By Geoffrey Clews, Barrister
A Paper for the NZICA Tax Conference, Christchurch, 17 October 2008
Only those who have turned to the dark side can sense the
1.1 About three years ago I received a telephone call from a client for whom I had been acting for some time. He was involved in a contentious and difficult series of tax disputes. There was no doubt that the Inland Revenue Department (“IRD”) regarded my client and the various organizations with which he was connected dubiously. They may well have had good cause to do so. He told me that the IRD had turned up at his premises that morning “mob handed” and with police officers in tow.
1.2 The reason I note this particular call is not that it presaged another round in the disputes between this client and the IRD, but that it introduced a new element with which I had not until then had to deal. I spoke to the IRD officer heading what I took to be a section 16 incursion and was told that the IRD wanted to “clone” the 10 or so computers that were on my client’s business premises and intended to remain there while they did so. I had no idea what he was talking about.
1.3 Until that time my appreciation of cloning was that it was a scientific and genetic procedure that was fraught with potential problems but was intended to produce a genetic replica of the subject organism. I had no idea that the same might be done with a computer. I was about to undertake a crash course in the world of data replication.
1.4 Since that first occasion, in which I am sure both the IRD and I fumbled our way through the procedure, I have had two other instances where the IRD has arrived unannounced at my client’s premises (in one case with an access warrant allowing entry to a dwelling) and sought to take copies of the computer records of the client in each case. In each instance I should make it clear that the IRD has, in my view, gone to considerable lengths to respond to issues of data protection and the protection of privilege and non-disclosure rights but I have been left in each case with the concern that we, ie the Department and taxpayer representatives, are making the rules up as we go along and are asking the Courts to do so as well.
1.5 It is not clear to me that the IRD acts in these cases with a clear legal mandate. It is also unsatisfactory that clients facing an incursion of this type are being asked to submit to a sometimes very uncertain, drawn out and convoluted process designed to ensure that, having corralled all of the available data on a computer, the IRD investigators do not actually look at anything that could reasonably be regarded as privileged or protected from disclosure.
1.6 As I have suggested the processes to deal with claims of privilege or non disclosure have been worked out “on the hoof”. In the case referred to above a colleague and I arrived at the clients premises and the arrangements for the collection and disposal of the information the IRD wanted to obtain were hurriedly written out in long hand on a legal pad and signed off by the IRD team leader, the client and myself. They were later reduced to the form of a deed or agreement as to the disposition of information.
1.7 In later cases the procedures were a little more refined and I knew a little more than I did about the process first time out but even then they proved to be difficult to design and to implement in a practical way.
1.8 For my sins I made a chance remark to one of the Institute’s tax staff about these experiences and the request to speak on the topic at this conference followed; a reminder that it is often better to keep one’s mouth shut!
1.9 I do not intend this paper to be a painstaking jurisprudential review. There are three basic themes to the presentation. They are first that the present law does not deal specifically with the computer cloning process and it should. Related to that I suggest that there are risks that IRD action to clone computer hard drives may not be lawful in some cases and that the IRD has to be careful about the way it founds it actions. That is an impractical expectation when IRD is in the thick of a section 16 action. I suggest therefore that serious consideration be given to adopting into the tax arena some aspects of the new Search and Surveillance Bill 2008 which is now before Parliament.
1.10 Secondly I suggest that the cloning process as carried out by the IRD may not meet what has become the expected norm of minimal consideration of documents before removal by the IRD. The expectations for such review which were propounded in the Australian case of JMA Accounting Pty Ltd seem to have been adopted here, at least as far as a preliminary determination in the Avowal case.
1.11 Thirdly a regime for the protection of privilege and non disclosure rights in the case of cloned material should be codified so that both the Commissioner and taxpayers know what they are dealing with.
2. BACKGROUND – OVERVIEW
2.1 By section 16 of the Tax Administration Act 1994 (“TAA”) the Commissioner of Inland Revenue (“CIR” or “Commissioner”) is given full and free access to land, buildings and places, subject to the need for a warrant to enter a dwelling, and to books and documents. By section 17 of the TAA he is entitled to have produced to him on request all books and documents which he considers to be necessary and relevant to the performance of his statutory functions. Section 2 of the TAA defines books and documents to include:
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.
2.2 The right of access can be exercised so that books and documents may be removed and copies may be taken or they may be removed for inspection . The right to remove for copying is conferred without the need for a warrant while the right to remove for inspection requires a warrant issued by the equivalent judicial officer, meeting the same requirements, as a warrant which authorises access to a dwelling for any of these purposes. The rights referred to are supposed to be exercised while at the same time allowing for the application of legal professional privilege (“LPP”) and tax advice document (“TAD”) non-disclosure rights .
2.3 The definition of “books and documents” is intended to be wide. It clearly goes beyond paper based records. It refers specifically to photographic or photostatic records, to tapes and discs, to reels and rolls. It then has a catch-all reference to “any other type” of record whatsoever. The common theme in all of these is that the definition refers to media by which information is stored. A piece of paper is a medium by which the information or content on it is stored and accessed for future use. Just so, a tape, disc, reel, roll or other “type of record” is a reference to any medium by which information is recorded and retained.
2.4 How far this definition goes to catch computers is unclear. In most businesses and in many homes the medium most likely now to be a repository of stored information is a computer hard drive, together with CDs/DVDs to which information may have been downloaded. There is little doubt that CD’s and DVD’s would fall within the definition as records, but in Avowal Baragwanath J said in his pre-trial determination that computers do not fall within the definition of book or document in the TAA and that the ordinary Oxford Dictionary meaning of those words does not “extend to embrace a computer” .
