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Standard practice statements: Investigations

SPS 10/02 - Imaging of electronic storage media

This statement also appears in Tax Information Bulletin Vol. 22, No. 7 (August 2010).

Introduction

  1. Taxpayers record and store business records and other information on a variety of electronic storage media. This Standard Practice Statement (SPS) sets out Inland Revenue's practice when taking an image of a taxpayer's electronic storage media. This SPS has been produced to establish Inland Revenue's standards for imaging electronic storage media and to ensure that Inland Revenue performs that function efficiently, effectively and consistently.
  2. All references to legislation in this SPS are to the Tax Administration Act 1994 ("TAA") unless specified otherwise.

Application

  1. This SPS discusses a small part of Inland Revenue's wider information-gathering powers under the TAA. The standard practice contained in this SPS will be applied where other means of obtaining information are inappropriate or inadequate.
  2. This SPS applies from 14 July 2010.

Background

  1. Electronic record-keeping and the storage of information by electronic means has become common practice for taxpayers. Technological developments mean records can be kept and information can be stored electronically on a variety of media.
  2. Information stored electronically falls within the definition of "book and document" under section 3. Examples include, but are not limited to, information stored in computer hard drives, USB flash drives, mobile phones, personal digital assistants, photocopiers, scanners, and external hard drives. The Commissioner is entitled to access such information where it is "necessary or relevant" under section 16.
  3. Consequently, there is a need for Inland Revenue to expand its information collection methods to accommodate technological advances. This SPS provides the framework within which an electronic storage medium can be imaged using the existing statutory information gathering powers provided for in sections 16 and 16B.
  4. The imaging of the electronic storage medium is generally performed on-site where the medium is located. If this is not possible, section 16B allows the Commissioner to remove the device to image off-site. In certain circumstances, section 16C provides that the Commissioner can, by obtaining a warrant or with the consent of the occupier, remove and retain the electronic storage medium to allow full and complete inspection. However, note that the scope of this SPS is limited to the imaging of electronic storage media only. It does not extend to the retention of electronic storage media for inspection.

Definitions

  1. The following terms are used throughout this SPS:
  • Electronic storage medium: Any device that has the ability to store data electronically. This may include computer hard drives, memory cards, memory sticks, mobile phones, MP3 players, or any other devices that have the function of storing data electronically.
  • Image: An exact copy of all data from the original electronic storage medium, saved in a file format that is evidentially sound and allows retrieval and analysis of that data.

Summary

  1. Section 16 authorises the Commissioner to have full and free access to any place to inspect and copy all books and documents that the Commissioner considers necessary or relevant for a purpose under an Inland Revenue Act.
  2. The definition of "book and document" in section 3 includes an electronic storage medium.
  3. Generally, as a starting point, a relevance search will be carried out on the electronic storage medium in order to satisfy the Commissioner that the electronic storage medium contains "necessary or relevant" information or it is likely to provide any information otherwise required. However, there may be circumstances where the Commissioner has sufficient information to be satisfied that the electronic storage medium contains information that is "necessary or relevant" without conducting a relevance search.
  4. In some cases, such as where the data stored on the electronic storage medium is encrypted or where there has been a claim of legal privilege or non-disclosure right, it may not be practicable for the Commissioner to conduct a relevance search. In which case the medium will be imaged without carrying out a relevance search. This does not necessarily mean that the search is unreasonable in terms of section 21 of the New Zealand Bill of Rights Act 1990 because there may be circumstances where the Commissioner has sufficient information to be satisfied that the electronic storage medium contains information that is "necessary or relevant" without conducting a relevance search.
  5. As the courts have found that an electronic storage medium is analogous to a book or a very long document, the entire electronic storage medium will be imaged if the relevance search identifies information that is "necessary or relevant".
  6. In the event that a claim of legal privilege or non-disclosure right for tax advice documents is made, in order to preserve the information, the electronic storage medium will either be sealed, or imaged and then sealed.
  7. The Commissioner will attempt to resolve the claim of legal privilege or non-disclosure right with the person making the claim by negotiation, although the matter may need to be resolved through the courts.
  8. The imaging of the electronic storage medium is generally performed on-site where the electronic storage medium is located. However, under section 16B, the Commissioner may remove an electronic storage medium for the purpose of imaging it.
  9. In deciding whether to remove an electronic storage medium, the Commissioner may consider the following:
    • Volume of data stored on the electronic storage medium;
    • Whether it is appropriate or practicable for the electronic storage medium to be removed;
    • The time it may take to image the electronic storage medium on-site;
    • The occupier's preference for the removal of the electronic storage medium or other reasonable alternatives as suggested by the occupier; and
    • Whether it is appropriate for the Inland Revenue officers to remain at the premises.

