Failing to Comply with s.263 and s.264 Notices

Tax Bar Association Seminar - In dispute with the ATO: What to expect

Brind Zichy-Woinarski QC 2 October 2014

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At the outset, let me make it clear I am not going to deal with administrative penalties for failing to comply with either section 263 or 264. If you or your client has failed to comply it is almost certain the Commissioner will apply an administrative penalty, pursuant to Division 284 of Schedule 1 to the Taxation Administration Act, on any tax payable.

Section 263 of the 1936 Act is the access power. Importantly, subsection (3) was inserted in 1987 to overcome any inadequacy or doubt arising from the decision O'Reilly v Commissioner of State Bank of Victoria (1983) 153 CLR 1, especially at 41. It requires the occupier of the building or place entered to provide all reasonable assistance - and I emphasise the reasonable - reasonable assistance for the effective exercise of the access power - it imposes a positive obligation to co-operate or assist the Commissioner when exercising access.

Section 264 of the 1936 Act permits the Commissioner to issue a Notice requiring a person to furnish such information to the Commissioner and to attend and give evidence concerning a named person’s income or assessment or to produce documents etc in the person’s custody or control. The Commissioner may require the evidence to be given on oath or affirmation.

Documents clearly includes computer and other electronic records.

Failure to permit the Commissioner to have access under s.263 or failure to comply with a Notice issued under s.264 may be an offence under a number of the provisions of the Criminal Code or the Administration Act.

The provisions of the Code concerning the elements of an offence apply not only to the offences the Code creates but also to offences created by a Commonwealth law and thus the offences created by the Administration Act. Some of the Code provisions that you need to consider are clearly identified by the section of the Administration Act that creates the offence. The Code is to be found in the First Schedule to the Commonwealth Criminal Code Act.

The Code defines offences by reference to physical and mental elements. A physical element is in effect the physical conduct or omission which lies at the heart of the proscribed conduct. The fault element is in effect the intention or knowledge of doing the physical conduct or omission or knowledge of the existence of the same. Subject to what I am about to say, generally a physical element has an associated mental element, but the Code recognises that the law creating an offence may specify that it is an offence of strict liability or one of absolute liability. An offence of strict liability means that there are no fault elements for any of the physical elements of the offence but the defence of mistake of fact under section 9.2 of the Code is available. An offence of absolute liability means again that there are no fault elements for any of the physical elements of the offence and the defence of mistake of fact under section 9.2 of the Code is not available.  And an offence may provide, as some of the Administration Act ones do, that strict liability, or absolute liability, applies to a particular physical element or physical elements of the offence.

Section 9.2 of the Code enacts the defence of mistake of fact: a defence which has been long recognised at common law. The defence of mistake of facts is that before the relevant conduct occurred, the person considered whether or not facts existed, and is under a mistaken but reasonable belief about those facts; and had those facts existed, the conduct would not have constituted an offence.

Turning then to the offences that are most likely to be of concern. The Code sections include 137.1, 137.2 and 149.1. Section 137.1 of the Code deals with giving information that is false or misleading in a material particular to a person who is exercising the powers or performing functions under, or in connection with, a law of the Commonwealth, or the information was given in compliance or purported compliance with the law of the Commonwealth. "Material particular" here simply means that the statement is of significance and not merely trivial or inconsequential. False simply means incorrect.

Under section 137.2 of the Criminal Code, it is an offence for a person to produce a document that is false and misleading in a material particular in compliance or purported compliance with a law of the Commonwealth.

Section 149.1 prohibits you from obstructing, hindering, intimidating or resisting a Commonwealth official in the performance of his functions as a Commonwealth official. The prosecution does not have to prove you knew the person was a Commonwealth official or that the person was performing his or her functions as such. Obstruct, hinder etc may cover conduct such as physically restraining a tax officer; hiding or getting rid of a document or thing; frustrating access; deliberately providing false or misleading information; refusing to provide an access code to a computer or a key to a safe; providing a false computer access code to enable data destruction programs to commence.

The relevant sections of the Administration Act include sections 8C, 8D, 8K and 8N. Section 8C makes it an offence to refuse or fail to furnish information to the Commissioner, to give information to the Commissioner in the manner required, to produce a document to the Commissioner or to attend before the Commissioner. Section 8D(1) provides that it is an offence to refuse or fail to answer a question asked of the person or to produce a document when attending a section 264 examination. Section 8D(2) makes it is an offence to refuse to take an oath or affirmation when required.

Section 8K makes it an offence to make a statement that is false or misleading in a material particular or to omit any matter or thing so the statement is false or misleading in a material particular. Section 8N deals with recklessly making a false or misleading statement in a material particular. Recklessness is defined in section 5.4 of the Code

There is a significant difference between the offences created by the Administration Act and those created by the Criminal Code. The offences created by the Taxation Administration Act - particularly sections 8C, 8D(1), and 8K - are easier to prove than the comparative Criminal Code offence. This is because the Administration Act provides that, in the case of sections 8C and 8D(1) that they are offences of absolute liability and strict liability respectively, and in the case of the section 8K offences absolute liability applies to some of the physical elements.

