Section 81 Tax Administration Act 1994 (TAA 1994) provides a principle of confidentiality of taxpayer information which is, as recognised in s 6 TAA 1994, a cornerstone of the concept of integrity of the tax system. This article considers the limits of that principle when it comes to the conduct of a tax dispute, against the background of the recent Supreme Court decision Westpac Banking Corporation Ltd v CIR; ANZ National Bank Ltd, UDC Finance Ltd and Tui Endeavour Ltd v CIR, (unreported, Supreme Court, 14 April 2008, SC 66/2007, SC 67/2007, Elias CJ, Blanchard, Tipping, McGrath and Anderson JJ) (“Westpac”).
Why Secrecy?
The secrecy of tax information is justified as a corollary of the IRD’s wide powers to require information (by tax return and otherwise) and the huge amount of information it holds. The reason why secrecy of taxpayers’ details is such a cornerstone of the tax system was explained by Richardson J in Knight v CIR [1991] 2 NZLR 30 (CA) at 39:
“Without an army of inspectors a tax system inevitably depends very substantially on the willingness of taxpayers to provide proper and timely tax information to the Revenue. As Lord Wilberforce observed in R v IRC, ex p National Federation of Self- Employed and Small Businesses Ltd [19821 AC 617, 633, the total confidentiality of assessments and of negotiations between individuals and the Revenue is a vital element in the working of the system. It rests on the assurance provided by stringent official secrecy provisions that the tax affairs of taxpayers are solely the concern of the Revenue and the taxpayers and will not be used to embarrass or prejudice them.”
Exceptions to Secrecy
Total secrecy would render the system unworkable. The Commissioner (CIR) could not make third-party enquiries, issue debt collection proceedings, prosecute tax offences or defend challenges to assessments. So there have to be some exceptions. Earlier this month the Italian government published every Italian’s declared earnings and tax contributions on the internet. The tax authority’s website was inundated by people curious to know how much their neighbours, celebrities or sports stars were making. While the Italian treasury suspended the website after a formal complaint from the country’s privacy watchdog, it is a reasonably safe assumption that such disclosure would not have happened in the first place under our privacy laws.
While clearly not at relaxed Italian levels, there are many exceptions to the secrecy provisions. Most of the specific exceptions allow the provision of general information to Government departments such as Statistics or Treasury, and provision of individuals’ information for data-matching purposes concerning benefits, student loans, ACC payments and the like. The general exceptions are found in ss 81(1) and (3) TAA 1994, and enable IRD officers to make communications and to give evidence and produce documents in Court, provided that this is “for the purpose of carrying into effect” the Acts administered by the IRD.
Cases on the General Exception
The Privy Council examined the similar secrecy obligation which existed in the then Ceylon in Gamini Bus Co Ltd v Commissioner of Income Tax, Colombo [1952] 1 AC 571. In that case the Commissioner used other taxpayers’ information to establish ratios and trends, for the purpose of establishing a comparison case, and while this was approved, Viscount Simon said that:
“Their Lordships would strongly deprecate the production or use of such a document if it did in effect disclose information about other identified or identifiable taxpayers…”
The scope of our s 81 TAA 1994 (strictly speaking, its equivalent in s 13 Inland Revenue Department Act 1974) first underwent serious consideration in Knight v CIR -1991] 2 NZLR 30 (CA), where the CIR was defendant in a suit alleging unlawful bugging by departmental officers of a conversation between the plaintiff and a third person. The CIR opposed discovery of relevant material in reliance upon s 81’s predecessor. The Court found against the CIR, holding that as the CIR was discharging statutory functions in conducting all litigation in which he was a party and discovery was a necessary element of litigation, it was part of carrying the Acts into effect to undertake such discovery, which was therefore covered by the equivalent to s 81(3) TAA 1994.
The Court of Appeal considered what may be seen to be two sides of the same coin in cases in the early-mid 1990s — CIR v ER Squibb & Sons (NZ) Ltd (1992) 14 NZTC 9,146 (“Squibb“) and Fay, Richwhite & Co Ltd v Davison (1995) 17 NZTC 12,011 (“Davison“).
In Squibb, the CIR had tabulated data from industry competitors to illustrate and to support his proposed assessment in relation to a transfer pricing issue. It was held that the CIR could not be compelled to discover such information in a format which identified other taxpayers’ confidential affairs. In that case the underlying requirements of s 81 would be met while providing reasonable detail, simply by use of schedules expressing the secret information in ratios or proportions, in a way which avoided taxpayer identification. Richardson J added (at 9,160) that to compel disclosure of a taxpayer’s identity whenever the CIR had regard to comparative industry data would inevitably undermine the integrity of the tax system, which the stringent secrecy provisions were designed to support, and would be inimical to carrying the Inland Revenue Acts into effect. These comments were relied on by the taxpayer in Westpac.
In Davison the issue was the extent, if any, to which the CIR could give evidence of the tax affairs of particular taxpayers in the “winebox” Commission of Inquiry investigating allegations of corruption and incompetence. Squibb was considered and explained, Hardie Boys J noting (para 41) that the secrecy provisions protect the IRD, not individual taxpayers, and emphasising that the passage from Richardson J’s judgment noted above should be read in the context of a taxpayer seeking production of other taxpayers’ records. As it was accepted that all evidence which was proposed to be given by the CIR was relevant to the winebox transactions, and the answering of questions in a Commission of Inquiry to refute allegations of corruption or incompetence was carrying into effect the Revenue Acts, the evidence came within the general exception in ss 81(1) and (3).