2.5 But His Honour made no distinction between the processing capacity of a computer and its information storage capacity. A computer hard disk drive, commonly referred to as a hard drive, hard disk, or fixed disk drive, is a non-volatile storage device which stores digitally encoded data on rapidly rotating platters with magnetic surfaces. Strictly speaking, "drive" refers to a device distinct from its medium, such as a tape drive and its tape, or a floppy disk drive and its floppy disk. Early hard disc drives had removable media; however, a hard disc drive today is typically a sealed unit (except for a filtered vent hole to equalize air pressure) with fixed media.
2.6 There is little in policy terms to support the view that a computer hard drive is not a book or document but a disc to which content from the computer has been down loaded is. Indeed the difficulty of such a distinction is shown by the fact that despite a download to disc, the same information will still be on the hard drive until over- written. Why be able to require access to one and not the other? Why be able to remove for copying one and not the other? The answer may be that the downloaded information is more specific and an inquiry about it can be more targeted, but that seems to be about all.
2.7 So, while Baragwanath J may have been correct in his observations in Avowal about computers not being books or documents, he missed the point that the part of a computer which retains information, its hard drive, is as much a record as any medium to which the information is downloaded. The fact that that the drive may be part of a machine by which information is inputted and processed, as well as stored for retrieval, is irrelevant. The Commissioner’s right of full and free access very probably extends to it. The substantive trial of the Avowal case has been heard recently before Venning J who has reserved his judgment. These matters may well be canvassed again in his judgement.
2.8 There is little doubt in my view, therefore, that a computer hard drive is a record, and so is a book or document to which the Commissioner is permitted full and free access and which he can require should be produced to him. But how does the Commissioner go about exercising his powers of access to such a medium and how should he do so while allowing for the balancing rights of privilege and non disclosure already referred to?
2.9 These questions are not new, at least in theory. The Commissioner has had to take account of privilege for years. He has also been permitted to have access to books and documents including non-paper media by virtue of the TAA reference to tapes, discs, reels and rolls. However, before March 2003 he was reliant upon the assistance of the document owner/taxpayer for access and copying, which had really to occur on the premises of the taxpayer. Moreover, in that setting it was much more likely that specific documents, isolated from a wider electronic record, would be reviewed on the taxpayer’s premises and any competing claims in those documents would be considered before the copies were removed.
2.10 It has really only been since March 2003, when the Commissioner was given the power to remove books and documents for copying, and from 2006 to remove them for inspection, that the procedures by which the Commissioner goes about exercising his powers in relation to computers have come into relief and questions have arisen about the way in which the rights and interests of taxpayers are protected. That has been prompted by the relatively new development of “cloning”.
2.11 In exercising his new powers in contentious matters the CIR now regularly adopts the practice of “cloning” all the computer hard drives of an investigation target, ie of making a digital copy of the entire content of the hard drive. This is normally done on the taxpayer’s premises during the course of a sometime extended incursion by the Commissioner and his officers exercising powers under section 16 of the TAA.
2.12 Cloning allows the IRD to preserve the taxpayer’s information as at the time the clone of the hard drive is taken and to undertake general or specific searches of the hard drive content at a later stage, without reverting again to the taxpayer’s computer record. The cloning process is undertaken by experts of the Inland Revenue Computer Tax Audit (“CTA”) Unit, sometimes with the involvement of private sector computer experts.
2.13 I turn now to consider the IRD practice of cloning computer records by examining:
(a) The powers of the CIR to access electronic information in the course of investigating tax matters. I suggest that there are still shortcomings in the legislative framework within which the Commissioner purports to operate when cloning computer materials and suggest that a specific regime ought to be enacted so that the Commissioner and taxpayers understand the rules by which each must abide.
(b) The practical tensions that exist between the CIR’s practice when accessing electronic information and the taxpayer’s rights to withhold information in which LPP or TAD non–disclosure rights exist. How should the Commissioner go about the process of cloning? In particular must he qualify or limit his actions to reflect the rights of the Taxpayer to withhold from the Commissioner certain information that may be on the cloned hard drive?
2.14 In large measure the tensions and uncertainties which exist reflect laws that have their origins in the age of paper records and which do not reflect the realities of the cloning process.
3. THE COMMISSIONER’S POWERS – WHAT AUTHORISES CLONING?
Sections 16 and 17, TAA
3.1 When changes to sections 16 and 17 of the TAA were mooted in a 2002 discussion document a proposal was made to authorise the Commissioner to remove computers for the purpose of allowing information to be copied from them. In the end the Bill which reflected the results of consultation on the topic dropped that proposal, at least ostensibly.
3.2 Submissions on the proposal emphasised the adverse effect on businesses of their computers being removed by Inland Revenue. The Government, it was said, recognised the importance of information to businesses and appreciated the need to minimise disruption. Officials were directed to carry out additional research on the proposal . It is not a long reach to conclude that officials were soon disabused of the notion that a computer had to be physically removed for its information content to be examined. In short the original proposal was an entirely obsolete notion: why bother removing a computer if technology allows you to “vacuum up” its entire contents for later perusal? The question is whether that process is permitted under the present provisions of the TAA.
