10 May 2000
Welcome to the first issue of Commercial Notes.
This newsletter will focus on current and developing issues in commercial law which are of importance to our clients.
Our national commercial group comprises practice networks in competitive tendering and contracting, corporate governance, environment and resources, international, property and construction, technology and intellectual property. Commercial Notes will deal with subjects across all these areas of law.
As this issue illustrates, attention will be given to legislative developments and also commercial cases from Commonwealth courts and tribunals.
Trends and other points of special interest in Commonwealth commercial law will also be monitored. As GST and electronic authentication issues are of considerable current importance, we have provided articles featuring these.
We also wish to include items from our clients (letters, questions and answers, follow up notes etc) so please contact me if you wish to explore making a contribution to future issues. Your feedback, thoughts and suggestions would be greatly appreciated.
Chief Counsel, Commercial
Tel: (02) 6253 7223
Fax: (02) 6253 7301
GST – Leasing Issues for Commonwealth Agencies and Authorities
The grant of a lease for non-residential purposes is capable of being a taxable supply which will attract GST. In those cases where it is, GST of one eleventh of the rent and other consideration will be payable by the landlord as the party making the supply. Unless the lease provides, the landlord is not entitled to recover from the tenant an amount for GST which is not included in the rent or other moneys payable by the tenant under the lease. The issues discussed in this note are equally relevant to licences.It is Parliament’s intention that the Commonwealth and Commonwealth entities (Commonwealth departments, agencies and authorities) will be notionally liable to pay GST and notionally entitled to input tax credits. The Finance Minister may give such written directions as are necessary or convenient for carrying out or giving effect to Parliament’s intention and in particular, may give directions in relation to the transfer of money within an account, or between accounts, operated by the Commonwealth or a Commonwealth entity.
GST will be payable on a taxable supply under a lease for non-residential purposes from 1 July 2000 subject to the following:
- If the tenant is entitled to a full input tax credit, leases entered into prior to 8 July 1999 containing a review opportunity will be GST free until the earlier of:
- the first review opportunity which arises on or after 8 July 1999; and
- 1 July 2005.
- Leases entered into on or after 8 July 1999 will be subject to GST from 1 July 2000 regardless of whether those leases contain a review opportunity.
- Leases (including renewals or extensions) for at least 50 years conferred by the Commonwealth, a State or Territory of land on which there are no improvements will be GST free.
Determining GST Liability
To determine liability for GST from 1 July 2000, Commonwealth agencies and authorities should review their lease portfolios to identify those leases entered into:
- prior to 8 July 1999; and
- on or after 8 July 1999
for terms which extend beyond 1 July 2000. For leases entered into prior to 8 July 1999 regard must be had to whether the lease contains a review opportunity as the lease will lose its GST-free status from the first review opportunity on or after 8 July 1999. Stated broadly, a review opportunity is an opportunity for the landlord acting either alone or with the agreement of the tenant to change the consideration directly or indirectly because of the imposition of GST or to conduct a general review, renegotiation or alteration of the consideration. Whether the Commonwealth party is the landlord or the tenant, it will be necessary to determine:
- whether the lease attracts GST and if so, from what date;
- whether the Commonwealth party as the landlord is liable to pay GST; and
- whether the Commonwealth party as the tenant has a contractual obligation under the lease to pay to the landlord the GST equivalent.
If a Commonwealth party as landlord enters into a lease on or after 8 July 1999 which operates beyond 1 July 2000, the Commonwealth party must pay GST from 1 July 2000. The landlord will not be entitled to increase the rent and other consideration for the lease by the GST unless the lease permits that course. Accordingly, if a Commonwealth party is the tenant, it can not be required to pay to the landlord any amount for GST unless the lease provides for that payment. A Commonwealth party as tenant will be entitled to an input tax credit equivalent to GST payable by the landlord in respect of the supply under the lease provided it obtains a tax invoice from the landlord.
Care must be taken to ensure that when a Commonwealth party enters into a lease prior to 1 July 2000 as the tenant:
- the rent and other consideration payable from 1 July 2000 is increased for GST only after deducting an amount equivalent to:
- the benefit of any reduction in or the removal of taxes which impact upon the costs to the landlord in performing the lease; and
- the input tax credits to which the landlord is entitled in respect of taxable supplies for which the landlord seeks reimbursement from the tenant
- provision exists to address a possible taxable supply by the tenant to the landlord so that the consideration for that supply is increased for GST; and
- the amounts included in the charges made by the landlord for outgoings, costs, consent fees etc (which form part of the consideration for the supply under the lease) are net of the input tax credits that the landlord may be entitled to.
Contact for further information:
Senior Government Solicitor
Tel: (07) 3360 5767
Fax: (07) 3360 5798
Planning Tenders to Avoid Evaluation Problems
Many government agencies are involved in conducting tender processes. The tender evaluation stage of a tender process is the stage most likely to lead to legal or probity issues. There are a number of Commonwealth publications dealing with tendering which should be consulted. The following are some practical suggestions to consider when planning a tender process which will help to avoid some common problems during the evaluation stage. It is not a comprehensive list.
Plan for the tender evaluation before the request for tender (RFT) or other relevant document is issued to tenderers.