  10. In any case, if there are reasonable grounds to believe that there is a risk to the information stored on the electronic storage medium, the electronic storage medium will be removed.
  1. Consent for the removal of the electronic storage medium for imaging is not required by section 16B.
  2. To minimise any disruption to business that may be caused by the removal of the electronic storage medium, the owner has a right to inspect and obtain a copy of the electronic storage medium that is removed.
  3. The scope of this SPS is limited to the standard practice for imaging electronic storage media. It does not extend to the power to remove and retain books or documents for inspection under section 16C.

Legislation

  1. The relevant provisions in the Tax Administration Act 1994 in relation to the information gathering powers are sections 3, 16 and 16B:


Tax Administration Act 1994

3 Interpretation

"Book and document", and "book or document", include all books, accounts, rolls, records, registers, papers, and other documents and all photographic plates, microfilms, photostatic negatives, prints, tapes, discs, computer reels, perforated rolls, or any other type of record whatever:

16 Commissioner may access premises to obtain information

16(1) Access of Commissioner or authorised officer Notwithstanding anything in any other Act, the Commissioner or any officer of the Department authorised by the Commissioner in that behalf shall at all times have full and free access to all lands, buildings, and places, and to all books and documents, whether in the custody or under the control of a public officer or a body corporate or any other person whatever, for the purpose of inspecting any books and documents and any property, process, or matter which the Commissioner or officer considers necessary or relevant for the purpose of collecting any tax or duty under any of the Inland Revenue Acts or for the purpose of carrying out any other function lawfully conferred on the Commissioner, or considers likely to provide any information otherwise required for the purposes of any of those Acts or any of those functions, and may, without fee or reward, make extracts from or copies of any such books or documents.

16(2) Assistance required The occupier of land, or a building or place, that is entered or proposed to be entered by the Commissioner, or by an authorised officer, must-

  1. (a) Provide the Commissioner or the officer with all reasonable facilities and assistance for the effective exercise of powers under this section; and
  2. (b) Answer all proper questions relating to the effective exercise of powers under this section, orally or, if required by the Commissioner or the officer, in writing, or by statutory declaration.

16(2A) Person may accompany Commissioner or authorised officer A person whom the Commissioner or an authorised officer considers necessary for the effective exercise of powers under this section may accompany the Commissioner or the authorised officer to a place.

16(3) Restricted entry to private dwelling Notwithstanding subsection (1), the Commissioner, an authorised officer, or a person accompanying the Commissioner or the authorised officer, shall not enter any private dwelling except with the consent of an occupier or pursuant to a warrant issued under subsection (4).

16(4) Warrant to enter private dwelling A judicial officer who, on written application made on oath, is satisfied that the exercise by the Commissioner or an authorised officer of his or her functions under this section requires physical access to a private dwelling may issue to the Commissioner or an authorised officer a warrant to enter that private dwelling.

16(5) Terms of warrant for entry Every warrant issued under subsection (4)-

  1. (a) Shall be in a form prescribed by regulations made under this Act; and
  2. (b) Shall specify an authorised officer of the Department, whether by name or in general, who may act under the warrant; and
  3. (ba) Shall specify whether other persons may accompany the officer acting under the warrant; and
  4. (c) Shall be valid for a period of 1 month from the date of its issue or such lesser period as the judicial officer considers appropriate; and
  5. (d) Shall state its period of validity, or the date on which it expires.

