Federal Commissioner of Taxation v. Smorgon and Others.

Stephen J

High Court

Judgment date: Judgment handed down 9 November 1977.

Stephen J.: In October 1976 I delivered judgment in two actions which were heard together and to which members of the Smorgon family, the Australian and New Zealand Banking Group Ltd and the Commissioner of Taxation were parties

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[reported at 76 ATC 4364]. They concerned the nature and extent of the Commissioner's power, under sec. 264 of the Income Tax Assessment Act, to require persons to give evidence and produce documents. In my reasons for judgment I expressed my views about the meaning of the section and about the validity of notices which the Commissioner had served upon the Smorgons and upon the Bank in purported exercise of power conferred by the section. In the outcome I held that the notices were defective in certain respects but not in all those respects which had been canvassed in argument.

The Commissioner has now served new notices upon the Bank and upon twelve individuals, all but three of whom bear the surname Smorgon and whom I shall, for convenience but perhaps not with complete accuracy, refer to collectively as the ``Smorgon family''. In this action the Commissioner seeks both a declaration that these notices are in valid exercise of the powers conferred upon him by sec. 264, together with certain other associated declarations, and also ancillary injunctive relief.

Mr. Webb, counsel for the Smorgon family, took a variety of objections to the wording of each of the notices and in addition relied upon other matters, some formal only, some of substance, for his general proposition that there had been no effective exercise of power under sec. 264. He also sought to preserve for argument on any appeal such of the contentions which he had urged in the previous proceedings as I had rejected in my judgment in those proceedings. Dr Spry, counsel for the Bank, restricted his attack upon the notices to those addressed to the Bank; he also contended that, whatever might be the contents of the safe deposit boxes, they were not in the custody or under the control of the Bank and that for that reason the Bank could not be required to produce them. This was one of the arguments of substance which had also been advanced by Mr Webb but it was dealt with in considerably more detail by Dr Spry and it is to it that I shall first turn.

Section 264(1) is as follows: -

``264(1) The Commissioner may be notice in writing require any person, whether a taxpayer or not, including any officer employed in or in connexion with any department of a Government or by any public authority -

  • (a) to furnish him with such information as he may require; and
  • (b) to attend and give evidence before him or before any officer authorized by him in that behalf concerning his or any other person's income or assessment, and may require him to produce all books, documents and other papers whatever in his custody or under his control relating thereto.''

The Bank maintains at its Stock Exchange Branch in Melbourne safe deposit facilities and for a fee an applicant may have the use of a numbered safe deposit box. Three companies apparently associated with the Smorgon family and also one of the individual defendants (to whom I shall refer as ``the depositors'') each use such a box, having entered into separate agreements with the Bank for that purpose. Various other members of the Smorgon family are also authorized by one or more of the depositors to use one or more of these boxes but are not parties to any such agreement with the Bank.

I need not recite the full terms of the Bank's form of agreement for the use of a box. A box requires two keys to open it. One key is kept by the Bank, another by the depositor and a duplicate of the depositor's key is also kept by the Bank in a sealed packet which it retains in safe keeping and may only use in replacement of the depositor's key if that key goes astray. The depositor, and apparently those authorized by him, have ready access to the box during business hours. The agreement contains a number of detailed provisions, including one concerning disposal of the contents of the box on termination of the agreement, but what I have said sufficiently describes both its effect and the system of operation of these safe deposit boxes.

The Bank seeks to support its primary submission, that, whatever may be in the boxes, their contents are not in its custody or under its control within the meaning of sec. 264(1)(b), by reference to certain English and Australian decisions, none of which I have found of much assistance. Of these, the decision in
Dollfus Mieget Compagnie S.A. v. Bank of England (1950) 1 Ch. 333 is most in point. The gold bars which, in circumstances entirely different from those of the present case, were there deposited with a bank for safe custody, were held by a majority of their Lordships to remain under the ``control'' of the depositors so long as they were held upon the terms on which originally deposited, although physically in the hands of the bank - per Somervell L.J. at p. 359 and Cohen L.J., at p.

