Tax Insight: Tax compliance certificates and government tenders

Treasurer Scott Morrison recently released the 2018-19 Federal Budget (Budget).  One key Budget measure and recommendation of the Government’s Black Economy Taskforce (Taskforce) will significantly affect businesses tendering for government contracts.

The Australian Treasury is currently consulting on this proposed measure with submissions due by 15 June 2018.

From 1 July 2019, it has been proposed that all businesses tendering for government contracts over $4 million (inclusive of GST) will be required to obtain a “Tax Compliance Certificate” (Certificate) from the Australian Taxation Office (ATO).

What problem is the Certificate trying to address?

The intent behind the Certificate is to improve tax compliance by causing adverse commercial consequences for businesses who do not comply with their tax obligations. Businesses that do not obtain a Certificate from the ATO will be ineligible to tender for government contracts over $4 million.

Total Government procurement in 2015-16 was in the order of $57 billion and therefore, this proposal is harnessing the purchasing power of the Government to drive better tax behaviour by business.

Criteria to obtain a Certificate

To obtain a Certificate from the ATO, a business must be able to demonstrate it has a “good tax record”. As yet, it is unclear how the Government or the ATO define a “good tax record”. For example, it is unclear whether current compliance activity will form part of any criteria which is adopted. However, the Taskforce recommended that any criteria should set a high benchmark and the business must:

• Not have a judicial or tribunal decision against it for tax evasion over the past five years (not including decisions under appeal or where there was a genuine dispute over the interpretation of tax laws);
• Have fulfilled its tax reporting and payment obligations over the past five years. If there is an outstanding debt, a payment plan must be in place and the terms must be met; and
• Not have any directors that have been involved with identified phoenix operations.

Currently, it is unclear how a “genuine dispute” will be defined and whether the ATO’s decision not to issue a Certificate could be the subject of review. The Australian Treasury is currently consulting on this issue.

Importantly, foreign businesses will not be excluded from tenders due to being unable to produce a Certificate as they are based in an overseas jurisdiction (and have not previously been required to pay tax in Australia). However, it is envisaged that these businesses could be required to provide a statutory declaration that they do not have a “bad tax record” applying the final form of the Certificate criteria.

How we can assist

In preparation for implementation of this proposal, HWL Ebsworth’s national tax team can assist businesses to conduct an internal review of their own taxation affairs prior to 1 July 2019. We can also engage with the ATO on a client’s behalf well in advance of this time if required. This is particularly important if the ATO is currently undertaking compliance activity.

Currently this proposal is not law and our national tax team will keep you updated as more is announced. However, the Government has provided the ATO with $9.2 million over four years to develop and consult on this measure.

Please contact a member of our tax team to discuss any aspect of the above further.

This article was written by Ari Schachna, Partner, Nima Sedaghat, Partner and Vincent Licciardi, Senior Associate.