There is some amelioration of these provisions. Subsections 8C(1B) and 8D(1B) provide that no offence is committed to the extent that the person is not capable of complying with the requirement. In other words an offence will not be committed if compliance was impossible or for reasons for which the person was not responsible. The defence bears an evidential burden in relation to that: that means that to escape liability, there needs to be sufficient evidence to suggest a reasonable possibility that the defendant was not capable of complying with the requirement. This does not mean that the defendant must satisfy the court of that on the balance of probabilities. There is authority to the effect that not capable of complying relates to the capacity to respond to the request and not the fact that you had no idea of the request: Ambrose v Edmond-Wilson (1988) 88 ATC 4173. Subsection 8K(2) provides there is no offence if the defence proves the person did not know and could not reasonably be expected to have known the statement was false or misleading. The defence must satisfy the court on the balance of probabilities about those two matters.

You should also remember that section 8G permits a court, upon a finding an offence against sections 8C or 8D has been committed, to order the offender to comply with the request within a specified period of time.Under section 8H failure to comply with such an order is another offence punishable by a fine of 50 penalty units or imprisonment for 12 months.

Further, where a person has been convicted of an offence against sections 8C, D or H, and the court is satisfied the purpose, or a purpose, of the conduct was to facilitate the avoidance of a tax liability of that or another person, under section 8HA the court may order the person to pay up to three times the amount of the tax liability.

Normally a conviction for an Administration Act offence will result in a monetary penalty. However, in the case of section 8C, 8D and 8N and where the alleged offender may have prior convictions for relevant offences, the Commissioner may elect to treat the matter as other than a prescribed taxation offence. If the Commissioner elects to treat it as other than a prescribed taxation offence there is a monetary penalty or 12 months imprisonment or both.

If a corporation is convicted of an offence, an officer of the corporation may similarly be liable for the same offence as the corporation: section 8Y

Convictions for offences against the Administration Act will be considered to be criminal convictions and given that they will be convictions for a tax related matter they may cause problems in entering certain countries, particularly the United States of America.

So, as you can see, failure by a person to comply with valid requests or requirements under sections 263 or 264 can have quite dire consequences for that person, even though the person is not the target taxpayer.

Generally, it seems that if access has been permitted or the information or documents have been provided before any summons is issued the Commissioner will not prosecute but will take the initial failure - the lack of co-operation - into account in determining the appropriate level of administrative penalty that should be imposed.

Now there are some basic matters which may assist you in resisting a prosecution or threat of prosecution for failure to comply with a request under either section 263 or 264. In this regard

The starting point with respect to both sections is the terms of the access sought or the notice under section 264. These will confine the extent of the power the Commissioner is seeking to exercise. This is particularly so under section 264(2), which limits the power to ascertaining the income or assessment of a named taxpayer or taxpayers - in this regard the term taxpayer will include a person who potentially may be a taxpayer under the 1936 and 1997 Acts. Thus if a question in a 264 examination does not relate to the income or assessment of a named taxpayer the question is not permissible. The validity of a notice under section 264 is not to be approached by narrowly analysing each word but to ask in respect of any particular request whether a reasonable man in the position of the addressee of the notice can fairly comply with it and not thereby be exposed to a penalty for possible non-compliance having regard to the manner in which the notice is formulated

Neither section over-rides legal professional privilege, although the Commissioner is entitled to peruse a document briefly to satisfy himself that the claim is a proper one. On the other hand the Commissioner is permitted to copy documents - including those in electronic form - that in general form appear to fall within the terms of the permitted access provided the Commissioner does not seek to breach legal professional privilege and enters into an arrangement to enable the proper party to claim the privilege or for the Commissioner himself to seek a declaration that the documents are not subject to the privilege.

Both sections remove the privilege against self incrimination.

The access power under section 263 contains no temporal limits and it now would seem certain that the Commissioner must exercise the power reasonably: in other words the Commissioner would be acting outside the power if he woke you up at 3.00am., demanding you take him to your office to permit him to exercise the power. Nor does section 263 permit the Commissioner to take control of the premises and deny you or your staff access to the building or parts of it or, for example, computers in the premises. Nor does it permit the Commissioner to deny your staff access to documents for work or other purposes.

Since so many documents are now kept in electronic form, access often is to the hard drive of computers. To go through all such records would often be an impossible task in time terms. Normally the Commissioner will use key word searches to seek to isolate documents that fall within the ambit of the access notice. This means the Commissioner cannot simply copy or image the whole of a computer hard drive. Failure by the Commissioner to reasonably attempt to confine his access - especially of vast computer records - will almost certainly mean the Commissioner is acting beyond the permitted access.

So what do you do if your client has buried his head in the sand or pushed the section 264 Notice aside as too hard to consider or has refused access. There really is only one response in my view and that is to initially and immediately make contact with the person who has carriage of the matter and explain the situation to them and to make arrangements to comply. Of course that will be difficult if your client has failed to turn up for a section 264 interview, but if that is the case arrange for a new one as soon as possible. It seems to me that in such cases the sooner you bring the matter back to normality and open up sensible and meaningful discussions with the Commissioner the better and the better the chance of avoiding prosecution.