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368. This was not, however, a case of deposit in a safe deposit box and is in other respects remote from the circumstances of the present case.

There exists, however, a wealth of authority in the courts of the United States which, unlike the English and Australian cases to which I was referred, are directly concerned with relationships arising from the use of safe deposit boxes maintained by banks and like institutions. These American decisions, to be found in 10 Am. Jur. 2d, para. 469-485, and discussed in the Annotations to 11 A.L.R. 216, 19 A.L.R. 861, 40 A.L.R. 868, 42 A.L.R. 1299 and 133 A.L.R. 270, identify and analyse the quite special considerations which must apply in these cases, where there are lacking such usual features of bailment as knowledge of or effective control over the articles entrusted to the supposed bailee. The predominant American view, despite what appears in Paton, Bailment in the Common Law, p. 14, and in the source which is there cited, Street,
Foundations of Legal Liability (1906), Vol. II, p. 291, is that the relationship is one of a bailment for reward. However, a wide range of possible analyses is open, as appears from the opinion of the U.S. Supreme Court in
National Safe Deposit v. Stead (1914) 232 U.S. 58 at pp. 67-8.

What distinguishes the case of bank safe deposit boxes from the ordinary deposit of valuables with a bank, such as occurred in
Giblin v. McMullen (1868) L.R. 2 P.C. 317, and also from the facts in the Dollfus Mieg case, is that the bank, instead of taking into its own vaults and under its control a customer's valuables, makes a available to the depositor as his own, a miniature vault to which it has no independent access and over the contents of which it can exercise no dominion. At the same time access to the premises in which the boxes are located is under the close supervision of the bank and it will usually possess a second key to the box itself, both its key and that of the depositor being needed if the box is to be opened. In these latter respects safe deposit boxes are yet again different from, and give rise to legal consequences different from, the familiar automatic coin-operated lockers found at railway stations and airports and discussed in
Marsh v. American Locker Co. (1950) 19 A.L.R. 2d 326, and from the lockers familiar to those using public baths or changing rooms and of which Ferguson J. spoke in
Greenwood v. Municipality of Waverley (1928) 28 S.R. (N.S.W.) 219. The leased cold storage facilities referred to in
Towers & Co. Ltd. v. Gray (1961) 2 Q.B. 351 present still another variety of fact situation again involving, as do these others, nice questions of possession and control and of whether a relationship of bailor and bailee exists.

The particular legal relationship to which each of these and other conceivable fact situations will give rise and the effect of each upon concepts of custody, possession and control of deposited articles will be as various as are the situations themselves. It is not, however, with any determination of the liability of the Bank at the suit of a depositor that I am concerned but rather with the application to the present facts of the terms of sec. 264(1)(b) of the Act. Just as Lord Parker C.J. was concerned in Towers & Co. Ltd. v. Gray to ``approach this case on the basis that the meaning of `possession' depends upon the context in which it is used'' - at p. 361 - so the words ``custody'' and ``control'', no less dependent upon context for their precise meaning, will take their meaning from the context of sec. 264(1)(b). What was said by Lord Guest in
R. v. Warner (1969) 2 A.C. 256, at p. 299, ``In the end of all, however, the meaning of `possession' must depend upon the context'', applies equally to the present case. A meaning must be given to ``custody'' and to ``control'' which will reflect what Lord Wilberforce in that case referred to, at p. 310, as ``the need justly and adequately to meet the requirement of the relevant legal rule'' - and see
Moors v. Burke (1919) 26 C.L.R. 265 at p. 71.

The present context is eloquent. The section itself is concerned with the obtaining of information in both oral and in documentary form. When it deals with the latter it contemplates that those over whom the Commissioner may exercise his power will have documents available for production to him. The section is, then, not concerned with the legal description of the relationship of such a person to particular documents, whether it be ownership, possession, custody or something else, and this despite the fact that it is that relationship which accounts for his ability to produce those documents. Its concern is, rather, with the existence of that ability itself.