A recent illustration of the Courts’ approach to s 81 in litigation appears in R v Morris [2005] 2 NZLR 684 (CA), where the Court of Appeal upheld a Crown submission that an Inland Revenue officer giving evidence in a fraud trial where Inland Revenue was the alleged victim, involved carrying into effect the Inland Revenue Acts and particularly the duty in s 6 TAA 1994 to uphold the integrity of the tax system.
In Westpac, another bank (the Bank of New Zealand, “BNZ”) had High Court litigation against the CIR challenging assessments of tax avoidance in relation to “structured finance” transactions which it had undertaken. In the course of the BNZ litigation the CIR provided a list of relevant documents, which included documents in relation to transactions entered into by the other banks of allegedly “a substantially similar sort” to those in issue in the BNZ proceedings. As such, it appears to be a sort of “similar fact” evidence. Westpac challenged the inclusion of its documents in the list on the bases of lack of relevance to the BNZ proceeding, and breach of the confidentiality provisions of s 81. By the time the Westpac case got to the Supreme Court, the focus was almost exclusively on s 81, challenges to potential relevance having seemingly been discontinued in the appeal process.
As the only possible purpose for giving similar fact evidence could be to advance the IRD’s defence in a tax avoidance challenge, one would have thought that it could not be seriously contended that defending a multimillion dollar tax assessment was not “carrying into effect the Inland Revenue Acts”. The judgment records the taxpayer’s argument, however, as being that “in relation to the use of information concerning the affairs of other taxpayers, the obligation of secrecy must be given full effect by allowing use of such material by the Commissioner only in a manner that does not lead to the identification of taxpayers other than those who are parties to the particular litigation”. This argument was largely based on a reading of Richardson J’s judgment in Squibb.
Like the giant squid recently examined by Te Papa scientists, which proved on being defrosted and analysed to be considerably smaller than earlier estimates, Squibb proved on analysis by the Supreme Court to have much smaller importance than the taxpayers had contended. The Supreme Court refused to accept that Squibb, in deciding under the facts of that case that identification of third parties’ details was unnecessary (as irrelevant) and hence impermissible (under s 81), established an absolute prohibition against identification of third party taxpayers’ details. In Westpac, unlike Squibb, “it is clear that if the identity of the other banks involved in those transactions is not before the High Court, the documents will have no utility as evidence. In those circumstances it is reasonably necessary that the identity of the other banks concerned should be before the Court” (para [72] Westpac decision).
Situation After Westpac
In summary, it appears to be the case that if evidence is relevant and otherwise admissible, then leading that evidence by the CIR in court will necessarily be for the purpose of carrying into effect the Revenue Acts. The House of Lords recently explained, with characteristic elegance, what relevance means in O’Brien v Chief Constable of South Wales Police [2005] 2 All ER 931 (HL):
· Relevance must, and can only, be judged by reference to the issue which the Court is called upon to decide.
· Evidence is relevant if it is logically probative or disprobative of some matter which requires proof.
· Logically probative or disprobative evidence is evidence which makes the matter which requires proof more or less probable.
No Carte Blanche
However, this does not mean that the CIR has carte blanche. The CIR, as custodian of so many secrets, has to be careful that the baby is not thrown out with the bathwater when deciding that information is relevant: s 81 requires particular care to be exercised as to the extent to which evidence is adduced. As the Supreme Court said in Westpac at para [69]: “Disclosure is not permitted unless, and to the extent that, it is reasonably necessary for the performance of the Commissioner’s statutory functions.”
In the light of these principles it seems clear that s 81 requires that such steps as are practicable be taken to ensure that only the evidence which is strictly relevant and admissible is led before the court, and not that evidence which might ordinarily be led as ancillary to the relevant evidence, such as details and identity, where these are not in themselves relevant and are otherwise protected by s 81.
The question will be: “is all the information relevant, and if not, what part or aspect is not relevant?” Sometimes, as in Squibb, it is only generalised information which is relevant, ie logically probative or disprobative. Sometimes, however, the identity of other taxpayers will either be logically probative or disprobative in and of itself, or it will be a necessary key in making relevant other information. As the Westpac judgment explains, the earlier cases are reconcilable with the outcome in that case when one has regard to what is the relevant information in those earlier cases (the general industry data in Squibb, the ratios and trends in Gamini Bus).
To show the careful approach which the CIR apparently needs to undertake, a letter held by the CIR may be relevant, but its relevance may depend on only some aspects of a number of different bits of “information” relating to that letter:
· Who wrote it;
· Who received it;
· What it said;
· The truth of what it said;
· The persons identified in that letter;
· Its date;
· Where it was found.
In those circumstances, it may well be that extraneous bits of information about the letter (for example, the author’s identity) which in context are irrelevant but would ordinarily be left in as unexceptional, are required to be redacted by the CIR so as to conform with s 81.