3.3 Section 16 of the TAA permits only two things. The first is access. It grants the Commissioner a right – full and free access – to books and documents. The second grant is implicit in the stated purpose for which the right of access is granted – a purpose of inspection. Before other powers were enacted section 16 did not (and by itself still does not) permit anything to be copied or taken away. Arguably the obligation on an occupier of a “place” to provide reasonable assistance for the effective exercise of the Commissioner’s section 16 powers might extend to copying material for the Commissioner but, before the enactment of the 2003 and 2006 additions, the more likely position was that the obligation to provide reasonable assistance extended only as far as to assist the access and inspection rights conferred by section 16.
3.4 Section 17 of the TAA was sometimes relied upon by the Commissioner to obtain copies of material accessed under section 16. The section certainly permitted the Commissioner without fee or reward to make extracts from or copies of any books or documents, but they had to be books or documents produced for inspection in accordance with the section. The right to copy did not extend to books or documents which the Commissioner came across in exercising his right of access. The documents had first to be produced for inspection by the taxpayer, whose refusal or delay might deny the Commissioner the desired copy.
3.5 The practical limits of this are not difficult to identify. A taxpayer might be asked to give access to computers and to provide reasonable assistance under section 16 to allow the Commissioner to inspect the content of the computer. The taxpayer might go as far as to do that but would only be required to produce documents if the Commissioner exercised section 17 powers. Granting access under section 16 for inspection was not necessarily production of the document so as to permit copying. Result: The Commissioner could not be clear that he could copy computer content even if he was given access to it.
3.6 There is no doubt in my view that, prior to the 2003 and 2006 amendments, if a taxpayer produced its computer hard drive for inspection under section 17, whether or not the Commissioner was at the same time exercising a right of access to the computer under section 16, the Commissioner was authorised to make extracts from or copies of the record comprised in the hard drive. There is nothing in the TAA which limits the means or method by which an extract or copy may be made. An extract is simply a part taken or copied from a whole. A copy is a replica of the whole. The problem with the pre-2003 position was that the Commissioner was dependent upon the taxpayer producing the books or documents before the right to extract or copy was engaged.
Section 16B, TAA
3.7 The enactment of section 16B of the TAA in 2003 was intended to deal with that. It conferred a new power to remove books or documents accessed under section 16, to make copies. The power was conferred on the Commissioner or an officer of the Department authorised by the Commissioner and was not dependent on anything being produced by the taxpayer. Copies were to be made and the originals returned as soon as practicable and the owner of the original book or document was permitted to take a copy at the time of removal or at any reasonable time subsequently .
3.8 Despite the obvious Parliamentary intention to permit the IRD to remove for inspection material accessed under the power to inspect, it is not clear that section 16B permits cloning of a computer hard drive, at least in the manner usually undertaken by the IRD. The power under section 16B is to “remove” the record. Removal is distinct from copying under the section. The cloning process is one of replicating a digital record of the content of the subject hard drive and no doubt amounts to copying. But the usual practice of the IRD in taking a computer clone does not involve removal of the record. Typically copying takes place on the premises of the taxpayer.
3.9 Section 17(6) of the TAA remains the only provision which permits the IRD to make copies of books or documents without the requirement that they first be removed, but as noted above it suffers from the shortcoming that it applies only to material produced under section 17. Unless that section has been invoked by the Commissioner, the power does not relate to books and documents accessed under section 16.
3.10 When section 16B of the TAA was enacted the Government made it clear that it had not yet decided whether to permit computers to be removed under the new powers. Removal is not necessary with cloning but the legislation which was enacted in 2003 is couched in terms which suggest that, without the approval of the taxpayer, the Commissioner may only copy after removal of the record. That might suggest that the whole issue of access to computers and their content was outside the ambit of section 16B, but the words of the section and the wide definition of “books and documents” is against that view.
3.11 The more likely position is that, as stated above, computer hard drives (as opposed to computers themselves) are within the scope of the section 16B power, despite what was said at the time submissions on the discussion document were reported. The relevant words permit the Commissioner to remove a taxpayer’s computer hard drive for copying if he chooses to invoke the section 16B power. Cloning is an option which permits the Commissioner to obtain the information he would be permitted to copy under section 16B, without the need for the computer to be removed from the taxpayer’s premises.
3.12 It seems, therefore, that the approach being taken by the Commissioner to cloning taxpayer hard drives on their premises in the course of a section 16 action is not consistent with section 16B of the TAA. That section permits the Commissioner to remove books or documents, including hard drives, and to copy them thereafter. There is no doubt that if the Commissioner acted in accordance with the strict requirements of this section, great inconvenience and disruption would be occasioned to taxpayers caught up in such action. The Commissioner is able to offer the affected taxpayer a concession which permits its computers to remain in place although subject to intrusion. That alternative is to permit a clone to be made on the premises.
3.13 Because it is not mandated by section 16B that option can only be undertaken with the agreement of the taxpayer, unless the Commissioner has exercised his powers under section 17 to require production of the hard drive, to which the taxpayer has acquiesced, so as to be able to invoke section 17(6). Otherwise the law as it stands very probably requires the Commissioner to remove the computer hard drive before making the clone.
Section 16C, TAA
3.14 Section 16C was enacted in 2006 and conferred a power to remove books or documents from a place accessed under section 16 for a full and complete inspection. The power extends to the Commissioner, an authorised officer (of the Department) or a person accompanying the Commissioner or that officer, such as a police officer. The power can only be exercised with the consent of the occupier of the place which has been accessed, or with a judicial warrant.
