Making sure the left hand knows what the right hand is doing: Illuminating the black economy through Commonwealth procurement

What you need to know

• A new Commonwealth procurement-connected policy, the Black Economy – increasing the integrity of government procurement (the Black Economy PCP), was announced on 26 March 2019 and will commence from 1 July 2019.
• The Black Economy PCP will apply to all non-corporate Commonwealth entities (NCEs) when undertaking procurements of goods and services through an open tender, which are subject to the Commonwealth Procurement Rules (CPRs) and which have an estimated value of over $4 million (inc GST).  
• The Black Economy PCP provides that NCEs must require tenderers provide a satisfactory and valid Statement of Tax Records (STR) as part of their tender.  Tenderers will also be required to obtain and hold STRs from their first tier subcontractors which will provide goods or services valued over $4 million (inc GST).
• An NCE must only accept tenders that are accompanied by a satisfactory and valid STR (or an STR request receipt followed by a STR within 4 business days of the close of the tender). 

What you need to do

• Update your approach to market to documentation to require tenderers to provide an STR for themselves and any first tier subcontractors which will provide goods or services under a subcontract valued over $4 million (inc GST), where the Black Economy PCP applies.
• Make clear in the approach to market documentation that a failure to provide the required STRs will prevent consideration of the tenderer's submission. 
• Update any contract templates, which may be used in a procurement subject to the Black Economy PCP, to require the contractor to obtain satisfactory and valid STRs for first tier subcontractors (which will provide goods or services under a subcontract valued over $4 million (inc GST)) that are engaged after the contract is awarded. 
• Review and update any other internal policies to ensure that these are compliant with the Black Economy PCP.
• Be alert to changes that may be made to the Black Economy PCP after its first year of operation.  In the future, there is potential that the policy may extend to second tier subcontractors and the criteria for satisfactory STRs may be broadened to cover other conduct related to the black economy.

Overview and Background

In late 2016, the Government established a Black Economy Standing Taskforce (the Taskforce) to crackdown on the "black economy", being entities and persons who:

• operate outside the Australian tax and regulatory system; or 
• do not correctly report their tax obligations.  

The Taskforce released its Final Report in October 2017.  It made 80 recommendations to the Government to counter the "black economy", including increasing the integrity of Government procurement (recommendation 9.1).

Recommendation 9.1 suggested that, in order to improve the integrity of Government procurement:

• Commonwealth contracts should include a clause that requires contractors and their suppliers to comply with all tax legislation and regulation for the duration of the contract; and 
• for large contracts, tenderers must provide evidence of their tax record as part of the procurement.  

The Final Report argued that this would be consistent with community expectations that the government only contract with businesses that have a history of complying with their tax obligations.  The Black Economy PCP is also intended to demonstrate best practice in supply chain management practices, and set an example for the private sector.  

The Department of Treasury released the draft Black Economy PCP for consultation on 19 November 2018, with consultations closing on 21 December 2018.  The final Black Economy PCP was announced on 26 March 2019.

Commencement

The Black Economy PCP will apply to approaches to market initiated on or after 1 July 2019.  This means any procurement processes commenced prior to 1 July will not be subject to the policy.  
The Black Economy PCP also makes clear that contracts or deeds of standing offer executed prior to 1 July 2019 do not need to be updated or amended in order to comply with the policy.  

Application

All NCEs (ie Departments of State and listed entities) must comply with the Black Economy PCP.  
Corporate Commonwealth entities and Commonwealth companies are not required to comply with the Black Economy PCP, but are encouraged by the policy to adopt it as a matter of good practice.  

Scope 

The Black Economy PCP will apply to procurements for all goods and services (including construction services) that are:

1. undertaken through open tender, which involves an open approach to market in which tenders are invited;
2. subject to the Commonwealth Procurement Rules (CPRs); and
3. have an estimated value over $4 million (inc GST).

The restriction of the Black Economy PCP to open tenders means that an NCE is not required to comply with the policy when undertaking a procurement by way of a limited tender, such as a sole sourcing arrangement.  

The Black Economy PCP's minimum value threshold ($4 million (inc GST)) is the same threshold that applies to the economic benefit to the Australian economy requirement in rule 10.32 of the CPRs.  Officials must estimate the expected value of the procurement before a decision on the procurement method is made (rule 9.2 of the CPRs).  This means NCEs should identify these additional requirements early in the procurement strategy planning. 