16(6) Production of warrant and identification Every person exercising the power of entry conferred by a warrant issued under subsection (4) shall produce the warrant of authority and evidence of identity-

  1. (a) On first entering the private dwelling; and
  2. (b) Whenever subsequently reasonably required to do so.

16(7) Definitions In this section-

"Judicial officer" means any District Court Judge, justice, Community Magistrate, or Registrar of a District Court; but does not include any person who is an officer or employee of the Department:

"Private dwelling" means any building or part of a building occupied as residential accommodation (including any garage, shed, and other building used in connection therewith); and includes any business premises that are or are within a private dwelling.

16B Power to remove and copy documents

16B(1) Removal of books or documents The Commissioner, or an officer of the Department authorised by the Commissioner, may remove books or documents accessed under section 16 to make copies.

16B(2) Return of books or documents Any copies of the books or documents removed must be made, and the books or documents returned, as soon as practicable.

16B(3) Certified copy admissible as evidence A copy of a book or document certified by or on behalf of the Commissioner is admissible in evidence in court as if it were the original.

16B(4) Inspection by owner The owner of a book or document that is removed under this section is entitled to inspect, and obtain a copy of, the book or document at the premises to which the book or document is removed-

  1. (a) At the time the book or document is removed to the premises:
  2. (b) At reasonable times subsequently.
  1. Also relevant are section 20 which relates to legal privilege and sections 20B to 20G which relate to the non-disclosure right for tax advice documents.

Discussion

The Commissioner's powers to obtain information under sections 16 & 16B

  1. Section 16 authorises the Commissioner to have full and free access to any place to inspect and copy all books and documents that the Commissioner considers "necessary or relevant".
  2. "Necessary or relevant" for the purposes of section 16 means that the book or document is necessary or relevant for any of the following purposes:
    • Collecting any tax or duty under any of the Inland Revenue Acts;
    • Carrying out any other function lawfully conferred on the Commissioner;
    • Likely to provide any information required for the purposes of any of the Inland Revenue Acts or the Commissioner's functions.
  3. Occupiers of lands, buildings, or places are required to assist the Commissioner by providing all reasonable facilities and assistance for the effective exercise of section 16 and to answer all proper questions relating to that exercise (section 16(2)).
  4. Section 16(3) provides that a private dwelling can only be accessed by obtaining a warrant or with the consent of an occupier.
  5. Section 16B was inserted into the TAA in 2003, giving the Commissioner the power to remove books or documents accessed under section 16 in order to make copies. This power was provided to address the risk of books or documents being destroyed, removed, or tampered with in certain cases. The power under section 16B will be exercised in situations where it is necessary to prevent the Commissioner's legitimate investigations being hindered or where copying on the premises is not practicable.
  6. As discussed in paragraphs 33 to 36 of this SPS, the removal of books or documents under section 16B includes removing an electronic storage medium for imaging. Consent to remove the book or document for copying is not required by section 16B.
  7. If the Commissioner removes a book or document, the owner is entitled to, at the time of removal or at reasonable times subsequently, inspect and obtain a copy of the book or document that is removed (section 16B(4)). This should assist in minimising any disruption to businesses or other activities that may be caused by the removal of the books or documents. In any case, books and documents that are removed will be copied and returned as soon as practicable.
  8. Decisions to access places and to remove books or documents from those places will be made or approved by an Inland Revenue officer delegated to do so on behalf of the Commissioner.
  9. Certified copies of books or documents are admissible in evidence in court as if they were the original (section 16B(3)).