3.15 Again it is not clear that this section authorises in express terms the process of computer cloning typically undertaken by the Commissioner. It is clear that the section contemplates the removal for inspection of records, including computers or their hard drives. Interestingly the books and documents need only be in premises that have been accessed under section 16. The section is silent on whether the records themselves must have been accessed. Presumably if they can be identified and removed they have been accessed!
3.16 But the practice of cloning computer content on the premises of a section 16 target can only be achieved as the result of the taxpayers’ agreement or the application contemporaneously of an information requisition under section 17. Practically speaking the taxpayer’s agreement is unlikely to be withheld if the alternative is to lose one’s computers for the time it takes for them to be subject to a “full and complete” inspection by the IRD.
3.17 I am doubtful, however, that the Commissioner has been clear to obtain in all cases the taxpayer’s agreement when taking a computer clone on their premises. That may make such action unlawful because the legislative authority for copying computer information applies post removal. Equally I am not clear that that IRD has, in each case it has cloned a computer hard drive, been acting under the terms of a section 17 information requisition in relation to which the hard drive has been produced for inspection by the taxpayer, and so became susceptible to the copying power under section 17(6) of the TAA.
Summary on authority for cloning practice
3.18 The TAA allows the Commissioner to take copies of books or documents in certain circumstances. The power extends to computer hard drives because they are a type of record. The Commissioner has a practice in contentious matters of exercising his powers of access under section 16 of the TAA and, in the course of doing so, taking a clone of the computer records of the target. The Commissioner’s powers are such that he may remove the original record for copying. The power to insist on copying the computer record in the course of his section 16 action is much less clear. The options available to the Commissioner seem to be:
(a) To obtain the agreement of the taxpayer to onsite cloning as an alternative to the Commissioner removing the computer hard drive and disrupting the taxpayer’s activities more; or
(b) Issuing at the same time as his section 16 action, a section 17 requisition for the taxpayer’s hard drives which, if produced by the taxpayer, may then be copied under section 17(6).
3.19 It is not clear that these circumstances necessarily exist in all the cases where computer hard drives have been accessed and copied during a section 16 action and the legal foundation for such action must be carefully examined while the law remains as it is.
4. CLONING, RELEVANCE, PRIVILEGE AND TAD NON-DISCLOSURE
Basics of relevance, privilege and non disclosure rights
4.1 It is axiomatic that the Commissioner must exercise his investigative powers in a way that affords proper recognition to the provisions of the TAA and to the common law, each of which permit taxpayers legitimately to withhold certain information from him. The statutory expression of LPP is an instance where there is no balancing of public interests to be considered. The privilege is the expression of the public interest and is to be afforded its full and proper effect in the way the Commissioner goes about his business. Although the provenance of the TAD non-disclosure right is more recent, the same can very probably be said for it.
4.2 It follows that in the way he implements an investigation the Commissioner must protect these taxpayer rights. That is part of his obligation to protect the integrity of the tax system. There are certain standards to which the Courts here and overseas have suggested the Commissioner must adhere.
Initial review of content – necessity or relevance?
4.3 The first standard is a threshold one. It is whether the Commissioner may simply “sweep up” documents and remove them, or whether he must make some preliminary assessment of them before doing so, in order to try to keep his investigation within the bounds of what is necessary and relevant. The right to remove books and documents for copying relates to those accessed under section 16. Those documents are supposed to be limited to ones which the officer exercising the power considers are necessary or relevant for the purpose of collecting any tax or carrying out a function lawfully conferred on the Commissioner.
4.4 The necessity and relevance test was seriously targeted for removal in 2002 but has survived. It is one element of the argument that the Commissioner must exercise some judgement in deciding what to access and what to remove when exercising his investigative powers. The judgement as to necessity and relevance is the Commissioner’s alone, but that does not mean that he can simply ignore it. It is a judgement that he must exercise genuinely even if others might differ with him over it.
4.5 The threshold obligation of the Commissioner to consider the necessity and relevance of materials is not a high one . It is sufficient for the Commissioner genuinely to consider that the record to which he claims access is necessary or relevant for the stated purposes. The question remains, however, whether having identified a record which is considered to be relevant the Commissioner must examine its content to decide between the relevant and the irrelevant elements which the medium holds.
4.6 The Full Federal Court in JMA held that it was impermissible for the Australian Tax Office (“ATO”) to copy all of the information from the server of one of the target entities in that case because no reasonable effort was made to distinguish between the relevant and the irrelevant for the purposes of section 263 of the Income Tax Assessment Act 1936 (Cth), the equivalent of section 16. In my view such a requirement confuses the content of the record with the record itself and with respect their Honours are wrong.
4.7 It is the record which is a book or document. If that is a digital database such as a hard drive, that is the record for which the Commissioner has the right of access and the right to remove. As long as the Commissioner is satisfied reasonably that there are contents which relate to his investigation held on a taxpayer’s computer hard drive, the CIR is able to take the whole of the hard drive (and therefore to agree with the taxpayer to clone it as an alternative), without further inquiry or review.
4.8 What he does with it thereafter is different. He may not be able to use the content without making distinctions between what is relevant or not, or without protecting privilege and other taxpayer rights. But to require the CIR to examine the content of the computer record and divide material between the relevant and irrelevant, even on a cursory basis before deciding whether or not to copy it, is simply not sensible. The record may be huge. It will inevitable contain irrelevant material but that is not the point. It may also contain relevant material and in my view distinguishing between the two types of content is not required by our law, at least at the stage of deciding whether to take a “blind” copy.
