Clyne v. Deputy Federal Commissioner of Taxation and Anor.

Morling J

Federal Court

Judgment date: Judgment handed down 2 October 1985.

Morling J.

There are before the Court a number of applications which have, by consent, been heard together. Several of the applications are made pursuant to sec. 30 of the Bankruptcy Act 1966 and another is made pursuant to sec. 77(a) and 129 of that Act. The fate of most of the applications will be determined by the view I form as to the validity, or otherwise, of certain action taken by officers of the Commissioner of Taxation in purported pursuance of sec. 263 of the Income Tax Assessment Act 1936.

The various applications arise out of the bankruptcy of Mr Peter Clyne, who was made bankrupt on 22 January 1985. Mr J.W. O'Brien is the trustee of his estate. Except for one small debt, the Commissioner of Taxation is the only creditor in the estate.

The public examination of the bankrupt began on 19 August 1985 and is part heard. On 1 September three officers of the Commissioner went to the Sebel Town House where the bankrupt resides. They sought and obtained access to a room in the lower basement. On entering the room they observed a number of boxes which appeared to belong to the bankrupt. These boxes contained a large number of documents concerning the affairs of the bankrupt over many years. They included the following:

The documents were inspected by the officers in purported pursuance of sec. 263 of the Income Tax Assessment Act. That section provides as follows:

``263. The Commissioner, or any officer authorized by him in that behalf, shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act, and for that purpose may make extracts from or copies of any such books, documents or papers.''

When the bankrupt became aware that the officers were inspecting his files, and making copies of them, he sought and obtained interlocutory relief from the Court. In separate proceedings, the trustee has also sought and obtained interlocutory relief. It is unnecessary, for present purposes, to refer to the exact terms of the relief which has been granted. It is sufficient to say that as matters presently stand, the files and documents have been removed from the Sebel Town House and are now in the possession of the trustee.

The bankrupt does not have any objection to his trustee inspecting the files and making such use of them (whether for the purposes of the public examination or otherwise) as he sees fit. However, he seeks orders which would effectively prevent the trustee from making the documents available to the Commissioner of Taxation or his officers. The Commissioner seeks orders that he be permitted to copy the documents which are now in the trustee's possession.

In my opinion, if the examination of the documents by the Commissioner's officers was authorised by sec. 263, no real problem arises in granting permission to the Commissioner to make copies of the documents. If, however, the action which was taken under sec. 263 was invalid, I do not think he should be permitted to either inspect or copy the documents. The property in the documents now vests in the trustee - sec. 58 of the Bankruptcy Act. The trustee is entitled to make unrestricted use of the documents for any purpose associated with the administration of the bankrupt's affairs. But, apart from sec. 263, it would not be a proper use of the documents by the trustee for him to make them available to third parties merely because they wished to have access to them for their own purposes. Since the documents are in the possession of the trustee and not the Court, the inspection of them by the Commissioner's officers could not in any sense be a contempt of court: cf.
Commercial Bureau (Australia) Pty. Ltd. v. Allen & Ors; Ex parte F.C. of T. 84 ATC 4198; (1984) 1 F.C.R. 202 at p. 208.

I turn now to consider the critical question in the case, that is whether the inspection of the documents by the Commissioner's officers was authorised by sec. 263. The section gives very wide powers. As I understood the argument for Mr Clyne, it was conceded that provided there was some extant matter affecting his liability to income tax, the Commissioner could use the powers available to him by sec. 263 to make a roving search through his files and papers. But it was argued that, like all powers, the power conferred by sec. 263 must be exercised in good faith and for the purpose for which it was conferred. See
F.C. of T. v. Australia and New Zealand Banking Group Ltd. (1979) 143 C.L.R. 499 at p. 544 and cases there cited and
O'Reilly and Ors v. Commrs of the State Bank of Victoria and Ors 83 ATC 4156 at p. 4162; (1983) 46 A.L.R. 225 at p. 234.

