Legal Insights
Changes to the Shadow Economy Procurement Connected Policy introduce much needed reforms – but are they just light relief?
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• 14 October 2024
• 5 min read
The Shadow Economy Policy
The Shadow Economy Policy (Shadow Economy Policy) is designed to protect the integrity of supply chains in Australian Government procurement from illegal supplier practices. It does this by excluding businesses that do not have a valid and satisfactory statement of tax record from participating in Australian Government procurement processes.
To demonstrate compliance with the Shadow Economy Policy, when submitting tenders to Australian Government procurement processes, businesses are required to provide one or more Statements of Tax Record (STR) (issued by the Australian Taxation Office) that are both ‘Valid’ and ‘Satisfactory’. The number and type of STRs required depend on the nature of the tenderer’s organisation and/or its corporate group (if relevant).
For Commonwealth entities, implementing the Shadow Economy Policy has required consideration of the Shadow Economy Policy itself, and the inclusion and application of various mandatory model clauses in approach to market documents.
Updates have now been made to the Shadow Economy Policy, which apply to new and existing Australian Government approaches to market that:
- are valued at $4 million or more (including GST);
- are for goods and/or services (including construction services); and
- close on or after 1 October 2024.
Importantly, the drafting of the Shadow Economy Policy means that the updates apply to approaches to market that were released before 1 October 2024 but close on or after 1 October 2024. Accordingly, Commonwealth entities should ensure that any current approaches to market are consistent with the revised Shadow Economy Policy, including through amending approaches to market released prior to 1 October 2024 if necessary.
The reasons for the updates
Ensuring that only businesses that have a satisfactory tax record participate in Australian Government procurement processes is important. However, in our experience, countless businesses (including small to medium enterprises and individuals) have been excluded from Australian Government procurement processes, and a number of procurements cancelled, as a result of the Policy.
In many cases, this was because the businesses did not meet the stringent administrative requirements of the Shadow Economy Policy, despite otherwise complying with their Australian tax obligations. For example, many tenderers have been excluded from Australian Government procurement processes simply because they held the right document at the wrong time, or the wrong document at the right time.
Following a lengthy consultation and review process, some of the stringent administrative requirements have been relaxed. These changes should reduce the risk of tenderers being excluded from procurement processes for reasons that do not advance the Shadow Economy Policy’s purpose.
However, the Shadow Economy Policy still contains requirements that tenderers and Commonwealth entities must understand and follow to ensure that the Policy is complied with, and businesses are not excluded from Australian Government procurement processes.
So what has changed?
Expand the sections below to learn more.
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Clarifying which STRs are mandatory for tenderers
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After 1 October 2024
The model clauses clearly state that tenderers must provide with their tender, and hold, all Valid and Satisfactory Statements of Tax Record for their entity type.
So what?
This clarifies the mandatory requirements to provide and hold Statements of Tax Record by making it clear that the minimum content and format requirements and conditions for participation require all Statements of Tax Record to be provided and held for the tenderer.
A failure to provide any one or more of the required Statements of Tax Record will mean that the tenderer does not meet the minimum content and format requirements and conditions for participation.
There is a risk that a tenderer must be excluded because it did not provide or hold all of the required Statements of Tax Record, unless that failure to provide any Statement of Tax Record is able to be cured through the unintentional error of form process.
Previous position
Tenderers were always required to provide and hold all Valid and Satisfactory Statements of Tax Record for their entity type (which can involve providing multiple Statements of Tax Record).
However, the wording of the previous model clauses could be interpreted as not clearly articulating a mandatory requirement to provide and hold all of those Statements of Tax Record at the closing time of the approach to market. Such ambiguity in the model clauses resulted in procuring entities adopting different approaches to this requirement.
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Clarifying which STRs are mandatory for subcontractors
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After 1 October 2024
The model clauses clearly state that Tenderers must hold all valid and satisfactory STRs for first tier subcontractors (where the value of the subcontract is $4 million (GST inclusive) or more) based on the first tier subcontractors’ entity types.
So what?
Similar to the above, the Shadow Economy Policy clarifies the mandatory requirements by requiring all Statements of Tax Record to be held by the tenderer for first tier subcontractors based on the first tier subcontractors’ entity types.
However, these subcontractor Statements of Tax Record do not need to be provided with the tender.
Previous position
Tenderers were always ultimately required to hold all Valid and Satisfactory Statements of Tax Record for their first tier subcontractors’ entity types where the value of the subcontract was more than $4 million.
However, the wording of the previous model clauses could be interpreted as not clearly articulating a mandatory requirement to hold all of those Statements of Tax Record at the closing time of the approach to market. Such ambiguity in the model clauses resulted in procuring entities adopting different approaches to this requirement.
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Clarifying when STRs are required
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After 1 October 2024
The model clauses no longer make it a requirement to hold the Statement of Tax Record at the closing time (or within 4 business days of the closing time).
So what?
If a failure to provide any Statement of Tax Record can be cured through the unintentional error of form process, this may mean that there is more flexibility to determine that the condition for participation is also met if the required Statements of Tax Record are subsequently held by the tenderer.
However, tenderers are required to correct any unintentional error within 10 business days of the Commonwealth’s request (see below) or they must be excluded (see below).
