Wide-ranging discovery ordered

Summary

The Commissioner was unsuccessful in opposing an application for discovery where he maintained that tax secrecy, public interest immunity or administrative difficulty would arise if the orders were granted. The Court held that these were matters for the Court, not the Commissioner, to decide.

Impact of decision

This decision may have implications for the discovery of information exchanged under the double tax agreements. From a practical perspective, the extent of possible discovery as a consequence of this decision is very broad.

Facts

On 6 September 2010, the Commissioner sought and obtained a freezing order without notice over a property owned by Giovanni Holdings Ltd ("Giovanni"). The freezing order was obtained on the basis that a Mr Petroulias and another were/are the beneficial owners of the property.

Proceedings

Giovanni filed an application in October 2010 seeking an order discharging or varying the freezing order. In the course of case management of that application, the Commissioner objected to representation of Giovanni by Ms Hancock (the director of Giovanni). The High Court (in a decision dated 22 December 2010) decided in favour of Giovanni and allowed Ms Hancock to represent the company.

Giovanni also filed an application seeking an order that general discovery be made by the Commissioner. The Commissioner opposed the application. This hearing was to consider the discovery issue.

Decision

Giovanni sought an order for general discovery of:

1. all transcripts of recorded phone calls held between Mr Petroulias and others and provided to the Commissioner by the Australian Tax Office ("ATO")
2. all electronic databases containing relevant information, including the "Z:drive" which was seized in the Commissioner's access operations in 2006
3. all probative communication between the Commissioner and the ATO
4. all other probative documents, correspondence and records of interviews with any party.

McKenzie J firstly granted the leave sought by Mr Petroulias to be heard in the discovery proceedings (the application had only been filed by Giovanni) as it was necessary in the interests of justice.

With regard to the general discovery sought, McKenzie J noted that the Commissioner's actions were being challenged (an application to strike out the proceedings had been filed on the basis of abuse of process) and acknowledged that while these were better addressed in the substantive proceedings, it was relevant in considering the extent of appropriate discovery.

McKenzie J agreed that, as a matter of general principle, the Peruvian Guano test was not appropriate in cases where, as a matter of policy, they should be dealt with swiftly (such as freezing orders). His Honour acknowledged that discovery was not usually appropriate in freezing order applications as they are usually dealt with on an urgent basis and confirmed that the onus is usually on the applicant for the freezing order to show it has a good arguable case and to disclose all material facts and possible defences. However, McKenzie J considered that this case was different as the application for discharge of the freezing order would require an inquiry wider than whether the Commissioner had an arguable case regarding beneficial ownership of the relevant property. Further, any delay in the proceedings (despite the urgency of a freezing order application) did not weigh against discovery, particularly when the Commissioner's position is protected by the freezing order.

The Commissioner had argued that all relevant material had been produced pursuant to section 81(1) of the Tax Administration Act 1994. McKenzie J rejected that submission stating that not all discoverable documents will usually be produced in evidence and should be verified by a discovery affidavit. McKenzie J confirmed the position in Knight v CIR and BNZ Investments Ltd v CIR that the conduct of litigation (and specifically discovery) is a purpose of carrying into effect the Inland Revenue Acts for the purposes of section 81.

However, his Honour recognised that production of discovered documents can be withheld where a claim of privilege is available. In that regard, McKenzie J referred to the Commissioners submission that the documents were subject to public interest immunity and confirmed the principle in BNZ Investments [2008] 2 NZLR 709 that section 81 addresses the reconciliation of the principles of taxpayer discovery and the interests of justice. While the respondents submitted that no public interest immunity issues arise as discussed in CIR v ER Squibb (1992) 14 NZTC 9146, McKenzie J stated it need not be addressed at this point in the proceedings (noting that the ultimate decision on a claim of public interest immunity is for the Court to decide, not the Commissioner and if necessary the Court will inspect the documents to determine the question).

With regard to the first category of documents, his Honour disagreed that the respondents had failed to establish relevance and held that the Commissioner's reliance on some of this material provided a sufficient basis for discovery of all transcripts.

As for the second category, McKenzie J noted that the "Z:drive" had been subject to previous litigation (Venning J had decided that the Commissioner was not required to make available a cloned copy of the hard drive). However, McKenzie J stated that the question before his Honour was different to that before Venning J and held that discovery should be required of relevant documents contained on that hard drive.

McKenzie J rejected the Commissioner's submission that discovery would be unduly burdensome due to the volume of information on the hard drive. His Honour stated that there are two ways to avoid such a burden: the Commissioner can either make a copy of the "Z:drive" available to the respondents or carry out keyword searching to locate relevant documents. McKenzie J considered it was inappropriate for the Court to fix a list of words and stated that it will be for the Commissioner to decide the relevant search terms (noting that the Commissioner will need to set out the basis for the relevance testing in an affidavit to ensure adequacy of the search can be examined should it be challenged).

His Honour rejected the Commissioner's submission that as the documents in the third category were the subject of incomplete investigations in both New Zealand and Australia, the disclosure would prejudice the maintenance of the law. McKenzie J held that section 81 was also relevant to this category of evidence and again stated that any decision on public interest immunity was for the Court not the Commissioner.

As for the fourth category, being all other relevant documents, correspondence and records of interviews, McKenzie J also ordered that these should be discovered.

In summary, the Commissioner was ordered to produce a discovery affidavit listing all relevant information from all four categories (which are or have been in the Commissioner's control) within 20 working days.