FEDERAL COURT OF AUSTRALIA Denlay v Commissioner of Taxation (No 2) [2011] FCA 1093 Citation: Denlay v Commissioner of Taxation (No 2) [2011] FCA 1093 Parties: KEVIN VINCENT DENLAY v COMMISSIONER OF TAXATION MIRJA HELENA DENLAY v COMMISSIONER OF TAXATION File number(s): QUD 151 of 2009 QUD 152 of 2009 Judge: LOGAN J Date of judgment: 17 June 2011 Catchwords: EVIDENCE – hearsay rule – exceptions – business records – whether documents met requirements in s 69(2) of the Evidence Act 1995 (Cth) – where documents obtained by employee of institution without permission of that institution – where employee had knowledge of record – keeping system – where documents had significant details concerning applicants' activities and identity – documents met requirements of s 69 of the Evidence Act 1995 (Cth) – documents admissible EVIDENCE – admissibility – improperly or illegally obtained evidence – whether documents illegally obtained – where manner in which documents obtained was contrary to Liechtenstein but not Australian law – where duty of confidence is not relevant factor – where respondent not party to manner in which documents obtained – documents not illegally obtained by respondent – documents admissible Legislation: Evidence Act 1995 (Cth) ss 69, 138, Income Tax Assessment Act 1936 (Cth) ss 166, 263, 264 Intelligence Services Act 2001 (Cth) Cases cited: Denlay v Commissioner of Taxation (2010) 276 ALR 675 cited Denlay v Commissioner of Taxation [2011] FCAFC 63 cited Pearce v Button (1985) 8 FCR 388 considered Smorgon v Australian & New Zealand Banking Group Ltd; Commissioner of Taxation v Smorgon (1976) 134 CLR 470 considered Date of hearing: 17 June 2011 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 28 Counsel for the Applicant: Mr G Ng Solicitor for the Applicant: Nyst Lawyers Counsel for the Respondent: Mr M Wigney SC with Mr P Looney Solicitor for the Respondent: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 151 of 2009 BETWEEN: KEVIN VINCENT DENLAY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: LOGAN J DATE OF ORDER: 17 JUNE 2011 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The objection to the receipt of evidence from Mr Kieber, including the exhibits to his affidavit and related translation evidence and to the receipt of evidence from Assistant Commissioner O'Neill be over-ruled. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 152 of 2009 BETWEEN: MIRJA HELENA DENLAY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: LOGAN J DATE OF ORDER: 17 JUNE 2011 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The objection to the receipt of evidence from Mr Kieber, including the exhibits to his affidavit and related translation evidence and to the receipt of evidence from Assistant Commissioner O'Neill be over-ruled. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 151 of 2009 BETWEEN: KEVIN VINCENT DENLAY Applicant AND: COMMISSIONER OF TAXATION Respondent IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 152 of 2009 BETWEEN: MIRJA HELENA DENLAY Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: LOGAN J DATE: 17 JUNE 2011 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The applicant taxpayers, via their counsel, have taken objection in respect of the receipt of evidence from Mr Kieber including, in that regard, the exhibits to his affidavit and what one might term evidence which is consequential upon Mr Kieber's evidence namely, translations of the documents which have apparently emanated from what I shall refer to as the LGT Group. I have dealt with one aspect of the objection in separate reasons for judgment which, for reasons associated with the foundation for that objection, were necessarily published only to the parties and their legal representatives. 2 The remaining grounds of objection arise under s 69 and s 138 of the Evidence Act 1995 (Cth) (Evidence Act). 3 First, that in respect of s 69. Section 69 of the Evidence Act is but a contemporary manifestation of reforms to the common law hearsay rule which were progressively made by statute, both in the United Kingdom and in Australia, over the course of the 20th century. The ramification of that is, as a reform provision designed to ameliorate what had come by Parliament to be regarded as an increasingly unjust operation of the common law rule against hearsay, it ought not to be given a narrow construction, but rather one which recognises its reforming purpose. Materially, s 69(2) provides that: The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made: (a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or (b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. 4 The asserted facts here, in respect of the documents exhibited to Mr Kieber's affidavit, principally exhibit HK-1, concern the existence of an account in the name of the Dorje Foundation with what might conveniently be called the LGT Group in Liechtenstein in respect of which the beneficial interest was held by the applicant taxpayers, Mr and Mrs Denlay. Other representations in those documents, obviously enough, concern the amounts in the accounts. Mr Kieber copied, whilst an employee of the LGT Group, documents from a back-up tape onto a hard drive. There is no question that he was not authorised in the course of his employment to copy the documents on the back-up tape to a hard drive which he held privately. He was, as an employee, and for that matter earlier when an employee of a contractor to the bank, engaged in the provision of information technology services to the LGT Group. 