In looking to that ability and in describing what a person may be required to produce, the section first selects the most obvious instance

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of such an ability, the simple case of actual custody, using the word ``custody'', as did the learned authors of Pollock & Wright, Possession in the Common Law, at p. 26, as meaning physical control. The section then proceeds to cast the net somewhat wider and refers to a less obvious instance of ability to produce a document, the case of a person lacking the physical control of documents but having a power over documents which are not in his actual custody. He, too, is to be amenable to a direction by the Commissioner. The words ``custody'' and ``control'' are thus used in a descending order of immediacy in relation to the ability to produce documents.

Understood in this way, as a provision concerned with requiring those who are able to do so to produce what they have in the way of relevant documents, sec. 264(1)(b) can in my view have no application to the Bank. For the purposes of ascertainment of liability in the event of loss of articles deposited in a safe deposit box the legal relationship between the Bank and those to whom it provides the use of a box will no doubt have to be defined and an analysis in terms of bailment may or may not be appropriate; liability may differ in the case of the actual party to the Bank's printed form of agreement relating to a box from the case of those others who are not parties to that agreement but are permitted to have access to that box. But when liability for loss is not in issue the relationships which it conjures up become irrelevant and instead, when the operation of sec. 264(1)(b) is in question, it is ability to produce documents which is relevant, the words ``custody'' and ``control'' being used only in the sense of describing situations in which that ability exists.

The Bank, in my view, lacks the ability to produce such documents as may be in a safe deposit box; those documents are in this sense neither in its physical custody nor are they in its control. The Bank lacks physical custody of the contents of a box because by its agreement with the depositor and by the circumstances surrounding the disposition of keys to the box it has from the start disclaimed all power over those contents. It has thereby relinquished that degree of positive physical custody which may otherwise attach to articles which are situated in its premises. It retains, and indeed exercises, a high degree of negative superintendence as guardian of the security of the boxes and their contents but positive control, which alone governs the ability to produce contents to the Commissioner, is wholly denied to it. It is no doubt correct to say that the operation of sec. 264(1)(b) cannot be frustrated by any contract of the parties. A person who gives documents into the Bank's physical custody, as by simply leaving them with the Bank for safe custody in the Bank's strongroom, cannot by contract with the Bank effectively shield them from the operation of the section. But if, in the case of a safe deposit box, documents which a person deposits in it never enter or pass through the Bank's physical custody, the terms of the relevant agreement together with the system of distribution of keys preventing that from occurring, the ``custody'' requirement of the section will be inapplicable to the Bank and the section will not apply to it unless the ``control'' requirement is applicable.

The Bank also lacks that control over the contents of boxes of which sec. 264(1)(b) speaks, that is, such control as will enable it to produce those contents to the Commissioner. Again it is the agreement and the arrangements as to keys which has effectively prevented the Bank from ever having had that control. The depositor and those persons authorized by him to have access to the box do however possess that control, just as the depositing governments had control in the Dollfus Mieg case. They may have access to the contents during ordinary business hours and are free to remove them or let them be, as they see fit. They do not have physical custody, at least when they are not in the Bank's premises with the box open in front of them. But this is because the circumstances of safe deposit boxes have been so arranged, as a safeguard against theft, that no one shall have that physical custody so long as a box is closed and locked.

It follows that in my view the Commissioner's power under sec. 264(1)(b) cannot be exercised, in respect of the contents of these boxes, by notice to the Bank. It may be exercised by notices to those having access to the boxes since they are the persons under whose control the contents are, whether they be depositors, as the actual parties to agreements with the Bank, or persons authorized by a depositor.