Previous position
If a tenderer did not hold the right Statement of Tax Record at the closing time (or within four business days of the closing time if a receipt had been provided with the tenderer) it had to be excluded, even if it was able to subsequently obtain the right Statement of Tax Record and correct any failure to meet the minimum content and format requirement though the unintentional error process.
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STR receipts are no longer permitted
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After 1 October 2024
Tenderers can no longer provide a receipt demonstrating that they have applied for an Statement of Tax Record as part of their tender.
So what?
Tenderers will need to apply in time to obtain the Statements of Tax Record.
Again, it may be possible to save any forgetful tenderer from exclusion if a failure to provided and hold the Statement of Tax Record can be characterised as an unintentional error and the required Statements of Tax Record provided within the applicable timeframe (see below).
Previous position
The model clauses previously allowed tenderers to include a receipt demonstrating that they had applied to the Australian Taxation Office for a Statement of Tax Record, provided that they then supplied the required Valid and Satisfactory Statement of Tax Record within four business days after the closing time.
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Clarifying contract award requirements
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After 1 October 2024
Commonwealth entities can only award contracts to a tenderer if the Commonwealth entity holds Valid and Satisfactory Statements of Tax Record for each entity of that tenderer for which a Valid and Satisfactory STR must be provided.
So what?
If Statements of Tax Record submitted by the tenderer are or will be no longer Valid at the time of contract award, the Commonwealth entity must obtain renewed Valid and Satisfactory Statements of Tax Record from the tenderer before entering a contract with the tenderer.
Previous position
The Shadow Economy Policy did not previously require that a Commonwealth entity hold all required Valid and Satisfactory Statements of Tax Record (and if need be, request updated Statements of Tax Record) as a condition of being able to award a contract to a tenderer.
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Managing unintentional errors
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After 1 October 2024
If a tenderer has failed to submit all Valid and Satisfactory Statements of Tax Record required for its entity type, it is open to Commonwealth entities treat the failure as an unintentional error of form, including where the tenderer:
- was unable to provide an Statement of Tax Record because of a failure by the ATO to issue an Statement of Tax Record; or
- unintentionally omitted the required Statements of Tax Record and has exhibited an intention to otherwise submit a compliant tender.
Commonwealth entities must require tenderers to correct any unintentional error by submitting all Valid and Satisfactory STRs within 10 business days after a request from the Commonwealth entity.
So what?
Although the policy allows for the correction of unintentional errors, a tenderer that fails to meet the 10 business day timeframe may need to be excluded.
The model clauses do not include drafting to give effect to this requirement and entities should ensure that any approach to market adequately addresses this issue.
Previous position
The Shadow Economy Policy was previously silent on this point. As a result, failures to submit Statements of Tax Record would only be treated as unintentional errors if Commonwealth entities did so in accordance with the approach to market documentation.
The Shadow Economy Policy was also silent on what should be done in circumstances where the ATO did not issue an Statement of Tax Record in time to meet an approach to market’s closing date, without fault of the tenderer.
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A positive step, but careful attention is still required
As is evident from the above, the updates to the Shadow Economy Policy include some additional clarity and flexibility that are aimed at reducing the chances of tenderers being excluded from procurement processes for reasons that do not advance the Shadow Economy Policy’s purposes.
However, despite these improvements, tenderers and Commonwealth entities alike still need to exercise a significant level of care to ensure that they understand and follow the Shadow Economy Policy. This is noting that the consequences of not meeting the Shadow Economy’s Policy's requirements include:
- for tenderers, exclusion from Australian Government procurement processes; and
- for Commonwealth entities, potential breaches of paragraph 4.9 of the Commonwealth Procurement Rules.
What do Commonwealth entities need to do?
We recommend the following:
| Task |
|---|
| Immediately check if they have any current approaches to market which close after 1 October 2024 that need to be updated to reflect the changes to the Shadow Economy Policy and promptly take steps to amend any applicable documentation. |
| Ensure that they understand which Valid and Satisfactory STRs must be submitted by each different type of tenderer and subcontracting entity. |
| Ensure that they understand at which stages of a procurement process they need to confirm that Valid and Satisfactory STRs have been submitted and held, and remain Valid and Satisfactory. |
| Consider including new prompts or checkpoints in their procurement templates and procedures (and making corresponding allowances in their procurement schedules) to ensure that they confirm that they hold (or if necessary, can request) current Valid and Satisfactory STRs for a preferred tenderer before signing a contract with that tenderer. |
Consider updating their approach to market templates to:
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| Consider incorporating information about the updates to the Shadow Economy Policy in any industry briefings they provide to the market in the coming months. |
| Ensure that they allow sufficient time in their evaluation timetable for the conformance checking stage to be able to provide tenderers that have failed to provide the required Statements of Tax Record an opportunity to correct any unintentional error of form. |
Still in the dark?
The policy still contains requirements that will mean it will continue to operate in a highly nuanced manner that needs to be carefully managed.
We have seen virtually every permutation of issue relating to Statements of Tax Record and have assisted many Commonwealth agencies to effectively navigate those issues.
Contact our team us for assistance with developing and implementing measures to align with, and manage, the updated Shadow Economy Policy.
Would you like advice on how the revised Shadow Economy Procurement Connected Policy will affect your Department’s procurement projects?
Reach-out today to discuss your concerns
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