JMA Accounting Pty Ltd v Michael Carmody, Commissioner of Taxation [2004] FCAFC 274 | Case summary

REASONS FOR JUDGMENT 1 The Australian Taxation Office is always on the lookout for tax avoidance and tax evasion schemes. Whenever possible it tries to shut down their promotion. It has created a taskforce, called the Promoters' Taskforce, with the specific function of dealing with these matters. In early 2004 the taskforce turned its attention to the appellants, JMA Accounting Pty Ltd and Entrepreneur Services Pty Ltd (collectively JMA). JMA is an accounting firm with offices at 360 Queen Street, Brisbane and at the Sunnybank Hills Shopping Centre in Queensland. The taskforce had information that JMA was involved in a fraudulent tax scheme. The scheme involved the purported acquisition for trading purposes of goods and services from an "entity" in the Labuan province in Malaysia (a so-called tax haven). An invoice, on occasion backdated, would be sent seeking payment. Funds were sent from Australia to Malaysia and were repatriated a few days later, less a small fee. The taskforce had identified approximately 70 potentially suspect transactions which involved amounts of about $1.35 million. The taskforce believed that at least 200 JMA clients may have participated in the scheme. 2 To further its investigation the taskforce wanted to inspect JMA's records. Most were stored on computers. The taskforce was not prepared to give JMA notice of any inspection because of a perceived risk that incriminating documents might be destroyed. Various options were available to deal with this situation. The least satisfactory was chosen. The taskforce decided to exercise the powers conferred by s 263 of the Income Tax Assessment Act 1936 (Cth)to enter JMA's offices and search for and take copies of relevant documents. The taskforce leader, Mr O'Gorman also wanted to restrict JMA's access to the documents while the taskforce conducted its search. In a co-ordinated operation which began at 9.00 am on 5 May 2004, ATO officers entered both JMA's offices and took control of all documents located there, including those on computer databases. JMA staff were denied access to the documents for work or other purposes. The officers spent two full days copying onto computer disks most of the documents under their control. At the end of the first day the taskforce locked JMA's offices and JMA staff were not allowed to enter the premises. 3 This appeal is concerned with the lawfulness of the search and seizure. The proceeding which JMA brought against the Commissioner of Taxation, and the officers who conducted the search, was for review of the decision to 'authorise access by one or more of the [ATO officers] to the premises of [JMA]' and for review of the conduct of the officers 'in so far as that conduct was constituted by the copying by them of the entire contents of the hard drives of [JMA's] computers and computer servers'. The respondents are indeed fortunate that they did not face claims in trespass or abuse of power. Whatever the outer limits of the power conferred by s 263 may be, the section did not permit the taskforce to take control of JMA's offices and deny its staff access to the computer records. Here we are only concerned with whether the officers had the power to copy the records and take the copies away. The answer to that question will require paying due regard to the conflict between a citizen's right to privacy and parliament's modification of that right by legislation, which has been enacted in the belief that there is an overriding public interest in preventing criminal conduct and evasion of the law. The court is often called upon to examine the legality of any purported exercise of this kind of power. In undertaking that task the court must act cautiously: where there is ambiguity the rights of citizens should not be impaired. On the other hand, the court should not unnecessarily tie the hands of those charged by parliament with investigating fraud or evasion. On occasion latitude should be given to ensure that parliament's will is not thwarted. Striking the required balance is an issue that must be dealt with. 4 Section 263(1) gives the Commissioner or his authorised officer 'full and free access to all buildings, places, books, documents and other papers for any of the purposes of [the Income Tax Assessment] Act,and for that purpose [to] make extracts from or copies of any such books, documents or papers.' By s 263(3) the occupant of the building or place which is to be entered is required to provide the Commissioner or his authorised officer 'all reasonable facilities and assistance for the effective exercise of the powers under [s 263(1)]'. 5 Although the power of search and seizure is very wide, it is not unlimited. There are certain documents which neither the Commissioner nor his officers can look at. It is now firmly established, for example, that s 263 does not authorise the Commissioner or his officers to read or copy documents which are subject to legal professional privilege. This is one consequence of the High Court's decision in Baker v Campbell (1983) 153 CLR 52. There the court held that legal professional privilege is not confined to judicial proceedings. Naturally, the privilege can be overridden by statute. However in Commissioner of Taxation v Citibank Limited (1989) 20 FCR 403 at 416 the court held that s 263 does not oust the privilege. 