It was argued that, on the facts of the present case, there was no extant matter affecting Mr Clyne's taxation affairs. That being so, so it was argued, it could be inferred from the evidence that the Commissioner had not exercised the power under sec. 263 in good faith and for the purpose for which it was conferred. It was submitted that the facts of the present case pointed to the irresistible inference that the search of Mr Clyne's papers was for the purpose of obtaining material, unrelated to his taxation affairs, upon which he could be cross-examined in his part-heard public examination. Since the examination is being held under sec. 69 of the Bankruptcy Act, Mr Clyne is obliged to answer all questions that the Court allows to be put to him and, unless the Court otherwise directs, he is not excused from answering any question by reason only of the fact that the answer to it may tend to incriminate him - sec. 69(12). In effect, it was submitted that the Commissioner is pursuing a vendetta against Mr Clyne and that he has purported to exercise the power under sec. 263 not for any purpose of the Income Tax Assessment Act, but for the purpose of seeking to obtain material which could expose Mr Clyne to criminal proceedings.

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Mr Clyne has filed a lengthy affidavit recounting the details of what he describes as a ``war'' in which he has been engaged with the Commissioner over a period of 26 years. The opening of hostilities appears to have been the bankrupt's challenge to the validity of the Income Tax Assessment Act (see
F.C. of T. v. Clyne (1958) 100 C.L.R. 246). It is unnecessary, for present purposes, to refer in detail to the ensuing skirmishes and battles in the war, the reports of which litter the law reports. It is sufficient to say that the bankrupt has sought to frustrate the Commissioner's attempts to assess his for tax and that, in the course of time, the Commissioner successfully petitioned the Court for the sequestration of the bankrupt's estate because of his failure to pay taxes assessed against him. It should, however, be mentioned that in December 1982 a prosecution alleging a breach by the bankrupt of the Foreign Exchange Control legislation was brought by Mr Paul James Holding, one of the Commissioner's officers. This appears to have been a private prosecution brought by Mr Holding, although the Director of Public Prosecutions later took over the prosecution. The bankrupt relies upon the bringing of this prosecution as evidence of the Commissioner's malevolence towards him. It was submitted that the inspection of the bankrupt's files in purported reliance upon sec. 263 was a further exemplification of that alleged malevolence.

In the present case no question arises as to legal professional privilege. No claim for such privilege is asserted on behalf of the bankrupt, and I therefore need not consider the extent of any limitation on the rights given to the Commissioner by sec. 263 in cases where the documents to which he seeks access are the subject of legal professional privilege. It would seem likely that even if the bankrupt is treated as being a member of the legal profession (which he is not) sec. 263 would override any relationship of confidence that may exist between the bankrupt and his clients. Cf. the position where sec. 264 is invoked by the Commissioner: F.C. of T. v. Australia and New Zealand Banking Group Ltd. (1979) 143 C.L.R. 499 at pp. 521-522 per Gibbs A.C.J., at p. 540 per Mason J. and at p. 546 per Murphy J.

I am not persuaded that it has been established that the action taken by the Commissioner under sec. 263 was not for a purpose of the Income Tax Assessment Act. It is true that there does not appear to be any present dispute between the bankrupt and the Commissioner as to the extent of the bankrupt's past and present liabilities to income tax. But that is not the end of the matter for the purposes of sec. 263. In the first place, it is not necessary for the exercise of the powers under sec. 263 that the person in whose custody the documents are should be liable to tax: see
Southwestern Indemnities Ltd. v. Bank of N.S.W. and F.C. of T. 73 ATC 4171; (1973) 129 C.L.R. 512 per Barwick C.J. at ATC pp. 4174-4175; C.L.R. p. 519.