Compliance obligations

If a Commonwealth procurement is subject to the Black Economy PCP, the NCE must require tenderers to: 

• provide a satisfactory and valid STR or, if the STR cannot be provided by the tender submission deadline, a STR receipt demonstrating the tenderer has requested a STR from the Australian Taxation Office (ATO) and then a satisfactory STR within four business days after the close of the tender submission date; and 
• hold satisfactory and valid STRs for any immediate subcontractors of the tenderer ("first tier subcontractors") it will engage to deliver goods or services under a subcontract valued over $4 million (inc GST).  The requirements regarding the STRs required from subcontractors is detailed further below.  

NCEs must also make it clear in their request documentation that, if a tenderer fails to provide a satisfactory and valid STR within the timeframes, this will "prevent consideration of their submission". 

Application of policy to partnerships, trusts, joint ventures and tax consolidated groups

Officials should also be aware that the Black Economy PCP also includes additional requirements relating to the provision of an STR where the tenderer or a subcontractor is a partnership, trust, joint venture or a member of a tax consolidated group, Multiple Entry Consolidated (MEC) group or GST group. In each of these cases individual STRs will be required form additional parties other than just the tenderer.  STRs will be required from additional parties other than just the tenderer.  

In each of these instances, STRs will be required from:

• the partnership itself and in respect of the partners who will be directly involved in the delivery of the contract, where the tenderer is a partnership; 
• both the trustee and in respect of a trust, where the tenderer is a trustee acting in that capacity for a trust; 
• each party to a joint venture where the tenderer is a joint venture, and if the joint venture operator is not a participant of the joint venture the joint venture operator as well; 
• the subsidiary and head company of a tax consolidated or MEC group, where the tenderer is a subsidiary of such a group; and 
• by the group member and the group representative, where the tenderer is a member of a GST group.  

The Black Economy PCP also requires that if a tenderer or subcontractor is a partnership and a new partner subsequently becomes involved in the delivery of the contract, a satisfactory STR must be provided in respect of that partner within a reasonable time.  Commonwealth entities could also consider including a requirement in their tender documentation and contract templates requiring new members of a trust, joint venture or group to also provide a satisfactory STR (noting that the Black Economy PCP does not yet impose this as an express requirement).

Treasury encourages entities to apply for STRs early and often to prevent delays in tender processes and address any issues early.  This will be particularly important for partnerships (such as law firms and accounting firms).

Issue of STRs

STR are issued by the ATO on request from the entity.  The Black Economy PCP states that STRs will be provided within four business days from application.

An STR will remain valid for:

• 6 months from the time of issue, if the relevant entity does not hold an Australian tax record with the ATO of at least 4 years (ie new or foreign businesses); or
• 12 months from the time of issue for all other entities.

If the ATO has not provided the STR by the tender closing time, the tenderer must:

• submit the STR receipt; and
• provide a satisfactory STR "no later than four business days from the close of tender and before the awarding of the contract".

NCEs should ensure that their request documentation permits the later submission of the valid STR, if an STR receipt is initially submitted with a tender.   If no valid STR is subsequently submitted within the 4 business day period, the tender should be treated as not having been submitted with a valid STR.  

Expiry of STRs

Depending on the duration of the procurement process, an STR which is valid at the time of the tender closing may no longer be valid at the time the contract is awarded.  In this circumstance, the NCE may request a renewed satisfactory STR before awarding the contract.  However, it is not a requirement of the Black Economy PCP that it does so.

The NCE may also make it a condition of the contract that the successful tenderer will be required to maintain an up-to-date satisfactory STR during the course of the contract.  This is not a requirement of the Black Economy PCP. Treasury has indicated that if up-to-date satisfactory STRs are required during the contract:

• this must also be stated in the request documentation; and
• the consequences of failing to do so must be detailed in the contract and the request documentation.

For example, aside from placing a contractor in breach of the contract, a failure to maintain a satisfactory STR might be taken into account in contractor performance assessment or contract renewal regimes or prevent eligibility for incentive payments.

What constitutes a satisfactory and valid STR

Satisfactory

The ATO will provide a satisfactory STR if the following conditions are met:

• the tenderer is up-to-date with registration requirements (eg ABN registration or possessing a Tax File Number); 
• the tenderer has lodged at least 90 per cent of all income tax returns, Fringe benefit tax returns or Business Activity Statements due in the last four years (or for their period of operation if this is less than four years); and
• the tenderer does not currently have $10,000 or more in debt overdue to the ATO (excluding debt that is subject to objection, review, appeal or a payment plan).