6 For the prohibition against the examination and seizure of privileged documents to be of any value, there must be some method by which the existence of any claimed privilege can be tested before the documents are read. While the reason for this is so obvious it needs no explanation, it is still useful to refer to the comments of Southey J in Re Borden & Elliot and The Queen (1975) 70 DLR (3d) 579 at 585-586, a case involving the execution of a search warrant at a solicitor's office: 'If the privilege could not be invoked to prevent the seizure and examination of documents under a search warrant, the Crown would be free in any case to seize and examine the files and brief of defence counsel in a criminal prosecution. It would be small comfort indeed to the accused and to his counsel to discover that his only protection in such a case was to prevent the introduction into evidence of the documents that had been seized and examined. Such a result, in my view, would be absurd.' 7 The problem with s 263 is that it contains no procedure to test before a search whether a document is privileged. This is a serious deficiency because there are cases which hold that if privileged material is read by a third party, even as a result of accident, trickery or theft, the privilege is lost: Waugh v British Railways Board [1980] AC 521 at 536. This is not a universally accepted view. In Baker v Campbell (1983) 153 CLR 52 for example,Mason J (one of the minority judges) suggested (at 76) that a party might not lose the privilege if his documents were obtained 'by illegal means or by deception'. 8 For a time judges could not find an adequate solution. They acted in the hope that in most cases the parties would 'co-operate in a reasonable and responsible way' in dealing with the matter: Baker v Campbell (1983) 153 CLR 52 at 97; Arno v Forsyth (1986) 9 FCR 576 at 588. The realities, however, are quite different. First, the person who might claim the privilege may not be at the place of the search. Second, there is not always any desire for cooperation. Consequently, it became necessary for courts to devise a mechanism by which contested claims to privilege could be determined at the time of the search. The process involved what Brooking J in Allitt v Sullivan [1988] VR 621 at 642 called "judicial legislation". That is 'a code of procedure in relation to the issue and execution of warrants based, not on statute or on the known rules of the common law, but on judges' notions of what is fair and reasonable'. 9 The lead was given by Davison CJ in Rosenberg v Jaine [1983] NZLR 1, a case which involved a warrant authorising the search of a solicitor's office. The validity of the warrant was impugned on a number of grounds. One ground was that the warrant authorised the search and seizure of materials subject to legal professional privilege without the clients' consent. The Chief Justice of New Zealand found (at 13) that the provision of the relevant statute (s 198 of the Summary Proceedings Act 1957 (NZ)) did not abrogate the privilege and that insofar as the warrant did not specifically exclude privileged documents it was invalid. At the conclusion of his judgment the Chief Justice gave guidance to those issuing warrants in the future. He said at 14: 'The person issuing the warrant should attach methods to the execution of the warrant that are suitable to safeguard to the maximum the right to confidentiality of a solicitor's client. In particular, the solicitor should be given the opportunity to claim the privilege where he considers on reasonable grounds that it exists and if necessary to test his claim for privilege before an appropriate Court.' 10 This suggestion was taken up in Australia, but in a different form. The case of Commissioner of Taxation v Citibank Limited (1989) 20 FCR 403 concerned a search, under s 263, of a bank. ATO officers made copies of several documents some of which may have been privileged. The Full Court decided that the officers conducting the search were required to ensure that Citibank had the 'opportunity adequately' or a 'practical or realistic opportunity' to claim privilege. According to the Full Court, if that opportunity is not provided the exercise of the right to access under s 263 would be invalid. If this reasoning be correct any of the following might occur: the search and seizure would be illegal; the officer concerned would be liable in trespass or abuse of power; the officer might be subjected to orders requiring him to return the seized (or copied) documents; and he might be subjected to injunctions preventing him from making any direct or indirect use of the information that was obtained during the course of the illegal search. 11 This rather startling conclusion was rejected by the South Australian Court of Criminal Appeal in Question of Law Reserved (No 1 of 1998) (1998) 70 SASR 281, another search warrant case. The principal judgment was delivered by Doyle CJ. He accepted (at 290) that a police officer executing a general search warrant is required to allow the person in possession of the documents 'a reasonable opportunity to make a claim to legal professional privilege'. It is a condition to which the party executing the warrant is subjected. But he said at 294: 'To require, as a condition of [the] validity [of the search warrant], that a statutory power be exercised in a manner that the court regards as reasonable, having regard to the scope of the power, is a far reaching proposition.' 