It would be legitimate for the Commissioner to exercise his powers under sec. 263 to inspect the bankrupt's documents for the purpose of considering the possible liability to tax of the bankrupt's clients, as distinct from the liability of the bankrupt himself. The documents could also be legitimately inspected for the purpose of considering whether they contained information which would justify the reassessment to tax of the bankrupt. The Commissioner may at any time amend an assessment in a case where a taxpayer has not made a full and true disclosure of all the material facts necessary for his assessment, and where the Commissioner is of the opinion that there has been an avoidance of tax due to fraud or evasion - see sec. 170(1) and 170(2)(a) of the Income Tax Assessment Act. Hence the fact that assessments have already issued for past years does not necessarily preclude the Commissioner from amending those assessments.

I have come to the conclusion that the evidence does not demonstrate that the Commissioner is seeking to inspect the documents for purposes which are not purposes of the Act. However, I am bound to say that timing of the action taken by the Commissioner was particularly unfortunate. He and his officers ought to have appreciated for a long time before 1 September that the bankrupt probably kept his records and clients' files at the Sebel Town House. It is unnecessary to determine whether they did, in fact, appreciate that that was the case. The Commissioner's failure to inspect them until after the bankrupt's public examination had commenced was bound to generate in the bankrupt's mind the suspicion that the Commissioner did not wish to inspect the documents for any purpose associated with the Income Tax Assessment Act, but rather for the purpose of gaining information which could

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be used to elicit answers from the bankrupt in the witness box which might expose him to criminal liability not necessarily related to his tax affairs. The history of the prosecution under the Foreign Exchange legislation could only have deepened that suspicion. Under the circumstances, it was not unreasonable for the bankrupt to apply to the Court for relief, but a consideration of all the facts leads me to the view that it has not been demonstrated that the Commissioner has abused the power given to him by the section.

It should not be assumed that the finding that the action taken by the Commissioner was authorised by sec. 263 will lead to the result that, when the public examination resumes, the Commissioner's counsel will be permitted to cross-examine the bankrupt on any matter which may be disclosed in the documents to which the Commissioner has gained access. The public examination of the bankrupt under sec. 69 of the Bankruptcy Act is to enable the trustee to examine the bankrupt, on oath, as to the bankrupt's conduct, trade dealings, property and affairs: sec. 69(1). However, the scope of the matters upon which the bankrupt may be examined is not confined to matters which may disclose offences under the Bankruptcy Act. The bankrupt may be questioned on, inter alia, any matter which the court may take into consideration on the application for his discharge:
Re Atherton (1912) 2 K.B. 251;
Re Jawett (1929) 1 Ch. 108;
Re a Bankrupt (1890) 25 Q.B.D. 17. Moreover, although sec. 69(20) provides that the notice of evidence given by a bankrupt may be used in evidence ``in any proceedings under this Act against the bankrupt'', it may well be the case that the notice may also be tendered against him in criminal proceedings under the general law; see
R. v. Owen (1951) 15 A.B.C. 132 and
R. v. Johnson (1959) Q.W.M. 21.

As I have already observed, sec. 69(12) obliges the bankrupt to answer all questions that the Registrar allows to be put to him, unless the Registrar otherwise directs. The bankrupt is not excused from answering any question by reason only of the fact that the answer to it may tend to incriminate him. It would seem to me that, in the exercise of his discretion, the Registrar might well be inclined to excuse the bankrupt from answering questions the answers to which might tend to incriminate him if those questions cannot be seen to be likely to elicit information which will be of real assistance to the trustee in his administration of the bankrupt's estate. I was informed from the bar table that the Deputy Registrar before whom the bankrupt is being examined has expressed willingness to refer to the Court for decision the question whether the bankrupt should be required to answer any particular questions the answers to which might be incriminating. On the facts of the present case this is an eminently reasonable approach for the Deputy Registrar to adopt.

The application to restrain the Commissioner from inspecting and copying the documents now in the possession of the trustee is dismissed. Having regard to the circumstances which led to the making of the application, there should be no order as to costs of that application.

It is conceded that the bankrupt's application to restrain the trustee from inspecting the documents cannot succeed, and that application is also dismissed. The bankrupt should pay the costs of that application, which I assess at $2,250.

All parties are granted liberty to apply for further or other relief.


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