I come now to the specific objection taken to the notices. The notices to each of the members of the Smorgon family are in the same form. Each requires the addressee to attend and give evidence before a Mr Peters,

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whom the notice authorizes for that purpose. The evidence to be given is stated to concern the income of, and the ascertainment of the taxable income and the tax payable thereon by, a very large number of named individuals, firms, funds and companies (whom I shall refer to as ``the taxpayers'') in respect of a period of twelve years of income. The notices go on to require the production of all books, documents and papers in one or more of the four numbered safe deposit boxes. Four notices in all were addressed to the Bank. Three of them are in what I shall call the long form and they require the Bank, by its proper officer, to attend before Mr Peters, again authorized for that purpose, and, in connexion with the income of, and the ascertainment of the amount of taxable income and the tax payable thereon by, the taxpayers for the same twelve years, to produce all books, documents and papers in those same four safe deposit boxes. The fourth notice to the Bank is in a much shorter form than are the others. Without troubling to refer to anyone's income or tax, it simply requires the production by the Bank of all books, documents and papers in the four numbered safe deposit boxes. There are, therefore, in substance two varieties of notice to the Bank, the short and the long form. With those notices addressed to the Bank I need not deal in any detail in view of my conclusion as to the Bank's want of custody or control. There is only one feature of the notices to the Bank to which I should refer; it concerns the short form of notice and its failure to identify any particular person to whose income or assessment the documents to be produced by the addressee of the notice are to relate.

In the case of the short form of notice there is no uncertainty in description of the documents to be produced of which complaint can be made in this action; the description of what is to be produced, the documents in the specified boxes, is clear enough in itself. The complaint is that the addressee will be quite unable to determine from the notice whether or not the documents which the notice describes are documents to which the Commissioner's powers under sec. 264(1)(a) extend. Nothing in the notice in any way associates them with the ambit of the Commissioner's power, not will any examination of the documents, production of which the notice demands, reveal whether or not they may fall within that power. In saying this I have assumed that sec. 264(1)(b) requires that the Commissioner should have some specific person or persons' income or assessment in mind when he exercises the powers it confers; it will not be enough that the documents he demands turn out to relate to the income or assessment of some quite different person. It is upon this assumption that it becomes apparent that an addressee must know whose income or assessment is in question if he is to make any sort of a determination whether the Commissioner's notice is, in relation to any particular document, a lawful exercise of power.

If the Commissioner's power were to require the production of documents, without more, no objection could arise to this short form of notice: the addressee having documents in his custody and being required to produce what he had, that would then be an end to the matter. But in sec. 264(1)(b) the power is not conferred in such broad terms; it is confined to those documents which relate to a person's income or assessment, that is the effect of the concluding words, ``relating thereto''.

Even in the case of notices in which the identity of the person whose income or assessment is in question is revealed the addressee may be unable, in the case of some documents, to determine for himself whether the power conferred by sec. 264(1)(b) extends to them; they may appear to have no connexion with the taxpayer but may yet relate to some aspect of his assessment to tax. However, in many cases no such difficulty will arise, the documents will on their face bear a relationship to that taxpayer's income or assessment so that it may be seen that sec. 264(1)(b) applies to them. Not so in the case of notices which take the short form employed by the Commissioner in the present case.

The legislation having conferred a limited power upon the Commissioner, he must so act as to observe that limitation; such requirements as he makes for the production of documents should accordingly reflect that limitation. To serve a notice in the short form, at least in cases where he is admittedly unaware of whether or not all the documents which he describes are within the ambit of his power (that is whether they do relate to the income or assessment of a relevant person), is necessarily to hazard or, indeed render probable, an excessive exercise by the Commissioner of his power. It goes without

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saying that this is a consequence which the Commissioner should be astute to avoid and the Courts vigilant to prevent. The terms of sec. 264(1)(b) should not be interpreted as authorizing a form of notice that will lead to this consequence. Where, as here, the addressee of a notice is a bank, owing contractual obligations of confidentiality to its customers, the ill consequences of the contrary interpretation are apparent. As Danckwerts L.J. reminds us in
Allen v. Thorn Electric Industries Ltd. (1968) 1 Q.B. 487, a construction of a statute which interferes with the legal rights of the subject to a lesser extent and produces the less hardship is to be preferred to another, having the opposite effect - at p. 505 - and per Winn L.J. at p. 509 and also
Colonial Sugar Refining Co. Ltd. v. Melbourne Harbour Trust Commissioners (1927) A.C. 343 at p. 359.