5 There is also no question on the evidence led by the respondent Commissioner of Taxation that the documents in exhibit HK-1 are derived from the records of the LGT Group. In other words, there is a continuity that is established which shows that these are one and the same as the records on the back-up tape, to the extent to which they have been extracted from that. That is not to say that the documents in HK-1, insofar as they relate to Dorje Foundation, are a complete record of everything on the back up tape. Mr Kieber said as much in evidence. Rather, they are part of the record. 6 There is also no question that, beyond the breach of the terms of his engagement with the LGT Group constituted by his copying to the hard drive material from the back-up tape, it was a breach of the duty of confidence which he owed to the bank, and which the bank in turn owed to its customers, for Mr Kieber to communicate what is now in exhibit HK-1 to, materially, the Commissioner of Taxation. That much acknowledged, Mr Kieber has, on the face of his evidence, a knowledge of the record-keeping system within the LGT Group. He acquired that knowledge as an employee and, for that matter, earlier as an employee of a contractor to the group. 7 In deciding whether the requirements of s 69(2) are met, it is permissible to decide that question at a level of abstraction which does not descend even to the identification of who might have had, or might be reasonably be supposed to have had, personal knowledge of the asserted fact. On the face of the documents within HK-1, there are a number of indicators concerning the identity of Mr and Mrs Denlay, which make it highly likely, to say the least, that they were placed on those documents by a person who either had personal knowledge or who might be reasonably be supposed to have personal knowledge, of the asserted fact. In itself, that their names appear in the records of the LGT Group in an obscure European principality gives a clue as to reasonable supposition of knowledge of the asserted fact. 8 Mr Kieber's evidence included a concession in the course of his cross-examination that, with particular types of accounts within the LGT Group, aliases or what one might loosely call identity fraud, was not unknown. He associated this type of account, though, with accounts in respect of criminal activities rather than what he described as tax haven matters. Beyond just matters of name, one sees dates of birth which are conceded to be accurate, as well as an occupational activity, deep sea diving, which on the face of Mr Denlay's affidavit, is one in which he engaged. Further, when one has regard to meetings which are recorded to have taken place in the records in Hong Kong and correlates that with Mr Taylor's evidence as to movements into and out of Australia by Mr and Mrs Denlay, there is an overlap. That is so even if one disregards that part of Mr Taylor's evidence which puts forward destinations, specifically Hong Kong. What remains, nonetheless, is a consistency between periods when Mr and Mrs Denlay were out of Australia and when a meeting with a representative of the LGT Group as entered in the documents is, according to the documents in HK-1, said to have occurred. 9 The objection has fallen for consideration at a time when, because of the particular exigencies associated with the unfortunate position in which Mrs Denlay presently finds herself in relation to her health, it has not proved possible for the Denlays, either Mr or Mrs Denlay, to be cross-examined. Instead, and exceptionally and by consent, the course has been taken whereby the Commissioner's case has been interposed prior to the completion of the Denlays' case, and in particular, prior to Mrs Denlay being cross-examined and also prior to all but a brief cross-examination, as yet unconcluded, of Mr Denlay. Even so, taking into account the evidence which has thus far fallen in-chief from Mr and Mrs Delay, there is to be noted a concession as to one particular gentleman from the LGT Group with whom they dealt in Hong Kong. That gentleman's name also appears within the record in HK-1. I am entitled to draw inferences available on the face of the documents which comprise HK-1. 10 Those inferences as to the names of Mr and Mrs Denlay appearing on the account, their dates of birth and their meeting with a person in Hong Kong, are all consistent with their being out of Australia and meeting a gentleman Mr Denlay concedes to have met. Of course, I also have to consider a denial which was given in the course of interviews under s 264, in respect of knowledge of the account. But that is in no way determinative of a question as to whether to admit the documents which comprise HK-1, or otherwise to allow the objection in respect of s 69. 