The scope and operation of sections

ATO practice is to initially proceed informally and rely upon the co-operation of taxpayers. Section 263 of the ITAA provides for the formal request for access,employing very general terms. The only limitation is that it be exercised in good faith for the purposes of the Act.

Hindrance or obstruction of an officer exercising access powers can lead to prosecution via section 263(3). The access power is not limited to the inquiry of named persons; the inquiry can be at a more general level such as identifying persons engaged in a particular activity. In

Knuckey38 the Full Federal Court upheld Sundberg J’s39 decision that the Commissioner, in conducting a work-related expense audit program that focused on tax agents, was acting within the purposes of the Act.

Only ‘reasonable force’ can be used by officers to gain access to premises and documents.

34 _{Commissioner of Taxation v Citibank Limited (1989) 20 FCR 403, 433 (French J). See Smorgon v ANZ} (1976) 134 CLR 475, 535 (Mason J). ‘Section 263 is a general provision giving the Commissioner a right of access. It makes lawful that which otherwise would be unlawful, e.g. entry upon premises, the examination of a document.’

35 _{(1984) 155 CLR 1; [1984] HCA 80 (6 December 1984).} 36 _{(1765) 19 St Tr 1029.}

37 _{(1984) 155 CLR 1; [1984] HCA 80[20] (6 December 1984).} 38

Knuckey v Commissioner of Taxation (1998) 87 FCR 187, 198 (Black CJ, Tamberlin and Goldberg JJ). 39 _{Knuckey v Commissioner of Taxation (1997) 37 ATR 213.}

If the section authorized the Commissioner to gain such access by force, it would bring about the most serious invasion of the ordinary rights of the subject, and the section would not be given that effect unless the clearest words required it.40

In Kerrison41the Commissioner sought access to a taxpayer’s boxes that were in the custody of a bank, the bank did not have keys to the boxes, and the taxpayer refused to open the boxes. Bollen J held that ‘the Commissioner is entitled to have full and free access to the boxes …and to the contents of the boxes’. 42

The term ‘document’ includes hard copy and electronically stored documents.43 The Commissioner is not entitled to bulk copy all documents, such as email folders or document folders, without first determining their relevance to any of the purposes of the Act.44 The Commissioner is required upon request, to provide a copy of all documents copied, scanned or extracted, so that the taxpayer can ascertain whether the documents copied are subject to privilege. The costs involved in providing the Commissioner with full and free access, are usually borne by the taxpayer.45

The Courts46 have interpreted section 263 as arming the Commissioner with a power of entry and search.

The section does not confer in terms a power of search; but plainly the power of search exists, whether it be an express power or an implied power necessarily arising from the power of full and free access to buildings, places, documents and other papers and the power for that purpose to make extracts from or copies of such books, documents or papers.47

Section 263 provides no guidance on how specific the authority needs to be in reference to: the places to be accessed; or the documents or class of documents that may be inspected and/or copied. The ‘generality’ of the language has caused controversy in a number of cases.48 In Citibank Lockhart J argued that since the section is an encroachment on the privacy of the taxpayer, the authority should provide such detail.

… where s 263 is invoked, the proper balance between the protection of the citizen from undue invasion of his premises, records and privacy on the one hand, and the protection of the revenue on the other, is secured by requiring not only that the authorising officer, …give due consideration to the particular circumstances which call for the issue of an authority under the section; but by

40

Federal Commissioner of Taxation v Australia and New Zealand Banking Group (1979) 143 CLR 499, 525 (Gibbs ACJ).

41 _{Kerrison & Banich Management Pty Ltd v Federal Commissioner of Taxation (1986) 17 ATR 338.} 42 _{Ibid 349.}

43

Australian Taxation Office, above n 33.

44 _{JMA Accounting Pty Ltd and Another v Commissioner of Taxation and Others (2004) 139 FCR 537,} 546 [30].

45 _{The costs are an allowable deduction under section 25.5 of the ITAA 1997.} 46

See Allen Allen & Hemsley v Deputy Commissioner of Taxation (1988) 19 ATR 1462, Pincus J assumed that section 263 granted the Commissioner the power to search.

47 _{Citibank Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1479, 1490 (Lockhart J); this} judgment was overturned on appeal.

48

See Commissioner of Taxation and Others v Citibank Ltd (1989) 20 FCR 403, 413 (Bowen CJ and Fisher J).

requiring also that the written authority show on its face the premises to be searched and the books, documents and other papers which are the subject of the search.49

On appeal the Full Federal Court disagreed with Lockhart J.

