confidentiality except for disclosure for the purpose of carrying into effect the Inland Revenue Acts.  To prevent the Commissioner disclosing information for that purpose would cut across the intended operation of that scheme. In Mount Murray Country Club Ltd v Commission of Inquiry into Mount Murray [2002] UKPC 33; [2003] STC 1525, the relevant Isle of Man statute provided for secrecy and confidentiality for information held by the revenue authorities but s 106(2)(j) provided for an exception in relation to disclosure required under an enactment or by a court order. The Privy Council concluded that if the exception applied, there was no scope of the operation of principles of public interest immunity (at [34]):

Section 106(1) of the 1970 Act imposes a strong statutory duty of confidence (“as secret and confidential documents”).  But section 106(2) creates a considerable number of gateways, including para (j) - “unless required or authorised to do so by any enactment or by order of a court in the Island” - which recognise that the confidential nature of tax returns may in special circumstances have to give way to some other public interest. Their Lordships agree with the Staff of Government Division that section 106(2)(j) does permit the Assessor to disclose the tax return documents, despite their confidential nature, in obedience to the summons issued by the Commission.  Disclosure is in that way authorised by an enactment, that is the 1950 Act, section 1(1)(a) of which confers on the Commission power to require the production of documents.  In the context of the 1950 Act that power would be nullified if confidential documents were impliedly excluded.

The corresponding argument in this case might be thought to be far stronger, because s 81 addresses the conflicting considerations far more directly than s 106(2)(j) of the Isle of Man statute.

[87]     A fourth factor is the level of confidentiality associated with the documents in question.  As we have noted, taxpayer information can be obtained by compulsion direct from the taxpayer.  On the other hand, taxpayers are entitled to expect that their returns of income will be kept confidential by the Commissioner.   In terms of this concept of “taxpayer confidentiality”, it seems reasonable to work on the basis that a higher level of confidentiality might apply to income tax returns than to the information which taxpayers provide once under investigation (by which stage there is likely to be a prospect of litigation and thus publicity) and there might be even less confidentiality for information obtained by the Commissioner from third parties.

[88]     A fifth factor is the general practice in relation to commercial and tax litigation.

Applying the principles to the facts

[89]     We have already held that the proposed disclosure is permissible under s 81 of the TAA.

[90]     Redaction of the other bank documents to take out all taxpayer identifiers would destroy the utility of the documents for the purposes for which the Commissioner wishes to use them.  Unless the documents can be correlated to particular transactions and banks, they will be meaningless and useless.  Yet virtually all details on the documents in terms of dates, counter-parties, amounts involved and tax treatment have the potential to identify the banks concerned.

[91]     To prohibit the use of the other bank documents (either absolutely or in unredacted form) is inconsistent with the thrust of s 81(1) which permits the Commissioner to use documents which are in his possession for the purpose of carrying into effect the Inland Revenue Acts. Public interest immunity principles cannot be relied on to interfere with the operation of the section.

[92]     If contrary to the view that we have just expressed, a balancing exercise is required, the considerations we have just mentioned point strongly in favour of an outcome which favours the Commissioner, as do the following considerations:

(a)We accept that some (although we suspect very few) of the other bank documents may be subject to commercial confidentiality concerns, but we see comparatively little relevant “taxpayer confidentiality”.  All the banks have engaged in litigation with the Commissioner over the repo deals and if that litigation goes to trial we anticipate that open justice considerations will prevail, cf Muir.  By the time that the other bank documents (other than tax returns) were provided to the Commissioner, it must have been obvious to the banks that litigation was likely and that there was thus every possibility that documents they provided would be released.  We see very little confidentiality in the information supplied to the Commissioner by the counter-parties who cannot be regarded as taxpayers for these purposes. 

(b)The arguments advanced by the banks seem to us generally to be inconsistent with the way in which commercial litigation (of which tax litigation is just a subset) is now conducted.  We can see no sensible reason why we should create in effect a series of “no go” areas for the Commissioner.

[93]     Accordingly we conclude that there is no public interest immunity in relation to the other bank documents.

The outcome of the specific appeals

CA272/06 and 275/06

[94]     We conclude that it has not been shown that discovery of the documents is an abuse of process.  Neither s 81 of the TAA nor relevant principles of public interest immunity preclude discovery and production of the other bank and other transaction documents.

[95]     Given that Westpac chose to intervene in the proceedings and mounted unsuccessful arguments, we see no reason why it should not pay costs.

CA280/06

[96]     We see no need to discuss the questions whether the Commissioner was exercising a statutory power of decision or whether declaratory relief was available. What is perfectly clear however is that ANZ National in satellite litigation can be in no better position than it would have been if it had intervened directly in the BNZ or Westpac litigation.

[97]     For essentially the same reasons as apply to CA272/06 and 275/06, we dismiss the appeal.

CA276/06

[98]     The result of our conclusions is that the Commissioner will be able to rely on other transaction documents in all the BNZ litigation.  This means that the considerations relevant to whether the 2004 and 2005 proceedings should be consolidated with the 2006 proceedings remain the same as at the time of the High Court judgment.  We accept that there are arguments both ways as to the most appropriate way of determining the litigation, but these involved an evaluative assessment which Wild J, as the Judge dealing with the litigation, was well-placed to form.

[99]     Nothing said in support of the appeal has persuaded us that the approach of Wild J was wrong.

[100]   This appeal is dismissed.

CA93/07

[101]   Given our conclusion as to CA276/06, this appeal must necessarily be dismissed.

Formal orders

[102]   All appeals are dismissed.  The BNZ appellants, Westpac and the ANZ National appellants are each to pay the Commissioner $6,000 costs (ie a total of $18,000 collectively) and are jointly and severally ordered to pay usual disbursements.  We certify for second counsel.

Solicitors:
Russell McVeagh, Auckland, for Appellants
Simpson Grierson, Auckland, for Westpac
Crown Law Office, Wellington, for Respondent