11 Ultimately, I may well have to reach a view as to whether or not that particular denial was true or not. For the moment, though, I am satisfied that the documents within HK-1 contain representations which were made by a person who had or might reasonably be supposed to have had personal knowledge of the asserted facts. And also I am satisfied, not that it matters, given the satisfaction just voiced, that the documents contain representations made on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had, personal knowledge of the asserted fact. 12 In other words, however I approach s 69(2) of the Evidence Act, I regard its requirements as satisfied in the circumstances of this case, insofar as they relate to the documents within exhibit HK-1. I therefore overrule the objection insofar as it relies upon that section of the Evidence Act. 13 That leaves the consideration whether or not there ought, nonetheless, to be an exclusion under s 138 of the Evidence Act. I have already, earlier in these proceedings in respect of another issue, had occasion to consider the operation of s 138 in the circumstances of this case. It falls for consideration now, though, against the background of having heard the evidence of Mr Kieber including, of course, his cross examination. I have already referred to the breaches of confidence which attend the communication by Mr Kieber of the documents within exhibit HK-1 to the Commissioner of Taxation. Mr Kieber also conceded, in the course of his cross examination, that to his understanding his actions were not just a breach of confidence, but also contrary to the laws of Lichtenstein. 14 In proceedings separately heard and determined I concluded that the use of material, which one now finds within exhibit HK-1, for the purpose of making an assessment, did not have the consequence that the assessment, in its making, was contrary to law and should be quashed: see Denlay v Commissioner of Taxation (2010) 276 ALR 675. That conclusion was upheld by the Full Court: see Denlay v Commissioner of Taxation [2011] FCAFC 63. 15 That question, though, concerned the use administratively of the material. It does not necessarily follow that the use of that material administratively means that the decision conferred by s 138 must be exercised in favour of its reception. It is, though, a relevant consideration in my opinion. That is so because, at least in relation to the circumstances in which this particular material was obtained by the Commissioner of Taxation, and the background to its removal and communication by Mr Kieber, it would be somewhat odd for there to be a position whereby the Commissioner was entitled to use that material for the making of an assessment and even though it was otherwise admissible under s 69 of the Evidence Act, he was excluded from tendering it in the exercise of a discretion under s 138. 16 There is no doubt at all that the material in exhibit HK-1, from the LGT Group, is relevant and of high probative value. It is not, of course, in any way part of deciding the objection to the evidence to determine ultimate issues. Further, even if the material is admitted, it is in no way determinative of ultimate issues, rather, it is relevant to that determination. It is conceded and, with respect, properly conceded for the Commissioner, that the circumstances under which Mr Kieber took and communicated the documents in exhibit HK-1 to him, ought to be regarded as an improper obtaining. That is a factor which, necessarily, must be taken into account in the weighing up process for which s 138 provides. 17 It is, though, no part of that obtaining that the Commissioner of Taxation was a party to the copying from the back-up tape of the documents. That was all Mr Kieber's work. Section 138(3) posits a number of considerations which the Court is to take into account. One of these is that found in subpara (h) namely, the difficulty, if any, of obtaining the evidence without impropriety or contravention of an Australian law. 18 Mr Kieber gave evidence that, via the German Secret Service (BND), he had received a sum of money for the communication of other information from the back-up tapes to the Government of the Federal Republic of Germany. It is, for the reasons upon which I elaborated in the reasons for judgment I delivered in respect of the application for judicial review, by no means impossible to see how, under Australian law, namely the Intelligence Services Act 2001 (Cth), it might be possible for Australia to have adopted a similar position to that of Germany in relation to obtaining material via Mr Kieber from the LGT Group. In that sense, it is possible to conceive of circumstances whereby the material might be obtained without contravention of Australian law, even though it might nonetheless amount to a contravention of the law of Liechtenstein. It would be difficult in those circumstances to classify the obtaining of that material, if it were lawful under Australian law, as nonetheless "improper", although given that a breach of a banker's and a bank employee's duty of confidence had occurred, that might nonetheless admit of that finding. That, though, is to posit a circumstance which not only did not occur but is one which one might regard as highly exceptional. 