IRD Search Powers Catch Computer Hard Drives
Avowal Administrative Attorneys Limited & Ors v DC North Shore and CIR
The validity of searches and the seizure of information from various premises owned or occupied by the applicants was considered by the High Court in judicial review proceeding. In particular, the case discussed the copying and removal of the entire contents of computer hard-drives from taxpayer premises.
On 8 November 2006, the revenue authorities in both Australia and New Zealand executed a series of co-ordinated searches as part of an investigation. The New Zealand searches followed a request for assistance by the Australian Tax Office to the New Zealand Commissioner of Inland Revenue (“CIR”) under Article 26 of the double tax agreement between New Zealand and Australia, which provides for the exchange of information.
Removal of computer hard-drives from taxpayer premises allowed
The New Zealand searches were conducted under section 16 of the Tax Administration Act 1994. Broadly, that section provides that the CIR has full and free access to taxpayer premises for the purpose of inspecting and/or making copies of books and documents he considers necessary or relevant for the purpose of collecting any tax. During the course of the searches, the CIR copied the entire contents of a number of computer hard drives on-site. A number of hard drives (and one laptop) were also uplifted and taken away to be copied.
The applicants challenged the validity of the searches and the seizure of the information and, in particular, they challenged the copying and removal of the hard drives.
In an interim judgment of 26 February 2008, Baragwanath J confirmed that the searches were undertaken for a legitimate purpose. He also made some other preliminary observations in relation to how computers were to be interpreted in relation to the meaning of “books and documents” in the Tax Administration Act. Baragwanath J found that a computer did not come within the definition of a book or document. It followed that a computer could not be removed from a taxpayer’s premises for the purposes of copying information from it, in his view. However, on his appointment to the Court of Appeal, Baragwanath J left the completion of the case to Venning J.
Venning J did not accept that he was bound by Baragwanath’s finding on the meaning of “books and documents”. He observed that section 3 of the Act defines “book and document” as follows:
“...include[s] all books, accounts, rolls, records, registers, papers, and other documents and all photographic plates, microfilms, photostatic negatives, prints, tapes, discs, computer reels, perforated rolls, or any other type of record whatever:”
Venning J concluded that the function of “computer reels” in the definition of “books and documents” is now carried out by the “hard drive” and accordingly a hard drive must come within the definition of “book and document” for the purposes of the Act. This decision was in part because of the broad reference in the definition to “any other type of record whatever”.
Accordingly, Venning J concluded section 16 of the Tax Administration Act authorised the Inland Revenue Department officers to inspect and copy hard drives where they considered their content necessary or relevant for the purposes of collecting tax or carrying out the Commissioner’s functions. Further, he found that section 16B authorises the removal of computer hard drives (and if the hard drive cannot be readily removed, the computer containing the hard drive), to enable copies of the hard drive to be made.
Relevance test not necessary where blanket privilege claim or suspected encryption
Inland Revenue Department officer’s powers under sections 16 and 16B are normally subject to the requirement to first conduct a relevance test. This is because the section permits access to records that are considered to be necessary and relevant to the conduct by the CIR of his duties. In this case relevance testing was complicated by alleged encryption of documents on the computer hard-drives and blanket privilege claims. Venning J separately considered the issues in relation to the electronic material taken from each of the different four sites in this case as follows.
Avowal site – blanket privilege claim made
Venning J held that the applicant’s challenge to the search and seizure at the Avowal site could not be sustained. He held that there was no need to first conduct a relevance search before removal at this site because the applicant’s had made a general claim to privilege over all documents, meaning the Inland Revenue Department were not able to first inspect them. Although the Court decided this claim arose at the decision of the applicant’s advisers, there is a continuing dispute whether the CIR was at all ready and able to do a relevance test in all events.
JB Lloyd site
Venning J dismissed the challenge to the search and copying of the three hard drives at the JB Lloyd site. It was accepted that the Inland Revenue Department officers were entitled to take copies of the server’s hard drive as information that was relevant was identified before the copying.
Browns Bay site
The challenge to the removal for copying of the back-up hard drive at the Browns Bay home of an Avowal staff member was upheld because Venning J found that there was no evidence of any relevance test being carried out on the back-up hard drive and it was therefore taken unlawfully and must be returned. However, the laptop hard drive was subjected to a keyword search before copying and so the challenge is relation to that was dismissed.
Motueka River Lodge – alleged encrypted hard drives
The challenge to the copying of a personal laptop and a second hard drive at this site was upheld as there was no evidence that a relevance test had been carried out. However, the challenge to the copying and removal of the allegedly encrypted hard drives was dismissed. It was held that because the computers had hard drives that were encrypted, the conclusion that the information encrypted on the computers was likely to be relevant was reasonable. It was accepted that where the files were encrypted, it was reasonable and open to the Inland Revenue Department officers to take copies of them onsite or if necessary to remove them under s 16B.
This judgment extends the definition of “book or document” in section 16 of the Tax Administration Act to include a computer hard drive. This is a considerable extension because at least arguably a hard drive is more analogous to a ‘library’ of computer files than a single book, document or record.
It is difficult to distinguish between relevant and irrelevant information on a computer hard drive which inevitably means the CIR will be entitled to seize significant amounts of irrelevant information if any on a hard drive appears to be relevant. A computer hard drive may also contain personal or even confidential information, irrelevant to a tax investigation. That raises a difficult question as to what proportion of a computer hard drive must be ‘relevant’ to justify copying it in its entirety. The judgment suggests that any relevant content will permit wholesale copying. The decision is under appeal.