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Search Powers Under Scrutiny - March 2009

Nicholas Petroulias, a former Assistant Commissioner in the Australian Tax Office, fell from grace in spectacular fashion in the early years of this decade, subsequently appearing as defendant in a series of criminal prosecutions alleging various sorts of corrupt activity while in office, and being convicted in 2008 for corrupt conduct - agreeing to receive money on an understanding that his role at the Australian Taxation Office (ATO) would be affected - and unauthorised publication of documents .   

In 2006, perhaps wishing to get away from the pressures at home for a while before his last trial, Mr Petroulias came to New Zealand and stayed at Motueka River Lodge, described online[1] as “a small luxury hotel in a hidden valley with its own enchanted forest”.  However, Mr Petroulias’s worries followed him across the sea; the valley turned out to be insufficiently hidden, and its forest’s enchantments inadequate to repel the tax man.  On 8 November 2006 revenue authorities on both sides of the Tasman undertook a series of searches as part of an investigation into Mr Petroulias’s activities, including four New Zealand locations:

·         The offices of Avowal Administrative Attorneys;

·         The Mount Manganui premises of a Mr Lloyd;

·         The Browns Bay premises of a Ms Chisnall;

·         The Motueka River Lodge

Challenges to the validity and legality of these searches, and the seizure of computer records which resulted, were considered in a decision of Justice Venning, Avowal Administrative Attorneys Limited & Ors v CIR (unrep High Court Auckland CIV 2006-404-7264, 22 December 2008, Venning J).  This article examines the background to the decision and summarises its findings.

The Double Tax Agreement

Article 26 of the New Zealand-Australia Double Tax Agreement provides for exchange of information between the two states.  It had been considered in an Australian Federal Court decision (Currie v Deputy Commissioner of Taxation (Federal Court of Australia, 4 October 2000, Melbourne, Finkelstein J) which held that the Australian Tax Office could not lawfully use its search powers to obtain information solely so as to provide assistance to another country (in that case, New Zealand) under a Double Tax Agreement.  Such a use of the search powers, it was held, was not required for the purposes of the Australian income tax legislation.

With effect from 28 July 2006[2], Article 26 was amended, perhaps as a result of this decision, to incorporate a new paragraph 4, which materially provided:

If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes.

In an interim judgment of 26 February 2008[3] Baragwanath J appears to have held that this amendment enabled him to embrace the spirit of trans-Tasman cooperation more whole-heartedly.  He ruled that the Commissioner was entitled to use his search powers in this case even if the purpose had been purely to assist the ATO.

The Bill of Rights and the CIR’s Search Powers

Shortly after the 1990 enactment of the New Zealand Bill of Rights Act, no less a tribunal than the Privy Council ruled in New Zealand Stock Exchange v CIR; National Bank of NZ v CIR [1992] 3 NZLR 1 that “the exercise of the powers conferred on the Commissioner by s 17 of the Act of 1974 is not, for the purposes of s 21 of the New Zealand Bill of Rights Act, "unreasonable"”.  This line was followed for a number of years (see for example Wojcik v Police (1996) 17 NZTC 12,646 (DC) where Barber DCJ held that the application of s 17 TAA 1994 cannot generally be said to be unreasonable in terms of s 21 New Zealand Bill of Rights Act 1990).

A series of cases in recent years renewed the challenge to the exercise of the CIR’s search powers based on the procedural safeguards afforded and civil liberties protected by the Bill of Rights Act.  Those cases included Vinelight Nominees Ltd v CIR (2005) 22 NZTC 19,298 (HC), Chesterfield Preschools Ltd v CIR (No 2) (2005) 22 NZTC 19,500 (HC) and Re Next Generation Investments Ltd (in liq); Mason v CIR (2006) 22 NZTC 19,775 (HC).  A judicial consensus appears to have emerged, and seems to be reflected in Venning J’s synopsis of Baragwanath J’s judgment, that the use of the CIR’s search and detention powers is to be read with the Bill of Rights.

