Avowal Administrative Attorneys Ltd & Anor v CIR  NZSC 104.
This commentary updates previous writings on this topic. To review those items, click here, and here.
The long running case of Avowal Administrative Attorneys has come to an end, at least in New Zealand, with the decision of the Supreme Court to deny leave for the company and Mr Nikytas Petroulias to appeal from the decision of the Court of Appeal. That decision dismissed all grounds of appeal from the first instance decision of Venning J. The decision of the Court of Appeal has moved the law relating to the seizure and examination of computer records resoundingly in favour of the Commissioner of Inland Revenue. The Supreme Court’s decision makes it clear that the Court of Appeal decision would have been upheld at that level if the matter had been argued.
The case has moved the law in a number of ways. First, the Court has dealt a death blow to arguments that the statement in section 16 of the Tax Administration Act 1994 (“TAA”) that the Commissioner has full and free access to information for the purpose of inspecting anything that he considers is necessary or relevant to his inquiries, requires some kind of screening of electronic information before a computer hard drive or server can be copied for later examination.
Although the Court notes that it is good practice for such screening to take place, the Commissioner may well have sufficient information before even setting foot on a taxpayer’s premises to warrant taking a clone of a hard drive in its entirety. This is essentially a matter for the Commissioner’s opinion, to be arrived at having regard to the requirement of the New Zealand Bill of Rights Act that any search and seizure not be unreasonable. This means that for all practical purposes a taxpayer has little if any objective standard against which to judge the reasonableness of an IRD raid whose object is to copy computer records. The taxpayer might insist that the IRD undertake a screening process first but that may be refused if the IRD thinks it already has enough information to be able to proceed without screening.
In all events the Court’s decision reaffirming the first instance judgment that “books or documents” amenable to IRD access and copying include computer hard drives, rather than the files on them, means that screening would probably not narrow the scope of a computer seizure in any meaningful way even if it was undertaken. All the screening needs to do is to identify any relevant content on a hard drive, for the whole of that repository of information to be treated as necessary and relevant. The fact that such a copying will inevitably sweep up irrelevant and even privileged material does not prevent the copying. The protection of that material is left to the reasonable efforts of the Commissioner but the existence of irrelevant and privileged material will not prevent the seizure of a computer record. The later examination of such material may be limited or prevented but seizure will not.
Indeed in the case of privileged material, as a result of the Court of Appeal decision its existence has become, perversely, a license for the Commissioner to copy everything on the drive which is thought to contain privileged material because he may wish to challenge that privilege. Admittedly he will be required to send to the local District Court registry all that is copied, but the claim of privilege in relation to computer records (whether over all of them as in Avowal, or it seems over some content only) will be enough to make all of the content relevant. Indeed the Commissioner is able to accelerate the whole process for the review of privilege claims and to place the cloned hard drive in the custody of the Court before any steps are taken by the taxpayer at all.
In the light of the decision in Avowal the IRD has published a standard practice statement (“SPS”) on the copying of electronic information.
The main points to take from the SPS are:
1. Generally a relevance search will be conducted – taxpayers should still confirm with the Commissioner’s officers that this will happen and try to glean some understanding of why the search may be foregone. There is still the opportunity to challenge a seizure by judicial review if the Commissioner has insufficient grounds to consider a computer hard drive to be necessary or relevant, but for practical purposes such action will be more difficult now to succeed on.
2. In the event of a privilege or non disclosure claim an electronic record will be sealed or the copy will be taken and sealed pending resolution of the scope and merit of the claim. This may involve the record being placed with the District Court. Claims will be negotiated to settlement where possible but will sometimes have to be dealt with by the Court.
3. Copying of electronic data will usually occur on the taxpayer’s site or computer hard drives may be removed to enable the copying to occur. The choice will be made by IRD having regard to the practical consequences including affects on the taxpayer’s business. The IRD notes that it does not have to have the consent of the taxpayer to removed information for copying, though it does require consent or a warrant if the removal is to permit a full and complete inspection of the information.
There are other aspects of the Avowal decision which are of concern and which have been left for another day and case. For instance the IRD was permitted to undertake cursory searches of the seized material despite a blanket privilege claim having been made, and was only required to disclose to the taxpayer what it considered appeared to be privileged. There was no adequate procedure for the IRD's decisions about what it considered was not privileged to be checked. This was a thoroughly unsatisfactory decision by the trial judge. It was appealed but the appeal was subsequently withdrawn by the taxpayer.
The decision of the Court of Appeal leaves taxpayers without any hard and fast touchstones as to reasonable behaviour by the Commissioner. These might have been the need for a relevance search before seizure of information and the limitation of a seizure to relevant material as opposed to the entire content of an electronic record. The decision to reject argument that the concept of necessity and relevance required some meaningful limitation on the Commissioner’s powers reflects the Court’s expectation that the wide powers granted by Parliament to him should not be read down or curtailed by the imposition of Court made limits.
Geoff Clews appeared as leading counsel for Avowal in the Court of Appeal and on its application for leave to appeal to the Supreme Court.