Books and documents

  1. The definition of "book and document" under section 3 refers to a broad range of items that store or record information, including those that do so electronically.
  2. In Avowal Administration Attorneys Limited & Ors v District Court at NorthShore & Anor [2010] NZCA 183, the Court of Appeal held that a computer hard drive comes within the definition of "book and document". A "record" includes information that is recorded, as well as the medium in which the recording is made. It follows then, that "any other type of record whatever" referred to in the definition should include a computer hard drive.
  3. This finding in Avowal is also consistent with the observations made in the Court of Appeal in A Firm of Solicitors v District Court at Auckland [2006] 1 NZLR 586 where it was observed that a computer hard drive is a "document" that may be [imaged].
  4. The courts have confirmed the Commissioner's view that devices that have the ability to store or record information electronically fall within the meaning of "book and document" under section 3 and therefore are subject to removal and imaging under sections 16 and 16B. Also see definition of "electronic storage medium" at paragraph 9.

Relevance search and imaging of the electronic storage medium

  1. The Commissioner's powers under sections 16 and 16B are subject to section 21 of the New Zealand Bill of Rights Act 1990, which provides that everyone has the right to be secure against unreasonable search or seizure. Therefore, as a starting point, a relevance search is carried out to enable the Commissioner to be satisfied that the electronic storage medium is necessary or relevant for the purposes of section 16(1) or it is likely to provide information otherwise required for these purposes.
  2. In some cases, it may not be practicable for the Commissioner to conduct a relevance search, such as where the data stored on the electronic storage medium is encrypted (making it impossible to carry out a relevance search), or where the information is subject to a claim of legal privilege or non-disclosure right.
  3. While the Court of Appeal in Avowal noted a preliminary screening of the electronic storage medium to be good practice, it did not see it as necessarily a prerequisite to a reasonable search or access under section 16. The Commissioner may already hold information that provides sufficient ground to be satisfied that the electronic storage medium is "necessary or relevant". The "reasonableness" of a search must be assessed having regard to the circumstances of the case.
  4. If the relevance search identifies information of interest, the Commissioner is entitled to image the entire electronic storage medium. The fact that the electronic storage medium also contains irrelevant or privileged information does not mean it cannot be copied or removed. The court in A Firm of Solicitors described the removal of a hard drive or the copying of a hard drive as analogous with the removal of a book or a very long document and reasoned that it cannot be contemplated that only pages containing relevant or non-privileged information are torn out and removed from that book or document. Therefore, the Commissioner will image the entire electronic storage medium.

Removal of electronic storage medium

  1. Avowal also confirmed that where the Commissioner has determined that the information contained in an electronic storage medium is necessary or relevant for a purpose under an Inland Revenue Act or is likely to provide any information otherwise required for these purposes, the Commissioner is entitled to remove that electronic storage medium for copying under section 16B. The reasoning in A Firm of Solicitors discussed in paragraph 40 also applies to the removal of the electronic storage medium. The fact that the electronic storage medium contains privileged or irrelevant material should not prevent it from being removed. What is required is a warrant, for the purpose of removal for inspection, with conditions to deal with irrelevant or privileged material appropriately.
  2. Section 16B does not require the consent of the occupier before removing the electronic storage medium for imaging.

Non-disclosure right for tax advice documents and legal privilege

  1. Confidential communications between legal practitioners and their clients that meet the criteria under section 20 are privileged from disclosure under section 16.
  2. Sections 20B to 20G deal with the right of an information holder to not disclose a book or document that is eligible to be a tax advice document. See SPS 05/07 Non-disclosure right for tax advice documents (or any subsequent replacements of the SPS) for more information.
  3. The Commissioner will adhere to the provisions of sections 20 to 20G regarding legal privilege and the non-disclosure right for tax advice documents when exercising the information-gathering powers, including when imaging electronic storage media.
  4. As decided in A Firm of Solicitors, the mere removal and imaging of documents that may be legally privileged or subject to non-disclosure right does not breach that right or privilege, as there is no disclosure of those documents. The Commissioner will engage in a process to ensure that these documents are not accessed unless it is necessary to extract those documents to resolve the claim of legal privilege or non-disclosure right.