19 That highly exceptional situation aside, the position is that the Commissioner of Taxation could not have obtained information from this particular Liechtenstein financial otherwise than in the manner in which it came via Mr Kieber to him. 20 Also relevant, in my opinion, is the position which applies under domestic law in relation to a banker's duty of confidence insofar as the Commissioner of Taxation seeks information from an Australian bank. That position was considered by Stephen J in Smorgon v Australian & New Zealand Banking Group Ltd; Commissioner of Taxation v Smorgon (1976) 134 CLR 475 at 486. The question in that case arose against the background of the assertion by the Commissioner of Taxation, as against the ANZ Bank, of an entitlement to have produced to him bank records concerning the Smorgons. Raised for consideration was whether the bank's contractual duty of confidence and its customer's corresponding contractual right to have the confidence preserved were an answer to that assertion. His Honour, at page 490 concluded that: The contractual duty of confidentiality arising from the relationship of banker and customer does not at all affect the power of the Commissioner to invoke the provisions of s 264(1)(b) in relation to information within the knowledge of the Bank's officers or to documents in the possession of the Bank which concern a customer's income or assessment. 21 Thus, had the information in exhibit HK-1 reposed not in a financial institution in Liechtenstein but rather in an Australian bank, that it was attended with a banker's duty of confidence and a corresponding contractual right on the part of Mr and Mrs Denlay, would have been nothing to the point in terms of the ability of the Commissioner to require production of the documentation in exhibit HK-1 to him, pursuant to s 264, or for that matter for him to access that material in the exercise of the power separately conferred by s 263 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) . 22 What I derived from that, is that in terms of the basis upon which the Australian Parliament intends the Commissioner to make assessments, pursuant to s 166 of the ITAA36, a banker's duty of confidence is not regarded as an obstacle to the information base against which Parliament expects the Commissioner to be able to assess. I take that into account in the weighing up exercise. 23 Another criterion to which s 138(3)(d) points is the gravity of the impropriety or contravention. There is no contravention of Australian law in what Mr Kieber did, but there is certainly an element of self-interest. The evidence as to the nature and extent of that self interest is not clear, but it is enough on the evidence which I do have to acknowledge that his motives were not altruistic. 24 Weighing those considerations up the conclusion I reach is that the documents which comprise exhibit HK-1 should be admitted. I reach that conclusion because the desirability of admitting that evidence outweighs the undesirability of admitting evidence that was obtained in the way in which it was by Mr Kieber. 25 I regard that outcome as consistent with the outcome reached by Pincus J, in Pearce v Button (1985) 8 FCR 388 (Pearce v Button), in relation to the question of whether at common law evidence which had been obtained, on that occasion by officers of the Commonwealth (customs officers) should be admitted, even though it had been obtained in circumstances where the officers concerned were acting under a customs warrant, which was later found to be invalid. There too, the evidence concerned had a high probative value. Here, the case is further removed from that which fell for consideration in Pearce v Button, in that no officer of the Commonwealth was a party to the improper removing of the material. 26 It was put, I should acknowledge, that there was a consequential element of impropriety, associated with the Commissioner's exploitation, via the drawing and then tendering of an affidavit of Mr Kieber. Given that, once the material had arrived in Australia, the Commissioner was perfectly entitled to access it under s 263, I have difficulty in seeing any impropriety at all even of this consequential nature. In any event, I should record I have taken that into account in reaching my conclusion. 27 For these reasons, then, I overrule the objection. It follows that insofar as objection was taken to consequential evidence namely, that of translation of the documents in exhibit HK-1, that the objection in that regard also is overruled. 28 Finally, it also follows from the conclusions which I have reached in respect of Mr Kieber that I am not disposed, by virtue of a like weighing up exercise, to exclude any evidence given by Assistant Commissioner O'Neill. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate: Dated: 21 September 2011