12 Doyle CJ said (at 296) that a statutory power to search and seize which is 'expressed in general terms' only authorises a search or seizure that 'is reasonable in all of the circumstances'. This would require a reasonable opportunity for legal professional privilege to be claimed. He went on to say at 297: '… there is no principle that powers under a general search warrant are exercised unlawfully and ineffectively merely because they are not exercised reasonably' and '… such a principle cannot be used to support a conclusion that failure to allow a reasonable opportunity for legal professional privilege to be claimed means that the power is exercised invalidly'. That is, the condition imposed on the person exercising the statutory power to enable legal professional privilege to be claimed is a condition which relates to the manner in which the search and seizure is conducted. This is the only aspect of the search and seizure which is subject to the limitation. We agree with this view. 13 This does not mean that an officer is prevented from conducting his s 263 search until all claims for privilege have been resolved. The resolution of such claims might take weeks or even months; it is inappropriate for the search to be delayed for that amount of time. To put the matter in its proper perspective it is necessary to recall the purpose for legal professional privilege. It is to keep secret communications between a lawyer and his client, and where the communication is written, it is to prevent the document containing the communication from being read. Accordingly, the mere seizure of a document without it being read will not infringe the privilege: Allitt v Sullivan [1988] VR 621 at 640; Solosky v The Queen (1979) 105 DLR (3d) 745 at 758. 14 A good deal of JMA's argument on this aspect of the appeal depended upon acceptance of the proposition that legal professional privilege will be infringed if a copy of a privileged document is taken, whether or not the original or the copy is read. That proposition is simply wrong. Moreover, there will be circumstances in which it will be proper for the officer exercising the s 263 power to look at a privileged document, including a document for which privilege is claimed, for the purpose of determining whether it might be covered by the privilege. The document should not be looked at closely; merely enough to enable the officer to decide whether the document may be copied. 15 In Allitt v Sullivan [1988] VR 621 Brooking J referred to this as a "lawful violation" of the privilege. The circumstances in which an officer will be entitled to undertake a bona fide examination of a document for this limited purpose will include cases where no one is present to claim the privilege and when there is a blanket claim for privilege and it is reasonably apparent that the claim is not sustainable. 16 The cases also establish three broad propositions concerning the conduct of a search and seizure, each of which is relevant to the outcome of this appeal. First, a person exercising a power to search and seize (such as that conferred by s 263) is only entitled to seize those documents which he is authorised to seize by the relevant power: Crowley v Murphy (1981) 52 FLR 123 at 152 and 155; R. Carter, The Law Relating to Search Warrants (1939) at 69-70. Second, both the search and the seizure must reasonably be carried out: Reynolds v Commissioner of the Police of the Metropolis [1985] QB 881 at 889; Bartlett v Weir (1994) 72 A Crim R 511 at 518. Third, the repository of the power must do no more than is reasonably necessary to satisfy himself that he has the documents which he is entitled to seize. 17 That being our view of the law, how should the law be applied to the facts? JMA makes two broad claims. First it is said that the manner in which the ATO officers exercised their statutory power denied JMA 'any real or genuine opportunity to make a claim for legal professional privilege', in part because many of the documents were examined before JMA were afforded the opportunity to make their claim. An aspect of this submission, perhaps an important aspect, is that documents were copied and removed from the premises before a claim for privilege had been made. Second it is said that the documents were copied in such a hurry that no proper consideration could have been given to whether they were required 'for the purposes of the [Income Tax Assessment Act].' 18 The judge found that the taskforce leader, Mr O'Gorman, was aware that privileged documents might be found at JMA's offices and that he put in place a procedure to deal with any claim for privilege. According to the judge: 'It was proposed that all material be scanned or copied on to disks which would be duplicated. One copy was to be given to JMA Accounting. The other was to be retained by the Australian Government Solicitor. An undertaking was to be offered that the Australian Government Solicitor would not take access to such information for a period of 14 days in order to allow any claim of legal professional privilege to be made.' 19 The judge also found that the ATO officers were briefed on the identity of the documents that were sought. Those documents included: any relating to the suspected schemes and any other schemes which might be revealed; client lists; lists of participants in the schemes; all relevant financial records relating to the schemes; documents relating to the practice or its clients; and correspondence between "relevant" parties. In this regard the judge found that Mr O'Gorman had instructed his officers 'to be selective in what was scanned or downloaded'. On the other hand, the judge said that Mr O'Gorman 'seems to have expected that the amount of information in question might compel a more general downloading at first instance, with the intention that any irrelevant documents be discarded [perhaps the judge meant 'returned'] later.' 20 The ATO officers arrived at both offices at around 9.00 am. The search at the Sunnybank office commenced almost immediately, but the search at the city office was delayed at the request of JMA staff who wished to speak with their solicitor. Mr O'Gorman met JMA's solicitor at 10.20 am and outlined ATO's proposal for dealing with any claim for privilege. According to the judge the proposal 'was a perfectly adequate proposal for achieving [the stated] purpose.' We respectfully agree with that conclusion. By and large it meant that the documents at both offices would not be closely read, although they might be glanced at to determine their relevance. This way the privilege would not be lost. 21 However, the judge went on to say: 'I cannot see that the ATO officers were entitled to dictate [the proposal's] adoption. They ought to have made it clear to [JMA] and/or their staff that the proposal was simply that, a proposal to which they could agree or disagree. If they disagreed, it would have been necessary for the ATO officers to remain in the premises until all claims to privilege had been resolved.' 