4.9 The decision in JMA seems to have been influenced in some measure by the fact that the ATO had employed an inconsistent practice in different parts of its section 263 action. In one office it searched computers using key words and identifiers and it copied only the material which those inquiries threw up. In the search complained of, however, the ATO omitted that step and simply copied everything. Their Honours could be forgiven for thinking that if it was good enough to review for relevance for part of the job, it was good enough for all, but I do not consider that the decision is good law or should be relied on in New Zealand.
4.10 It is sufficient that the Commissioner should be able to point to some reasonable basis for concluding that the record could contain relevant material for him to be able to access and remove (and therefore copy) it. His inquiry might be as innocuous as to ask the taxpayer whether there are communications relating X transaction on the hard drive and to receive an affirmative reply. To access and copy the record in that case would be unobjectionable as long as no examination of the content occurred until protective steps had been taken in relation to taxpayer rights, and the question of the relevance of the actual content.
Initial review of content – LPP and TAD rights?
4.11 The second standard is also one related to a preliminary consideration of the information contained in records accessed by the Commissioner. It is whether the Commissioner must make some determination, before exercising his removal power or copying the record, whether the record content is or could be protected from disclosure by LPP or TAD rights.
4.12 Again the approach of the Full Federal Court in JMA suggests that the Commissioner and his officers may not read or copy documents which are privileged. Yet the Judges acknowledged a problem with section 263 of the Australian Act, that it contained no procedure for testing privilege before a search is undertaken. They described this as a serious deficiency in the legislation and the same might be said of the TAA.
4.13 The decision in JMA makes it plain that the mere seizure of a document without it being read will not infringe privilege . That is because the purpose of the privilege is to keep secret communications between a lawyer and client, and when the document is written to ensure that it is not read. JMA had advanced the argument that the very act of copying a privileged document destroyed the privilege, a proposition which the Court described as “simply wrong”. Having noted that, the Judges also said that there would be occasions when it was proper for an ATO officer to look at a document to decide if it was privileged or not. This would merely be to enable him to decide if it may be copied. Having said that privilege was not extinguished where a document was not sighted, they also accepted that claims of privilege could not hold up an investigation and that they could take weeks or even months to resolve.
4.14 In my view none of this means that the IRD must review the documents on a computer hard drive for privilege before being able to remove it for cloning or, with the taxpayer’s agreement, to clone it on the taxpayer’s premises. The Federal Court in JMA was not proposing a condition or limitation on the section 263 actions of the ATO which had to be met in every case. If a record was to be reviewed, it ought not to be looked at closely, but that assumes that the record had to be reviewed at all. In short if privilege could be protected without the record having to be looked at, there was no need for the content to be reviewed for privilege before it was copied.
4.15 It is at this point that the image of the revenue official working his or her way through a bundle of papers in front of a photocopier starkly contrasts with that of the technician from the Computer Tax Audit function who transfers a replica of the digital content of a computer. The official copying paper records can see them; will in all likelihood cast an eye over them and so can be expected to know if one looks like it might be privileged or not. The CTA functionary will not see the content of the transfer until it is subjected to certain information recovery programmes. The communications are not “seen” at all in the process of cloning. The copying is blind.
4.16 The complaint which the Court in JMA upheld was that a server’s content was taken without review for relevance. It was not a complaint that inadequate effort had been made to examine for privilege. I do not think there is any authority to be drawn from JMA that the Commissioner must review for privilege before taking a copy of a computer hard drive, as long as it is clear that no perusal or other use of the cloned hard drive is to be made until privilege and other taxpayer rights have been properly taken into account. Under the present regime that will usually be the subject of agreements or protocols drawn up between the Commissioner and the taxpayer, which is the subject of the next section of this paper.
Summary on the initial review issue
4.17 The CIR has full access to and may remove for copying all books and documents which he considers are necessary and relevant to his statutory purposes. He must have a genuine basis for considering that the books or documents are necessary or relevant but that does not mean that he has to have read them to be sure.
4.18 The definition of books and documents includes media for information storage. The right of access and to remove for copying attaches to media, ie to the mode of recording. If the Commissioner can be satisfied that the medium of a computer hard drive could contain information which relates to his functions he may remove it. And if he can remove it to copy he can agree with a taxpayer to copy without removing. He does not have to review the content to be satisfied about relevance because he may reach his honest view by other means. In all events because he may only copy without removal with the agreement of the taxpayer (unless section 17(6) is applicable) any question of the copying having to be subject to a review for relevance becomes redundant.
4.18 As to privilege and, by extension, TAD non-disclosure rights, there is no requirement that a process of “blind” copying such as the cloning of a computer hard drive requires even a cursory review of content to decide what should be copied and what not. The Commissioner should however put in place procedures which protect privilege and TAD rights before cloned material is used by his investigators.
5. PROTECTING TAXPAYER INTERESTS IN CLONED MATERIAL
5.1 In all of the cases in which my clients have been visited by the IRD seeking a copy of computer records, the IRD’s immediate concern has been to get the copy and to worry afterward about how the copy is to be dealt with. In some cases the IRD has legitimate concerns that the data record of the target may be destroyed if it has notice of the IRD’s interest in its affairs. In other cases it may be concerned that the record is in the hands of someone who is about to leave the country, which would place the record beyond the IRD’s reach.
