The federal government is pursuing a crackdown on Australia’s black economy, estimated to be worth about $50 billion a year.
The Coalition’s plans to screen tax records of firms bidding on Commonwealth contracts could disadvantage longstanding businesses and rule out owners who have had disputes with the ATO.
Part of efforts to crackdown on Australia’s black economy, bidders will be required to provide a statement of tax record from the Tax Office as part of pitches for government contacts worth more than $4 million from July 1, 2019.
The government’s black economy taskforce estimates that the illegal activity could be as large as 3 per cent of GDP and worth as much as $50 billion a year.
KPMG tax dispute resolution and controversy partner Keith Swan said the plan was part of a suite of measures to prevent suppliers who had not complied with tax obligations from outbidding other suppliers.
The statement is designed to signify “satisfactory engagement with the tax system, rather than a perfect tax record” and the government believes most businesses will be able to receive the statement without difficulty.
Mr Swan said what constituted satisfactory engagement had not been defined.
“Will past ATO disputes, late lodgements or penalties prejudice your ability to procure an STR?
“Will subcontractors, known to associate with phoenix-ing or black economy activity, impinge on a bidding principal contractor’s bill of health? Will [the statements] 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?”
Monitoring is key
He said an array of difficult policy issues needed to be settled before the right balance could be determined.
“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.”
Industry groups want businesses to only face reviews of three to four years and have warned against the process being used to discourage tax disputes or for the coercion of additional payments.
“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,” Mr Swan said.
“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.”
Thomson Reuters Tax and Accounting managing director Edmund Wong said the plan would place great requirements on companies to be transparent about their tax and to demonstrate they have appropriate internal systems and processes in place.
“With the statement of record having been validated by the ATO, there’s another level of governance in the government procurement process,” he said.
“It puts a lot more importance on having the right level of governance, use of technology within organisations but it if companies have the right level of processes it shouldn’t be onerous. It should be like doing your tax return.”
Mr Wong said the plan could help address skepticism about large companies paying their share of tax.
“It sets a fairer playing field for large companies as well as smaller ones. It really sets a different baseline in the industry and I think it’s the right move forward from a governance stand point.”
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