22 In the result, the judge found that the copying of documents at Sunnybank was an abuse of power, because it was done without agreement. With respect this confuses the nature of the limitation imposed upon the exercise of the search and seizure power. The officers were not obliged to reach an accommodation with JMA. Provided their proposal for protecting any claimed privilege was a reasonable one, and the judge found that it was, all that the officers were required to do was to ensure that the proposal was implemented. 23 In any event, the judge erred in reaching the conclusion that there would be an abuse of power simply by copying privileged documents. Provided there was only a "lawful violation" of the privilege (that is a reading of any privileged material for the limited purpose of deciding whether the document might be privileged) there would be no abuse. More to the point, copying a privileged document without reading it, which, according to the evidence, is what occurred here, is not on any view a breach of the privilege. 24 JMA's complaint about the reasonableness of the search and seizure has more substance. Whatever view one ultimately takes of these facts, the only documents which could be copied were those which had, or could reasonably be supposed to have had, some relevance to the investigation that was then being undertaken by the taskforce as well as other documents which might be relevant to other matters under the Income Tax Assessment Act and which came to light during the search. 25 The judge expressed his opinion this way: 'I do not accept that s 263 authorized only the downloading and/or copying of documents which appeared to relate to taxation matters. In my view, the ATO officers were entitled to adopt a process which identified documents of possible interest for the purposes of the Act and to examine and/or copy them. Inevitably, some documents would prove to be irrelevant. Equally inevitably, some relevant documents would be overlooked. Given the suspicion upon which Mr O'Gorman was acting, it would have been appropriate to examine virtually all of the documents found in the offices, at least in a cursory way, and subject to any claim to legal professional privilege.' 26 Provided the judge's statement that ATO officers were permitted to copy documents of "possible interest" was intended to mean (as we think it does) documents which the officers reasonably believed might be of interest to the ATO, it is unexceptional. If, on the other hand, the judge meant to say that the officers could also copy documents in relation to which there was only a remote chance they were relevant for the purposes of the Act then, with great respect, he is in error. 27 One problem which confronted the officers when conducting the search is that they were faced with a vast number of documents to go through. If the officers had looked at each document carefully they would be there for days. In our opinion, such a search is not required by s 263. At the end of the day the only obligation imposed upon the officers was to conduct the search in a reasonable fashion. Whether or not they were acting reasonably depended upon the circumstances of the case. Those circumstances included, among other things, the nature and volume of documents to be examined and their location. 28 A similar situation arose in Reynolds v Commissioner of Police of the Metropolis [1985] QB 881. The plaintiff there claimed damages for malicious procurement of search warrants under the Forgery Act 1913 (UK), as well as trespass to his land and goods by reason of the unlawful execution of the search warrants. The action was dismissed following a trial without a jury. On the appeal one of the principal grounds of attack was in relation to the manner in which the search had been conducted and the large number of documents which had been seized, allegedly without proper investigation as to their relevance. On this issue Waller LJ said at 889: 'Searching and taking away papers is an invasion of liberty and any such action must be carefully scrutinised. Where it is done in pursuance of a search warrant or on arrest, the police must consider the way in which they perform the search. If there are only a few papers, no doubt they can be carefully scrutinised on the spot without too much disturbance to the household. If there are many papers, it may be in the best interests of the householder for the police to be broadly selective, i.e. rule out documents which are clearly irrelevant, and take others which they reasonably believe to be of evidential value to examine more closely at the police station. It will of course be of the greatest importance to ensure that documents which prove to be of no evidential value should be returned at the earliest opportunity. In my judgment the question in every case must be whether the police were acting reasonably or not.' Slade LJ said at 895: 'In any case where very numerous documents are involved, a process of preliminary sorting is inevitable in order to carry out the very object for which the search warrant was granted, that is to say, so that any forged material may be identified and removed. Documents of the same, or a similar category, may be found in many different parts of the house. A considerable degree of sorting out into categories may be required in order to enable the necessary comparisons to be made effectively. …' 29 Later (at 895-896) Slade LJ rejected a submission that the police would not be entitled to take away a file or