5.2 That is not to say that issues of privilege and TAD rights are ignored by the IRD. On the contrary they are important to the extent that the IRD’s interests lie in keeping the time in which those matters might be disputed to the absolute minimum. Thus the IRD sometimes commences proceedings in the District Court ahead of a section 16 action, to get any dispute over privilege and TAD claims onto the Court’s books ahead of time!
5.3 The way in which the cloned a material is dealt with has been the subject of agreement in my cases and of dispute in Avowal. For obvious reasons I cannot relate the terms on which my clients have dealt with matters but a general discussion about the relevant issues and the general shape of the process is possible. I emphasise that there will be permutations of the process described, but there are common threads which I hope the paper illustrates.
Isolation to CTA of the cloned record
5.4 The first concern for any taxpayer is that cloned material should not be available to the IRD investigators handling its case. It is normal, therefore, to have the cloned material retained by the IRD CTA Unit on express undertakings that the Unit is not to subject the material to search and that no part of the cloned content is to be made available to the investigators other than in accordance with the agreement. I have to say that in my experience at least, the IRD has abided by this type of undertaking scrupulously.
Selective search of the cloned material
5.5 The next step is for the cloned material to be searched by the CTA Unit, again on the basis that none of the search results are yet to go to the investigation team. This search can follow one of two broad approaches. The first is directed at identifying material that is potentially relevant to the IRD’s investigation. It is a search which is initiated by the IRD investigators. They provide to the CTA Unit a list of key words or search identifiers which are applied by the CTA Unit using specialised recovery programmes.
5.6 The resulting output provides a “catchment” of information in relation to which privilege and TAD related claims can then be made. Unless there are supplementary searches, privilege and TAD issues are not raised in relation to any other material because, by agreement, only the “catchment” produced by the search terms can eventually be released to the investigators. Sometimes supplementary searches are provided for but on the basis that privilege issues must be resolved in the same way as for the initial search.
5.7 The second type of selective search is one initiated by the taxpayer. It is designed to try to identify from amongst all of the cloned material held by the IRD any in relation to which privilege or TAD rights may exist. Typically the taxpayer will supply the CTA Unit with names and references that would be likely to identify protected material, such as the names of legal or tax advisers with whom the taxpayer has dealt or references to transactions in relation to which it is known that legal or tax advice may have been sought. Just as the IRD will insist on its key words not being disclosed to the taxpayer it is not unusual for the key words of the taxpayer not to be disclosed either.
5.8 The choice between these two initial selective searches often comes down to the position being taken by the IRD in relation to the information it has cloned. If it believes that all or a great deal of that material will be relevant to its inquiries, it will be reluctant to refine the cloned information too early and will require the issue of privilege to be dealt with in relation to entire cloned record.
5.9 If, on the other hand the IRD has concluded that its cloning is likely to have swept up more than it actually needs, for instance where its concerns relate to certain transactions or types of transactions which form only part of the taxpayer’s business, it may be willing to refine the information which it wants to review first, leaving open the possibility of making supplementary searches if necessary.
Submission to taxpayer of search product
5.10 Either of the initial selective searches will result in material being submitted to the taxpayer. At this stage the only involvement of the investigators is to provide the key words to search, if they agree to refine the cloned material as a first step. In that case the taxpayer will receive a record of the material which has been produced by the CTA Unit applying the IRD’s key words. This is typically delivered in CD form and the taxpayer will be asked to identify on that disc (normally the disc is set up with a “tick the box” format) which, if any, of the identified material is the subject of a privilege or TAD claim .
5.11 Having done that the taxpayer is required to return the CD to the CTA Unit where the specific documents for which privilege or TAD claims have been raised will be isolated to a separate record. The remainder of the records provided as the result of the IRD’s key word search, for which privilege or TAD status have not been claimed will be supplied to the investigators. It is usual for the taxpayer to be provided with a copy of these.
5.12 In the case of a search initiated by the taxpayer, the product delivered to the taxpayer will be all those “hits” where the named legal advisers, tax advisers and relevant transactions are referred to. The taxpayer will be asked to consider these and to identify those in relation to which a claim of LPP or TAD rights is made. Again this will be electronically marking the document. This is not always as straightforward as it sounds. The taxpayer involved may not be the one who “owns” the privilege or he may hold it with others. Care is required to be sure that available claims are not inadvertently waived.
5.13 Depending on the circumstances of the case the review of potentially privileged material may take some time and extend to a large number of documents. The IRD is normally very keen to move this process on and in some cases has applied to Court to have a taxpayer deemed to have waived privilege for delay.
5.14 In the same manner as described above, the record of the documents for which a privilege or TAD claim is made is returned by the taxpayer to the CTA Unit. There may be items in which no privilege exists, despite a reference to a lawyer or tax adviser, or in respect of which the taxpayer elects not to press an available claim. Those items will be released to the investigators and the balance will be set side for the issue of privilege or non-disclosure to be considered by the Commissioner.
Consideration of disputed privilege or TAD claims
5.15 The consideration of disputed claims is not normally an issue when the number of documents is small. But if a large number of items has been identified as privileged from amongst a considerable computer record cloned by the Commissioner, the process can be cumbersome. The District Court has jurisdiction to consider and determine privilege and TAD claims and, with respect to the Judges of that Court, in my experience none has indicated a burning desire to become involved in the review of hundreds of documents in relation to which privilege or TAD status is in dispute. Nothing would be more likely to remind a Judge of long forgotten days as a law clerk reviewing documents in discovery! If it is possible for the parties to refine the issues the Judges are understandably keen for that to happen and when that is not possible they may well appoint an amicus to assist and report to the Court.