In the present case his Honour’s confinement of the scope of the authority for which s 263(1) provides turned upon the general proposition that the section is an encroachment on liberty and so should be read narrowly. He relied upon the principle that a statute should not be construed as taking away long standing legal rights unless by clear words to that effect.50

…In my opinion, however, it is not open to the Court in the present case to create a new category of rules which would impose a procedural fetter on the exercise of this “wide” statutory power in order to ensure that its repository gives due regard to common law rights.51

Bowen CJ and Fisher J while also disagreeing with Lockhart J noted that perhaps it was unfortunate that the legislation did not mandate a degree of specificity on the face of the authority; as such a requirement would enable an occupier to assess the extent and nature of his obligation to facilitate and assist the Commissioner in the search.52

The High Court in Industrial Equity53 addressed the question of whether the Commissioner by employing sections 263 and 264 to conduct a random audit was acting ‘for the purposes of the Act’. The ITAA makes no mention of thephrases ‘tax audit’ or ‘random audit.’ The ATO had informed Industrial Equity that it had ‘not been chosen for any particular reason’ and that ‘to a large extent the process is quite random.’54 The Court decided in favour of the ATO.

The expression “tax audit” does not appear in the Act. The Shorter Oxford English Dictionary defines “audit” as “make an official systematic examination of (accounts)”. Such an examination, where a taxpayer’s affairs are involved, will be for the purposes of the Act where it is directed to ascertaining the taxable income of a taxpayer.

…Clearly enough, the resources of the Australian Taxation Office do not extend to auditing the returns of every taxpayer, even if it were thought appropriate to do so: …Inevitably, there will be a random aspect to those who are finally selected for closer examination; but the Commissioner will still be acting for the purposes of the Act so long as he is endeavouring to fulfil his function of ascertaining the taxable income of taxpayers.55

Section 263 makes no mention of ‘seizure’ of documents, computer hardware, or indeed the exclusion of staff from their offices, as was the case in JMA.56 The ATO did not give JMA ‘notice of any inspection because of a perceived risk that incriminating documents might be destroyed.’57 Dowset J compared section 263 to a search warrant.

Section 263(1) is not equivalent to a search warrant provision. It does not, in terms, authorise the seizure of documents. Rather, it provides for “full and free access” to documents. To my mind that does not create a right of exclusive possession, either of premises or documents, enforceable against the owners, occupiers or bailees. Although the occupier of a building or place must afford

49 _{Citibank Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1479, 1491.} 50 _{Commissioner of Taxation v Citibank Ltd (1989) 20 FCR 403, 432 (French J).} 51 _{Ibid 434 (French J).}

52

Ibid 413.

53 _{Industrial Equity Ltd v Deputy Commissioner of Taxation (1990) 170 CLR 649.} 54 _{Ibid 665 (Gaudron J).}

55 _{Ibid 660-1 (Mason CJ Brennan, Deane, Dawson, Toohey, and McHugh JJ).} 56

JMA Accounting Pty Ltd v Commissioner of Taxation (2004) 139 FCR 537. 57 _{Ibid 539.}

reasonable assistance, that does not necessarily involve total surrender of control over, or access to premises or documents. The subsection does not authorise the Commissioner or his officers to remove documents from the premises; nor does it authorise the exclusion of any other person from the premises or from having access to document.58

Dowset J held that the exclusion of JMA staff from the premises was unlawful; however to the dismay of JMA, he also held that the ATO was entitled to possession of the copies of documents made,59 subject to any valid claim of client legal privilege.60 JMA appealed the decision on the grounds of the lawfulness of the search and seizure, and the Full Federal Court in ruled in favour of JMA.

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 of search and seize (such as that conferred by s263) is only entitled to seize those documents which he is authorised to seize by the relevant power ...Second, both the search and seizure must be reasonably carried out …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.61

6.5 The scope and operation of sections 264

Section 264 is a section that has remained unchanged from the original 1915 Act; it too employs very general language; however the section must be exercised for the purpose for which it was granted.

Section 264, unlike its companion section s 263, does not expressly qualify the power conferred upon the Commissioner as being exercisable only for the purposes of the Act. None the less it may readily be accepted that where a coercive power such as s 264 has been conferred, that power may only be exercised bona fide for the purpose for which it was conferred...62

The wide ranging powers of the ATO under section 264 were defined by Mason J in the High Court Smorgon case.63

The strong reasons which inhibit the use of curial processes for the purposes of a “fishing expedition” have no application in the administrative process of assessing a taxpayer to income tax. It is the function of the Commissioner to ascertain the taxpayer’s taxable income. To ascertain this he may need to make wide-ranging inquiries, and make them long before any issue of fact arises between him and the taxpayer. Such an issue will in general, if not always, only arise after the process of assessment has been completed. It is to the process of investigation before assessment of s 264 is principally, if not exclusively, directed.

