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How the Black Economy measures will affect you

Keith Swan, Jacqueline McGrath and George Hempenstall investigate a proposal to screen the tax record of potential bidders on Commonwealth government contracts.

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Key questions remain for a proposal to screen the tax record of potential bidders on Commonwealth government contracts.

From 1 July 2019, businesses may be required to produce a Statement of Tax Record (STR) from the Australian Tax Office (ATO) as a condition to tender for those contracts valued over $4 million. Emanating from the Black Economy Taskforce findings, STRs are aimed at preventing suppliers that have saved costs by not complying with their tax obligations from outbidding other suppliers.

The mechanics underlying STRs are currently under consultation (15 May 2018, Consultation Paper – Increasing the integrity of the Commonwealth procurement process) (Consultation Paper). Their overarching intention is to signify 'satisfactory engagement with the tax system, rather than a perfect tax record.

Questions remain

But precisely what is satisfactory engagement? Will past ATO disputes, late lodgements or penalties prejudice your ability to procure an STR? Will subcontractors known to associate with phoenixing or 'black economy' activity impinge on a bidding principal contractor’s bill of health? Will STRs put long-existing domestic bidders at a competitive disadvantage relative to newly-formed players or international competitors – with no tax history at all –or vice versa?

Evidently, there are an array of difficult policy issues that require fulsome debate before determining the right balance. Treasury states in the Consultation Paper that “it is expected that most businesses will be able to obtain the Statement of Tax Record without any difficulty”. The risk that black economy participants will be able to easily obtain an STR (by setting up a 'cleanskin' entity for example) needs to be balanced against the requirement for an efficient process using objective criteria. Treasury is recommending that the criteria be limited in the first year. The determination and implementation of additional criteria thereafter will be crucial.

Submissions to government

Industry bodies including the Australian Chamber of Commerce and Industry (Australian Chamber), Chartered Accountants Australia and New Zealand and CPA Australia have prepared submissions, along with KPMG. These submissions illustrate that implementing STRs may not prove a mere formality.

Key industry recommendations include limiting the look-back review to 3 to 4 years, safe harbours for late tax lodgements/payments and an avenue for tax agents to query, challenge or seek STR amendments. The Australian Chamber submissions suggested that “government procurement contracts should not be used as a means to coerce payment (explicitly or implicitly), or discourage business from, contesting a tax debt with the ATO”. While all bodies warned that caution is needed when determining the definition of a 'satisfactory tax record', none rejected the proposal altogether.

Legislation in practice overseas

In a global context, the proposed STR is not revolutionary. Indeed, having a good tax compliance history and governance framework is increasingly being seen globally as an important precondition to having a social license to operate. In countries such as the UK, Ireland, South Africa, and Fiji, similar tax compliance certificates are already in effect.

If the Australian Government adopts a similar approach to South Africa, all entities in a supply chain may be required to have an STR; this pulls subcontractors from the shadows and into the light. Indeed, KPMG’s submissions noted that “without this requirement, there would be a risk that the head contractor’s STR effectively only covers a tiny part of the activities performed under the contract”. Subcontractors with a checkered tax history may be locked out of government contracts, as may be the head contractors who rely on that sub-contractor’s expertise to best position a bid for a win.

The precise form STRs will take in Australia remains uncertain. It appears likely that STRs will exist, and soon. The probable expansion of the STR criteria following the first year will need to be monitored to ensure it does not make the process inefficient and overly subjective. Companies should be striving for 'satisfactory engagement with the tax system' today, lest mistakes now impact their ability to tender for government contracts down the track.

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