5.16 In at least one instance in which a client of mine has been involved, the parties agreed that an independent legal officer of the IRD would be appointed to consider the initial claims of privilege made by the taxpayer. That officer was appointed as amicus and was required to commit to secrecy from the investigators and to review each document in the CD record submitted to the CTA by the taxpayer. He was to determine those documents where he agreed that privilege applied, those where he disagreed and those where the matter was in doubt. The taxpayer could accept the legal officer’s decisions or reject them, or make supplementary submissions. In the case in question the IRD wanted to be able to make submissions to the legal officer to background its reasons for considering that some ostensibly privileged material might have been brought into being to further an illegal or wrongful act, and quite substantial submissions were made.
5.17 Those documents whose protected status was agreed were to be removed from the record which was to go to the investigators. Those documents which the taxpayer accepted were not protected were to be released to the investigators and it was those which remained doubtful that would ultimately be referred to the Court for a determination of their status.
Determination of disputes by the Court
5.18 So far that is the latest point that these procedures have reached in the cases I have been involved in. In one the client’s business activities collapsed and matters went no further. In another the cloned material remains in the hands of the CTA and suggestions for the way in which it might be dealt with have still to be settled against the background of the Avowal case. In the third the client has personally been wading through huge numbers of documents which were reviewed by the IRD’s legal officer and will confirm those that he considers are privileged thereby crystallising a dispute over what I am sue both sides hope will be a substantially smaller number of documents. At that point it will be for the District Court to exercise its statutory function to resolve the dispute and to confirm or reject claims of privilege and TAD rights.
Observations on the process
5.19 For the purposes of this paper I make two observations about the procedures which I have outlined above. The first is that they are time consuming and costly and something should be done to address that. The second is that they rely on the willingness of the IRD and its counsel to deal fairly and to reach agreements on the protection of privileged or TAD information. That means that one taxpayer who is not as well advised as another may agree to things it should not.
5.20 I noted at the start of this paper that the call which initiated me into the world of computer cloning came 3 years ago. The other cases have been going slightly less time but that indicates the time that these procedures take to be agreed and implemented. That is the first observation to make. They require a great deal of commitment from taxpayers, not all of whom are in a position to give it. In one case my client has not been able to fund a legal review of the documents and has ended up dealing with them himself over many weeks. That is not to suggest that taxpayers should expect that they be relieved of the obligation to raise in a timely and principled way claims of privilege and TAD rights. Clearly those matters have to be dealt with properly and taxpayers are the only ones who can really do that – the documents are theirs after all.
5.20 But the procedures I have outlined are thrust upon taxpayers by the rush to secure the record. If the IRD undertook cloning by using on the taxpayer’s premises key word searches that limited the amount of information which was transferred to the clone – the type of approach which the Full Federal Court approved in JMA - the risk that taxpayers would be caught up in a huge logistical exercise would be reduced. The “vacuum cleaner” approach means that the pool of material which potentially has to be reviewed is simply too large in some cases.
5.21 I do not mean to suggest that the IRD is deliberately imposing unnecessary costs on taxpayers. In the instances that I have seen where the IRD has taken the view that the whole of a hard drive must be cloned and that the initial refinement must be in the hands of the taxpayer, I believe Departmental officers have acted genuinely though, my clients would insist, wrongly. There is merit in making sure that the process focuses as soon as possible on the least number of individual documents reasonably consistent with the IRD’s investigation needs. Otherwise it can swamp the taxpayer, and there is too much of that about the TAA tax dispute process without adding more.
5.22 Next, the process is dependent in most cases on agreement being reached between the IRD and the taxpayer. Negotiations may well occur against the background of an application having been made to the Court for privilege issues to be resolved, and that gives some assurance of oversight. But taxpayers often feel a real pressure to keep the matter low key and to avoid the escalation in cost and angst which is involved in going to Court. I have already noted that in my experience the IRD (and I include the Crown Counsel advising it on these matters) has been very good at working through the procedures to protect taxpayer rights. However, that still leaves the taxpayer dependent on the knowledge and skill of its adviser in covering adequately all of the issues that might affect its position. In my view it is unsatisfactory that these matters should be left to agreement between the parties. There should at least be a framework in the TAA which provides minimum protections for taxpayers caught up in this process.
5.23 There is obviously an alternative view that flexibility is required to meet the different circumstances that present themselves. That would commend the present position where agreements can be reached with Court oversight and it could be expected that the Court would intervene to protect the taxpayer form any untoward predation on its rights. The Judges in JMA noted the way in which the Courts had developed rules for the protection of privilege in relation to the exercise of police search and seizure powers, and over time similar rules might well develop to cover the reasonable expectations of taxpayers whose computer records have been cloned. For my part, I would prefer to see the whole matter deal with by having the TAA reflect the reality of what is going on.
6. SOME SUGGESTIONS FOR CHANGE
6.1 I have suggested in this paper that the process by which the Commissioner clones the hard drives of taxpayer computers does not accord with the provisions of the TAA. He is given the power to remove records which have been accessed so that they may be copied. He is only permitted to copy records on the premises of a taxpayer if they are produced under section 17, so as to engage the copying power in section 17(6). Cloning on site is invariably the result of an agreement into which the taxpayer feels “shoehorned” because the alternative is for the hard drive of the computer to be removed, with all the disruption that involves.