Often the materials or evidence required by the ATO are only within the knowledge or possession of the taxpayer, and/or their bank, or tax practitioner. The section provides the Commissioner with three powers. ‘Each of the three powers while capable of exercise

58 _{JMA Accounting Pty Ltd and Entrepreneur Services Pty Ltd v Carmody (2004) 56 ATR 327, 342[61].} 59 _{This decision was reversed by the Full Federal Court.}

60 _{JMA Accounting Pty Ltd and Entrepreneur Services Pty Ltd v Carmody (2004) 56 ATR 327, 351[50].} 61

JMA Accounting Pty Ltd v Commissioner of Taxation (2004) 139 FCR 537, 542-3[16] (Spender, Madgwick and Finkelstein JJ) (citations excluded).

62 _{Commissioner of Taxation v De Vonk (1995) 61 FCR 564, 578[E] (Hill and Lindgren JJ) (citation} excluded).

63

Commissioner of Taxation v Australia and New Zealand Banking Group Ltd (Smorgon) (1979) 143 CLR 499, 535-6.

independently could, should the Commissioner so desire, be exercised together so that one notice would suffice.’64 First, section 264(1)(a) empowers the Commissioner to require any person to furnish him with such information as he may require. The section abrogates any contractual and/or equitable obligations of confidentiality that the recipient of a notice might owe to third parties.65 The section enables the ATO to undertake a ‘roving inquiry’66 and/or a ‘fishing expedition’ into the income or assessment of taxpayers.67 The power can be exercised before the existence of a dispute between the taxpayer and the ATO. Thus a notice can be issued for the purposes of a ‘preliminary inquiry’, to obtain information necessary for further investigations.68 This enables the ATO to conduct ‘real-time’ enquiries, enhancing their ability to respond to new and emerging issues.

The section does not require the identification the person or persons in connection with whose income or assessment the request for information is made.69 Nor is it necessary for the notice to reveal on its face that the Commissioner is entitled to require the information specified; it is enough for the notice or the covering letter to record that the information is required for the purposes of the Act.70

Section 264(1)(b) has two limbs, with two distinct powers. Firstly, the Commissioner may require any person to attend and give evidence before him concerning his or any other person’s income or assessment. Secondly, the Commissioner may require any person to produce documents in his custody or control which relate to the income or assessment of identifiable persons. This section unlike section 264(1)(a) is expressly limited by reference to a particular taxpayer’s income or assessment.

6.5.1 A section 264(1)(b) interview

The interview is essentially administrative, and therefore ATO officers are not bound by rules of the evidence. The officers are not exercising a judicial power; they are not making any authoritative or conclusive decisions. The officers are not bound to accept as truth anything said during the course of an examination or even that the interviewee is an honest witness. The examination is limited to an investigation of an identified person or persons’ income or assessment. The section itself does not impose any express duty to comply. A statutory duty

64 _{Fieldhouse v Commissioner of Taxation (1989) 25 FCR 187, 208 (Hill J).} 65 _{See Smorgon v ANZ (1976) 134 CLR 475, 486-90.}

66

Deloitte Touche Tohmatsu v Deputy Commissioner of Taxation (1998) 40 ATR 435, 450 (Goldberg J). 67 _{See Commissioner of Taxation v Australia and New Zealand Banking Group Ltd (Smorgon) (1979) 143}

CLR 499, 535-6.

68 _{ANZ Banking Group v Konza (2012) 206 FCR 450, 468[40].} 69

Fieldhouse v Commissioner of Taxation (1989) 25 FCR 187, 207 (Hill J).

to comply is imposed by Part 111, Division 2, of the TAA. The penalties for breach of these provisions can include substantial monetary fines and the possibility of imprisonment.71 The Commissioner and the interviewee are entitled to legal representation to facilitate the proper conduct of an examination.72 _{The ATO is entitled to employ Counsel for the purposes}

of the interview, though an authorised ATO officer must be in charge of proceedings.73 The employment of Counsel does not change the private nature of the process, as Counsel ‘is bound not to divulge information acquired during the examination.’74