Preliminary inspection required before documents removed by IRD
Avowal Administrative Attorneys Ltd & Ors v North Shore District Court & Anor (2007) 23 NZTC 21,610
In this case the High Court held that where the Commissioner (or his officers) access books or documents under s 16 of the Tax Administration Act 1994 (“TAA”), there must be an inspection of them (including computer entries) before they can be removed from a taxpayer’s premises. This is so the Commissioner can be satisfied that the information is necessary or relevant for the purposes of section 16(1). However, there is no need for a detailed examination which can wait and be performed after the books, documents or computer records have been removed for further examination and copying.
The applicants sought a determination that the exercise by the Commissioner of powers under sections 16(1) and 16B(1) of the TAA to enter commercial premises and private homes was unlawful. IRD officers had entered two commercial premises and five private houses and removed books, documents, computers, electronic equipment and other items and materials thought to be relevant to a request for assistance from the Australian Tax Office and to possible tax avoidance activities in New Zealand.
The question posed was whether the Commissioner was required under the TAA or section 21 of the New Zealand Bill of Rights Act 1990 (“BORA”) to inspect any books or documents accessed before removing them from a taxpayer’s premises to make copies. That question was based on the argued limits of the Commissioner’s right of access. The Commissioner has a right of “full and free access” to all places, books and documents for the purpose of inspecting any books and documents which he “considers necessary or relevant for the purpose of collecting any tax”. The issue was whether he could ever be satisfied as to the necessity and relevance of the documents if he simply scooped up everything on the taxpayer’s premises.
Baragwanath J commented that this access right is to be seen within the context of the following three broad policies reflected in the law:
1. It is the duty of the Commissioner of Inland Revenue to collect over time the highest net revenue that is practicable within the law (section 6A of the TAA).
2. Section 21 of the BORA, which (subject to sections 4-6 of that Act) protects against unreasonable search or seizure.
3. The protection of legal professional privilege.
The interaction of these policies creates a problem because legally privileged material may not be searched or seized. However, the investigator executing the warrant may have little knowledge of what a search may reveal.
The fact that information is often stored on a computer hard drive and server creates further issues because it is difficult for that information to be accessed in a way that discriminates between privileged and non-privileged material or relevant and irrelevant information. It is to be noted that the court found that information contained in a computer falls squarely within the Evidence Act 2006 definition of ‘document’ and therefore constitutes a document for the purposes of section 16 of the TAA, though a computer itself is not generally regarded as being a document within the definitions of the TAA or more broadly.
Despite the fact section 16 is expressed in subjective language, the court has previously held that the express terms of the BORA and the common law impose a test of objective reasonableness in relation to whether books and documents are necessary or relevant. Applying a reasonableness test was held in the Privy Council in CIR v NZ Stock Exchange not to contravene the standards of section 21 of the BORA.
In this case the Judge held that a reasonableness test must equally apply to section 16B which gives the Commissioner power to remove and copy documents. With regard to the degree of inspection necessary to conclude that books and documents are indeed relevant, the High Court held that there must be some inspection of books and documents (including computer entries) before removal. However, there is no need for detailed examination. The more detailed examination may be performed after the books, documents or computer records have been removed.
It appears the Commissioner’s obligation is to conduct the search in a fashion that is reasonable in the circumstances. Relevant circumstances include the nature and volume of the documents to be examined and their location.
This decision emphasizes the power the Commissioner has to come onto taxpayers’ premises and take documentation. Baragwanath J’s reasoning took into consideration the fact the Commissioner is charged with ensuring that the assessable income of every taxpayer is assessed and the tax paid in the interests of the community. The Court sought to uphold this power, and was mindful of the practical realities necessary to do so. Taxpayers should endeavour to clearly mark legally privileged and confidential tax advice so this can be easily distinguished from material the Commissioner is entitled to have access to.
The Avowal decision is one of those which form the background to Geoff Clews’ paper to the NZICA 2008 Tax Conference dealing with the issues that arise when the Commissioner seeks access to electronic information. To view that paper click here.