Standard Practice

Accessing the electronic storage medium

  1. Section 16 authorises the Commissioner to access all lands, buildings and places to inspect and image electronic storage media if it is considered that the electronic storage media is "necessary or relevant". This includes access using section 16 and obtaining a warrant or with the consent of an occupier to enter a private dwelling.
  2. The Inland Revenue officer exercising section 16 may be accompanied by any other person considered necessary for the effective exercise of the power.
  3. The Commissioner's entitlement to full and free access to information stored in electronic storage media, together with the requirement in section 16(2) that the occupier of the premises must provide the Commissioner with all reasonable facilities and assistance for the effective exercise of the Commissioner's powers under section 16, means that the occupier must provide, for example, decryption codes and passwords in order to access the data stored in the electronic storage media.
  4. It is the Commissioner's view that reasonable force can be used to obtain full and free access to an electronic storage medium. Reasonable force would be, for example, removing the need to use a password on a computer or disassembling a computer in order to access the computer hard drive.

Carry out a relevance search

  1. A relevance search is carried out to determine whether the electronic storage medium contains information that is necessary or relevant or is likely to provide any information otherwise required.
  2. If the relevance search reveals that the electronic storage medium contains information of interest, that entire electronic storage medium will be imaged. Generally, the imaging is performed on-site where the electronic storage medium is located.
  3. The occupier will be given information about the right to claim legal privilege and non-disclosure right for tax advice documents. If a claim to legal privilege or the non-disclosure right for tax advice documents is made over the contents of an electronic storage medium, a relevance search will not be carried out and the electronic storage medium will be sealed or imaged then sealed. (See paragraphs 64 to 70 on the process for dealing with legal privilege and non-disclosure right.)
  4. Further, a relevance search will not be carried out where it is not practicable for the Commissioner to do so, such as where the data is encrypted.  In these cases, the encrypted electronic storage medium will be imaged without carrying out a relevance search.
  5. As mentioned in paragraph 39, the Commissioner may already hold information that provides sufficient ground to be satisfied that the electronic storage medium is "necessary or relevant" without carrying out a relevance search. Not carrying out a relevance search in some cases does not necessarily lead to an unreasonable search and seizure of the electronic storage medium.

Removal of electronic storage media

  1. The Commissioner's preference is to image electronic storage media on the premises accessed under section 16. However the removal of electronic storage media for the purposes of imaging is provided for in section 16B. The decision to remove the electronic storage media will be made by an appropriately delegated Inland Revenue officer.
  2. Section 16B provides for the removal of electronic storage media for the purpose of imaging. The Commissioner may take into consideration any relevant factors when deciding to remove an electronic storage medium for imaging, including but not limited to the following:
    • Volume of data stored on the electronic storage medium;
    • Whether it is appropriate or practicable for the electronic storage medium to be removed;
    • The time it may take to image the electronic storage medium on-site (to avoid prolonged occupation at the premises or disruption to business);
    • The occupier's preference for the removal of the electronic storage medium or any reasonable alternatives as suggested by the occupier; and
    • Whether it is appropriate for the Inland Revenue officers to remain at the premises. For example, access to a private dwelling where children are present or may be expected.
  3. In any case, if the Commissioner has reasonable grounds to believe that there is a risk to the information stored on the electronic storage medium, the electronic storage medium will be removed.
  1. While the information stored on a computer hard drive can be regarded as falling within the meaning of "book and document" and is removable under section 16B, the computer itself does not. However, if the hard drive of a computer is not readily removable, the entire computer may need to be removed in order to image the hard drive. Consent is not necessary but the criteria for removal in paragraph 57 will be applied.
  2. Where it is not appropriate for Inland Revenue officers to remain at the premises, or where the occupier has expressed their preference for removal, the electronic storage medium will be removed. The Commissioner will follow the same process of carrying out a relevance search on the electronic storage medium off-site, and the device will be imaged if the relevance search identifies information that is necessary or relevant or is likely to provide any information otherwise required.
  3. A receipt detailing the items removed and the date of removal will be provided to the occupier at the time of removal.
  4. If legal privilege or the non-disclosure right is claimed, an undertaking will be provided that the contents of the electronic storage medium will not be viewed until such claims have been dealt with, unless it is necessary to view the contents to resolve the claim of legal privilege or non-disclosure right.
  5. The electronic storage media that are removed will be taken to a site where they will be imaged by a qualified technician and returned to the occupier as soon as practicable. An indication will be given to the occupier at the time of removal as to when the electronic storage media will be returned, having regard to the amount of data to be imaged.
  6. To minimise any disruption to business or other activities, the owner of the electronic storage medium is entitled to inspect and obtain a copy of the electronic storage medium that is removed, at the time of removal or at reasonable times subsequently.