Courts must, of course, guard against any too narrow an interpretation of statutory powers, otherwise the manifest intention of the legislation may be frustrated. The facts of this case show that there is no present danger of this sort. The Commissioner has, in addition to the notice in short form, served notices in long form; that is, they all identify the persons whose incomes and assessments are in question. He has thereby overcome the objection which I would sustain in relation to the short form of notice, without at all diminishing the effectiveness of the exercise of his powers under sec. 264(1)(b).

The long forms of notice are themselves attacked upon somewhat different grounds. Those addressed to the Bank call for no further consideration since the Bank has, in my view, no documents in its custody or under its control. The notices to the members of the Smorgon family, all in the long form of notice, are said to be defective in form only to the extent that they relate to the production of documents. Other objections to their general validity are taken but no objection as to form affects their requirement that the addresses attend and give evidence before Mr. Peters. What is objected to in relation to the requirement that documents be produced is that the documents in question, described as all those in a particular safe deposit box, are said not to be adequately described as documents relating to the income or assessment of the taxpayers who are named in the schedule to the notice.

There is, I think, no substance in this objection. It may be desirable that the Commissioner should expressly indicate a relationship between taxpayers and documents. It is no doubt for the purpose of expressing such a relationship that the Commissioner has prefaced the requirement to produce documents by the phrase ``and in connection therewith I do further hereby require you...''. However his failure to do so will not affect the validity of his notice. That will depend not upon the presence or absence of any averment of such a relationship but upon whether or not the necessary relationship in fact exists. Only if it does will there be power under sec. 264(1)(b) to require production of documents. If an addressee believes that some or all of the documents in a safe deposit box bear no relationship to the income or assessment of any specified taxpayers he may choose to refuse to produce those documents. A prosecution under sec. 224 of the Act will fail if the document in question proves to lack that relationship. Moreover, where an addressee had good grounds for believing that no such relationship existed but proves to have been mistaken in that respect, it may be that this will constitute ``just cause or excuse'' within sec. 224.

An addressee who is an entire stranger to the documents in his custody, knowing nothing of the affairs of the taxpayer in question and perhaps under a contractual obligation not to disclose the documents to third parties, may be placed in a very difficult position by the service upon him of a notice under sec. 264(1). He may be unable to determine for himself whether the documents relate to the income or assessment of the specified taxpayer, if they do and he refuses to produce them he risks prosecution; if they do not and he produces them he will do so in breach of his contractual obligation. The position of the Bank, had I concluded that it had custody or control of any documents, would have exemplified such a dilemma but I rather doubt whether it will arise in the case of the members of the Smorgon family. Some amendment of the Act seems to be called for to avoid such a position arising; to omit the words ``relating thereto'' in sec. 264(1)(b) would achieve this object and would also enable notices in the short form to be given by the Commissioner. However it is not for me to say whether this is a desirable mode of amendment.

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Mr. Webb made three distinct submissions unrelated to the form which the notices to his clients took. The first denies Mr. Peters' power to adjourn to subsequent dates the occasion for the attendance before him of the addresses of notices so that they may give evidence and produce documents. It is conceded that Mr. Peters would have had power to adjourn from day to day had proceedings begun on the first appointed day and not been completed at the end of that day, but it is said that he had no power to adjourn the proceedings, as he did on 1st March 1977, until 1st June 1977 and again until 3rd November 1977. The first adjournment, until 1st June 1977, followed an application by Mr Webb that the matter ``be stood over''. The second adjournment, on 1st June 1977, followed a request by the solicitor for the members of the Smorgon family that there be a further adjournment until November. On neither occasion had the members of the Smorgon family attended in person before Mr. Peters and the reason given for their non-attendance and for the adjournments sought was stated on their behalf to be the initiation of the present proceedings. No authority other than
R. v. Spencer (1873) 4 A.J.R. 29 was cited in support of this submission as to the lack of power to adjourn. That case in fact affords no support for the proposition urged and the terms of sec. 264 do not themselves lend it any support. I accordingly reject this submission.