The contents of an STR will vary for entities that do not have an Australian tax record of at least four years.  It is expected that this will primarily be the case for either new or foreign businesses.  The ATO will issue a satisfactory STR in these circumstances if the applicant's appropriate officers provide a statement on behalf of the relevant entity, stating that it:

• has no tax record or a record of less than 4 years; 
• will comply and pay all Australian tax obligations;
• has no tax or criminal related convictions in the last four years; and
• is complying with any tax obligations outside of Australia.

The Black Economy PCP emphasises that an STR is not evidence of the financial viability of a tenderer and should not replace any ordinary financial due diligence undertaken by the Commonwealth in the course of undertaking a procurement and assessing tenderers. 

Status of subcontractor STRs

As noted above, a tenderer is also required to hold satisfactory and valid STRs for any "first tier subcontractors" who will individually be undertaking work under a subcontract entered into with the tenderer valued at over $4 million (inc GST).  

The Black Economy PCP does not require that subcontractors STRs be submitted as part of the tender process.  However, they must be available to the Commonwealth entity on request. ��

The tenderer is not required to hold STRs for "second tier subcontractors", which are those subcontractors hired by the first tier subcontractor.  However, Treasury has indicated the policy may be expanded to also cover second tier subcontractors in subsequent years.

As well as holding STRs for those subcontractors who are known at the time of tendering, if the tenderer is awarded the contract and subsequently engages further subcontractors (in respect of goods and services  under a subcontract valued over $4 million (inc GST)) it must obtain STRs for these subcontractors.  While the Black Economy PCP does not require these additional certificates to be submitted to the Commonwealth entity, the Commonwealth entity should include a clause in the contract requiring the contractor to: 

• obtain these STRs from its subcontractors; and 
• disclose them to the NCE on request, 

as well as setting out the consequences where there is a failure to provide the STRs upon a request.  

The Commonwealth entity may also make it a condition of the contract that the successful tenderer will be required to maintain an up-to-date satisfactory STR for all contractors (including those disclosed during the tender process) during the course of the contract.  Again, this is not a requirement of the Black Economy PCP, it is only an option that is identified.

Panel Arrangements

A particular issue warranting consideration is how the Black Economy PCP will apply to panel arrangements.  The policy must be complied with when establishing a panel arrangement (or refreshing a panel arrangement established after 1 July 2019), where it is expected that the total value of orders under the arrangement is estimated to be over $4 million (inc GST).  

However, the Black Economy PCP will not apply to existing panels (ie those established prior to 1 July 2019), that are refreshed or renewed after 1 July 2019.  

Implications

NCEs will need to review and ensure that their approaches to market documentation, contract templates, policies and procedures are consistent with the requirements of the Black Economy PCP.  

Specific actions to consider include: 

• updating your request documentation to require the provision of a satisfactory and valid STR by the tenderer (and in some cases, its partners, joint venturers, group representative, head company or trustee) within the timeframes, and setting out the consequences where there is a failure to provide this;
• updating your request documentation to alert tenderers that you may ask for evidence of a satisfactory and valid STR for all nominated first tier subcontractors (who are providing goods and services  under a subcontract valued over $4 million (inc GST));  
• updating contract templates as appropriate to require the contractor to hold satisfactory and valid STRs for first tier subcontractors (who are providing goods and services under a subcontract valued over $4 million (inc GST)) that are engaged after the contract is awarded; and
• whether the contractor should be required to maintain up-to-date satisfactory STRs for itself and nominated subcontractors during the course of the contract and, if so, the consequences if this obligation is not complied with.

Going Forward

Commonwealth officials should be aware that the Department of Treasury intends to review the Black Economy PCP on an annual basis to assess its effectiveness.  In particular, Treasury has flagged that:

• the scope of the policy may be expanded to second tier subcontractors; and 
• the criteria used to determine whether a STR is satisfactory could be expanded to account for other matters related to the black economy, such as court order penalties imposed on directors and convictions for phoenixing behaviour, bribery or corruption.

Authors: Steve McKinney, Partner, Sarah Ross-Smith, Partner, Angela Summersby, Partner, Georgina Adams, Consultant, Hyans Mach, Counsel, Cale Woods, lawyer and Derek Smith, lawyer.