Computers, Books & Documents

The information in question was contained in various computers, and specifically, their hard drives.  Venning J, correcting an apparent oversight by Baragwanath J, referred to the definition of “books and documents” in the TAA and pointed out that it included various sorts of electronic storage media, “or any other type of record whatsoever”.  He held that a computer hard drive was a “book or document” for the purposes of the TAA, and could therefore be searched for and seized under s16.

A “Relevance Search”

In his ruling, Baragwanath J had held that:

In the circumstances [where the Commissioner or his officers is entitled to access property under s 16 of the Tax Administration Act 1994] there must be such inspection of the books or documents (including computer entries) before removal that the Commissioner has general reason to believe and does believe that it is necessary or relevant for the purposes of s 16(1).

This is known as a “relevance search”.  The tenor of the judgment seems to be, that if the CIR fails to undertake a relevance search or scan of the computer disk before seizing it, such a seizure may well transpire to be unreasonable and hence void by virtue of section 21 of the Bill of Rights.

An issue which fell to be decided by Venning J was whether, if a relevance search identified items or files of interest on a hard drive, the IRD inspectors were restricted to copying just those documents.

Other Issues

Other issues identified by Venning J included:

             Was a relevance search still required when a general claim to legal privilege over all documents was made?

             What are the rights of the IRD officers where the hard drives are encrypted?

             Whether freely given informed consent of the occupiers would permit removal of the computer hard drives without a relevance search first being conducted?

             What constituted such “freely given informed consent”?

             What relief should be granted to the applicants in the event of breach?

The Decision

Venning J found:

·         The ultimate test must be whether the inspection is conducted in a reasonable fashion and whether the search and decision to copy is a reasonable decision having regard to all the circumstances of the case.

·         Avowal had made a blanket claim that all material on the computer drives at its premises was subject to legal professional privilege.  While the IRD officers’ resulting decision not to undertake a relevance search was a cautious one (such a search could be undertaken in such a way as to respect legal privilege and not disclose to the IRD officers any privileged advice), they could not be criticised for following the provisions of section 20 TAA which set out a process for determining privilege claims.

·         The search of Avowal’s premises took considerably longer than anticipated, and well into the evening the pragmatic decision appears to have been made by all concerned that IRD could remove the computers for copying.  This constituted a free and informed consent, such that the relevance check did not need to be undertaken.

·         In carrying out a relevance check, what is required is a reasonable attempt to provide a preliminary filter, or sorting mechanism. A keyword search as was carried out in the present case was sufficient for that purpose.  There must be such inspection of the books or documents (which in this case includes hard drives) so that the IRD officers have general reason to believe that copying or removal of the hard drives is necessary or relevant. 

·         While it may have been technically possible for the computer technicians acting on behalf of the IRD to have copied just the documents which they had identified by the hits following their relevance checks, as a matter of principle that approach is not required by the authorities.

·         Several hard drives were not subject to a relevance check, and there was no consent to their removal.  They were taken unlawfully and had to be returned.

·         Some hard drives belonging to Mr Petroulias were not subject to a relevance check, and hence their seizure was prima facie unlawful.  However, three of those drives’ contents were encrypted, effectively making the use of a preliminary keyword search of the drive pointless.  It was therefore reasonable and open to the CIR’s officers to take copies of the drives.


The Bill of Rights is alive and well, and applies to IRD searches of computers.  Its application is limited, however, to circumstances where a relevance check is not undertaken or is not satisfied.  In circumstances where a relevance check cannot be undertaken (because the taxpayer claims privilege, or the computer drive is encrypted) the Bill of Rights will not render a search unreasonable.

[2] Clause 2 of the Double Taxation Relief (Australia) Amendment Order 2006

[3] The judgment is not released; it is summarized in the judgment of Venning J delivered on 22 December 2008