Protection of non-disclosure right for tax advice documents and legal privilege

  1. An electronic storage medium may contain information that may be subject to legal privilege or tax advice documents that are protected by the non-disclosure right under the TAA.
  2. The occupier will be given an opportunity to claim legal privilege or non-disclosure right for tax advice documents before a relevance search is carried out. Alternatively, a claim of non-disclosure right may be made by a later date as agreed by the Commissioner. Legal privilege and non-disclosure right may be claimed by providing the name of the legal practitioner or the tax advisor to the Inland Revenue officers. (Note that this differs from the process for claiming the right of non-disclosure as set out in SPS 05/07.)
  3. If a claim to legal privilege or the non-disclosure right for tax advice documents is made over the contents of an electronic storage medium, it is the Commissioner's view that the information in the electronic storage medium should be preserved in order to deal with the claim at a later stage (see paragraph 68). In these circumstances, a relevance search will not be carried out. However, to protect the claim, the Commissioner will either:
    • Seal the original electronic storage medium; or
    • Image the electronic storage medium then seal the imaged copy and return the original. This would allow a business to continue to operate.
  4. The sealed item will be held in a secure place that has restricted access and is independent from the investigation. The Inland Revenue officers will provide an undertaking that the sealed item would not be viewed, unless viewing it is unavoidable while carrying out the step in paragraph 68.
  5. The Commissioner will attempt to deal with the claim of legal privilege or the tax advice status of information by negotiation with the person making the claim. To identify documents that may be legally privileged or that may be tax advice documents, the Commissioner will request names and keywords that may identify these documents. These documents will then be filtered and provided to the person to decide which documents they want to claim legal privilege or tax advice status on. The person will be given sufficient time in order to make the claim. The filtering of the documents will be carried out by a trained technician who is independent from the investigation.
  6. If the claim of legal privilege or the non-disclosure of tax advice documents cannot be resolved between the Commissioner and the person making the claim, the Commissioner may apply to a District Court Judge for orders under section 20(5) as to whether the claim for legal privilege is valid, or under section 20G as to whether the document is a tax advice document (or for related orders regarding tax contextual information).
  7. Only documents that are relevant and not treated as legally privileged or tax advice documents will be relied on by the Commissioner.

Protection of secrecy

  1. Section 81 requires Inland Revenue officers to maintain the secrecy of all matters relating to the Inland Revenue Acts that come to the officer's knowledge, including all information stored on electronic storage media. The prohibition on disclosure also applies to information on the electronic storage media that is not relevant to an Inland Revenue Act, for example marketing information on a company's new product.
  2. Accordingly, Inland Revenue will not disclose any information obtained except where it is in the course of carrying into effect an Inland Revenue Act.
  3. The maintenance of secrecy provisions in the TAA extend to any third parties that may accompany the Commissioner in the exercise of the section 16 power.

This Standard Practice Statement is signed on 14th day of July 2010.

 

Rob Wells
LTS Manager, LTS Technical Standards

 

 

 


Date published: 03 Aug 2010

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