bundle of documents which they reasonably believed contained material of evidential value even for the temporary sorting at the police station unless they had first satisfied themselves that each and every document in the file or bundle might be forged or of evidential value. He said at 896: '(1) No matter how convenient this course may seem to be, a police officer acting under a search warrant issued under the Forgery Act 1913 is not entitled, without the consent of the owner, indiscriminately to remove from the premises each and every file, book, bundle or document he can lay his hands on, even if only for the purpose of temporary sorting. Before doing so, he must have regard to the nature and contents of the item in question. (2) However, provided that he acts reasonably in so doing, he is entitled to remove from the premises files, books, bundles or documents which at the time of removal he reasonably believes contain (i) forged material, or (ii) material which might be of evidential value, as showing that the owner is implicated in some other crime. (3) Any necessary sorting process in relation to all items removed (e.g., those contained in files and bundles) should be carried out with reasonable expedition and those of them which are not found to fall within either of the two relevant categories should then be returned reasonably promptly to the owner.' See also Purchas LJ at 902-903. 30 Applying these principles to the present case leads to the following result. One group of documents copied by ATO officers was "all e-mail store folders". None of the contents were examined before being copied. They simply 'copied e-mails in bulk' as one of the officers told the judge. This is quite impermissible and the copies must be returned (if that be possible) or destroyed. 31 The examination of the remainder of the documents can be best described as cursory. Mr Chang, the computer technician put to work at the Sunnybank office, searched the desktop computers and the server. When searching the computers he looked for key words that would arise in relation to the information sought. He looked for client lists and financial transactions and in particular any which indicated overseas transactions in Malaysia or Malta. He downloaded this information. When it was suggested to him that he downloaded entire directories without any examination he said: 'No. As part of the analysis we do try to target and limit them specifically to Excel spreadsheets, Word documents and keyword searches that we do go through, so we can look for specific entities or specific words on each of the computers.' Although brief, this was a sufficient examination in the circumstances. 32 On the other hand, Mr Chang's examination of the server was limited indeed. Most of the information on the server was contained in a "work file" directory and this was downloaded in full. Mr Chang said: 'To have looked at every file on the server or to have searched every work file would have taken at least several days, possibly weeks. This included various word docs, excel spreadsheets and acrobat PDF files. It also incorporated most of the files that were currently being worked on, and included client mailing lists, client letters etc.' 33 In other words, Mr Chang had no idea whether the information downloaded was relevant or not. Everything which was current was taken regardless of its relevance. This is not good enough. In legal terms, no reasonable effort was made to distinguish between the relevant and the irrelevant. 34 The search at the Queen Street office was conducted by Mr Davar, another technician. He explained that he conducted a search of the documents contained in the hard drive of each computer; that is the databases, the e-mail files and the PDF files. Initially he selected all files and then browsed the files by title. Any file that was not relevant by its title was not copied. He explained that by selecting files on the basis of titles he could not say that every document or file might be relevant or that some relevant documents were not missed. However the alternative was to copy the entire contents of the hard drive. He did not do this. Interestingly, and perhaps rather fortunately for the respondents, Mr Davar refrained from copying everything, not because he thought it was impermissible but because 'on most occasions time constraints would not allow this to occur.' The search of the computer files was brief but reasonable. 35 Mr Davar's search of the documents on the server was more detailed than that of Mr Chang. Mr Davar explained that the information on the server was stored according to categories in directories. There were several directories and approximately 7000 files were stored within those directories. To ascertain which directories were relevant he had regard to the directory title, looked inside the directories or looked at random files within those directories. Only directories that he considered relevant were downloaded. We consider that this was a reasonable examination of the documents in order to determine their possible relevance. Mr Davar was not required to look at every file; that would have been an enormous task. Unlike Mr Chang, at least Mr Davar made some effort to distinguish between relevant and irrelevant documents. 36 In the result, the appeal will be allowed, the orders made below will be set aside and in lieu thereof it be ordered that the respondents deliver up copies of the e-mails taken from the appellants' computers and copies of all documents downloaded from the server at the Sunnybank office. The appellants should have the costs of the appeal and of the proceedings below. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Spender, Madgwick and Finkelstein.

JMA Accounting Pty Ltd v Michael Carmody, Commissioner of Taxation

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