Then it is said that the relevant delegation by the Commissioner of Taxation to the Deputy Commissioner of Taxation, Melbourne, of various powers and functions, including powers under sec. 264, is bad for want of compliance with the requirements of sec. 8 of the Taxation Administration Act 1953. Section 8 empowers delegation ``in relation to a matter or class of matters, or in relation to a State or part of the Commonwealth''. The relevant instrument of delegation, the terms of which I shall not trouble to set out, is said to include a delegation of prospective powers, as distinct from powers ``in relation to a matter or class of matters'', because it refers to powers and functions under the Act or under the Act as amended from time to time. There has in fact been no amendment of sec. 264 and the delegation of power under that section, which alone is presently relevant, cannot be affected by the purported delegation of powers which may only arise in the future as a result of legislative amendment. As to validity of the latter delegations I need say nothing; the delegation is, I think, an effective delegation of the Commissioner's powers and functions under sec. 264 in relation to the matters with which that section deals.

The next point taken is that because the person holding the office of Deputy Commissioner of Taxation, Melbourne, retired on 30th June 1977 the authorization of Mr Peters to take the evidence of addressees and to have documents produced to him then came to an end, much as the demise of the sovereign used to bring offices under the Crown to an end. The analogy is, however, a false one. Mr Peters' appointment, contained in the notices themselves, was made by the then Deputy Commissioner of Taxation signing as such and as delegate of the Commissioner. The Commissioner's instrument of delegation is one in favour of ``the person for the time being occupying... the office of Deputy Commissioner of Taxation, Melbourne''; whoever from time to time occupies that office may exercise the delegated powers, one of which is the authorization of an officer to hear evidence under sec. 264(1). The former Deputy Commissioner having authorized Mr Peters, the fact that a change then occurs in the holder of the office of Deputy Commissioner does not bring that authorization to an end any more than it affects the validity of other acts done by the former holder, such as the issue of assessments and the like.

The foregoing exhausts the points, formal and otherwise, taken on behalf of the members of the Smorgon family. The question now arises concerning the form of relief to which the Commissioner is entitled. As against the Bank he can obtain no relief; as against the members of the Smorgon family he is entitled to a declaration to the effect that the notices served by him on each of them are notices validly given pursuant to the powers conferred by sec. 264(1) of the Act and in respect of which each of them is required to attend before Mr Peters to give evidence concerning the income or assessment of the persons referred to in the notice in question and to produce all such books, documents and other papers in the specified safe deposit boxes as relate to the income or assessment of any one or more of those persons. However such a declaration would be restricted to those members of the Smorgon family other than Mr. Browne,

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against whom the Commissioner now seeks no relief. I would not propose to make any declaration concerning the Commissioner's rights to access in terms of sec. 263 of the Act nor, as at present advised, would I be disposed to make other declarations in the mandatory form sought by the Commissioner in his statement of claim. I would dismiss the counter-claim of the first twelve-named defendants. I have expressed my views concerning relief in a tentative form because the parties requested that argument, if any, upon the precise form of relief to be granted should await delivery of reasons for judgment. It is to be hoped that what I have said above will enable the parties to agree upon a form of order without the need for further argument before me. With this in mind I also express my present views on the question of costs. The appropriate order would appear to be that the Bank should have an order for its taxed costs as against the Commissioner and that, as against the other defendants, with the exception of Mr. Browne who is entitled to his costs as against the Commissioner if he has in fact incurred any, the Commissioner should recover one half of his taxed costs of the action together with his taxed costs of the counter-claim. In the event of failure to agree upon a form of order, the matter can be disposed of before me.

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