6.2 This is unsatisfactory. The IRD should be given an express power to clone material from the computer subject to procedures to protect privilege and TAD rights. A model for at least part of the legal framework that could be used can be found in the Search and Surveillance Powers Bill , introduced to Parliament this year. The Bill followed an extensive review of search and seizure powers undertaken by the Law Commission whose report recommended a comprehensive restatement of such powers in order to try to standardise procedures, powers and protections. The report and the Bill are both notable for the fact that, although they extend beyond police powers and cover the role of other “enforcement officers” such as Customs and Fisheries officers, they did not refer to the IRD. The Acts covered by the Bill exclude the TAA.
6.3 The Law Commission report devoted a chapter to the issues related to computer searches. It considered whether in the context of enforcement powers a different regime should apply to computer searches than applies generally. It adopted an approach of functional equivalence to adapt law developed for a paper-based environment to encompass electronic technology . The report summarises succinctly and well the particular sensitivities that arise for access to computers and which may have formed some of the background to Baragwanath J’s statement that computers are not within the generally understood bounds of a book or document. The Commissioners said :
The computer is a powerful repository of private information that has no exact equivalent in tangible terms. A person subjected to a search may be more concerned about law enforcement agencies accessing their computer than their premises, because of the complete picture that may be revealed about them. This side to the range of information that may be present on a computer, such as personal correspondence, appointment diary, business dealings, financial, banking and tax records and medical information. This information may exist in tangible form, but tangible information is more likely to be dispersed throughout the premises and the specificity of the warrant is likely to preclude access to all that information. In searching a person’s computer, the concern is that a large amount of information of many different types unrelated to the basis for the search is potentially accessible.
6.4 Some of what is said in the report is irrelevant to the IRD’s warrantless power of access and its related right to remove records for copying, but the sensitivities are the same. The Law Commission recommended inter alia that:
(a) Statutory authorisation should be given for law enforcement agencies to access intangible data in the exercise of search powers;
(b) The authorisation should extend to using specialist forensic search methods;
(c) Agencies should be able to access data remotely or from computer data storage devices.
6.5 These suggestions have found voice in clause 110(i) and (j) of the Bill. If enacted these provisions will clarify that amongst the search powers of a warrant holder are:
(a) The power to access and copy intangible material from computers and other data storage devices located at or accessible from the place at which the warrant is being executed, including copying by way of previewing, cloning or other forensic methods; and
(b) The right to use any reasonable measures to gain access to any computer or data storage device and to take a forensic copy of any material in it.
6.6 Both of these provisions would usefully supplement the Commissioner’s powers under the TAA and would do away with the unsatisfactory situation where he relies upon taxpayer agreement, or the production of the hard drive under section 17 to clone on site. They would express the reality of the situation – that taxpayer have no practical choice but to allow cloning - rather than have it based on an uncomfortable fiction that they do.
6.7 Alongside such legislation the issue of protecting privilege and TAD rights would have to be addressed. The Search and Surveillance Powers Bill does this by recognising in Clause 131 a list of privileges and then providing in clause 136 that a person who has a recognised privilege has the right in accordance with clauses 137 to 142 of the Bill,
(a) To prevent the search of any privileged communication; and
(b) To require the return of any such communication if it has been seized or secured.
6.8 The procedures of clauses 137 to 142 have certain basic themes. First they require that efforts be made to ensure that the target of a warrant has advice and the opportunity to raise privilege claims even in an interim way. Secondly they provide for the information which has been accessed (and copied) to be secured with the Court pending the resolution of privilege claims.
6.9 These procedures are to apply against the background of a warranted search and seizure which, one expects, involves a degree of oversight and protection of the interests of the subject as the result of a warrant being required. There is more to be said for those protections being part of the law where the Commissioner may access premises and records without warrant.
7.1 The Commissioner is using forensic techniques to copy computer hard drives in the course of accessing taxpayer premises under section 16 of the TAA. He does this to secure the record for evidential purposes. It is not clear that he has authority to do this under the present terms of the TAA unless he has removed the hard drive from the premises under section 16B or 16C (subject to warrant), has the agreement of the taxpayer to onsite copying, or the hard drive has been produced to him in response to a section 17 request for information and so becomes subject to his right to copy under section 17(6).
7.2 In reaching agreement about taking a clone, the Commissioner and taxpayers are making the rules for the protection of privilege and TAD rights as they go along, usually against the background of a pre-emptive application by the Commissioner for such rights to be determined by the Court. However the procedures are sometimes cumbersome, uncertain and time consuming. Without specific legislation there is a risk that taxpayers may inadvertently compromise their privilege and TAD rights.
7.3 The TAA should be amended to deal with these matters specifically. A starting point for considering possible changes exists in the Search and Surveillance Powers Bill. That proposed legislation deals expressly with the powers of enforcement officers to access and to take forensic copies of intangible material. Some of its coverage could usefully be considered and should be adopted into the tax content. The Bill also provides for a regime which recognises certain privileges and requires that an enforcement officer exercising search powers take steps to ensure that a search target obtains advice and is able to assert any available privilege. It also provides expressly for the securing of material pending a resolution of privilege claims.
7.4 While it might be said that the IRD strives to achieve much the same result, it is unsatisfactory that it should do so by administrative action. It exercises powers of access without warrant in many instances. If it is good enough for the law to limit the way in which material obtained from computers can be used under a warranted search by law enforcement it is good enough for the same sort of provision to be made where warrantless powers are afforded the IRD.