Prepare an internal tender evaluation plan and make sure the evaluation methodology
proposed in the plan is consistent with the draft RFT. For example,
if the plan proposes threshold or mandatory requirements, these may need to be referred to in the RFT issued to tenderers.
Carefully consider the evaluation criteria and methodology proposed – they should be capable of dealing with all of the matters which are intended to be taken into account in the evaluation and should be internally consistent.
The RFT will ask tenderers to provide certain information. Make sure that the RFT asks for all of the information needed to evaluate tenders against the evaluation criteria.
Consider why each piece of information is asked for in the RFT. Information requested from tenderers should generally have a purpose in the evaluation. If it does not then consider why it is being requested. Conversely make sure that the evaluation methodology allows all relevant information to be taken into account.
Consider requiring all tenders to be submitted in a proforma or mandatory format to facilitate evaluation.
If general policy documents may be relevant to the conduct of the tender process (eg.Commonwealth Procurement Guidelines; for Defence the Commercial Support Program Manual), be careful to ensure that the relationship with the RFT is clear. If it is not intended to follow a procedure or process referred to in a public document, a clear statement to this effect should be included in the RFT. Otherwise tenderers may be entitled to assume that the public document will be followed.
In most cases, all significant contractual obligations intended to be imposed on tenderers should be set out in the RFT. This limits disputes regarding the contract with the preferred tenderer but also limits the possibility of unsuccessful tenderers arguing that there is a flaw in the evaluation process (if the chosen tenderer can effectively ‘claw back’ some of the terms of its tender in the contract negotiations).
Select the members of Tender Evaluation Committee (TEC) carefully and early – preferably before the RFT is issued.
Where a tender process may affect the employment of existing staff, it is generally not appropriate to include those staff on the TEC – to do so may lead to allegations of bias in the evaluation.
Provide ‘probity’ training to the TEC as soon as they are identified, not when the evaluation is about to start – the TEC needs to understand conflict of interest and other probity issues throughout the tender process, not just during the evaluation.
Make sure the TEC has or has access to sufficient expertise to evaluate the tenders. Many Commonwealth agency staff are not often called upon to consider the types of financing and legal structures which tenderers may be proposing. If complex issues are involved it may be necessary to seek legal, accounting or taxation or other expert advice or plan to include relevant advisers on the TEC.
For more information see also AGS Legal Briefing 51 (Probity Aspects of Tendering) and 35 (Competitive Tendering and Contracting) available at: http://ags.gov.au/publications/briefings/index.html
Contacts for further information:
Senior Government Solicitor
Tel: (03) 9242 1322
Fax: (03) 9242 1481
Senior Government Solicitor
Tel: (03) 9242 1203
Fax: (03) 9242 1481
GST and Contracts – Tales of the Unexpected
Most clients are probably aware that when they are procuring or supplying something, they should make allowance for the Goods and Services Tax (‘GST’) in the price. However, GST liability can arise in less obvious ways, but it is just as important to make provision for it when it does.
Key GST Concepts
GST will be payable by an entity which makes ‘taxable supplies’ within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). Central to determining whether or not there has been a taxable supply are the concepts of ‘supply’ and ‘consideration’, both of which are defined very broadly in the GST Act. There will be few things that do not fall within these definitions. Of particular note is that, if non-financial consideration is given for a supply, it could itself also be a ‘supply’.
The Commonwealth could make Taxable Supplies even where it is Procuring
Hence, even where the Commonwealth is, on the face of it, procuring something under an agreement, circumstances could arise where it makes a taxable supply, for example:
- where it is providing some form of non-financial consideration;1 or
- where it surrenders some right that it may have.
Where the Commonwealth has a GST liability in such unexpected circumstances, it may not be able to ‘pass on’ the liability to the other party. However, the agreement could provide, for example:
- that all taxes under the agreement are to be borne by the other party; and/or
- that the Commonwealth could ‘pass on’ any such liability.
In this way, contingency is made for unexpected circumstances arising from GST considerations.
1 For example, where the Commonwealth grants some right to the other party, such as access to Commonwealth material, premises, or provides assistance, such as secretarial services or office accommodation.
Gatekeeper Project Update
The Gatekeeper Project is a project to implement public key technology in Commonwealth agencies to enable them to conduct secure electronic communications and transactions for the purposes of electronic service delivery and e-commerce.
The project arose out of the report Gatekeeper – A strategy for public key technology use in Government (May 1998, http://www.ogo.gov.au/publications/GatekeeperStrategy.pdf). AGS has been involved in providing assistance to a number of agencies as part of its ongoing involvement in the project.
As a result of AGS’ early involvement in Gatekeeper, and because of the important legal issues that needed to be addressed in this area, AGS was asked to assist the Government Public Key Authority (GPKA) with its evaluation of Certification Authorities (CAs). This process is a comprehensive examination of all aspects of the operations of a CA, from the software that is used to operate the Public Key Infrastructure (PKI), to the kinds of locks that are used on the doors leading to the equipment on which the CA conducts its operations.
Currently, AGS formally evaluates four of the documents that applicant CAs are required to produce to describe their operations. These documents are described in the current CA Accreditation Criteria. The last three of the documents described below have substantial legal content and implications, and to a large extent provide the contractual framework in which the CA’s services (certification services) are delivered.
An understanding of these documents is essential in order to appreciate how the certification services are to be delivered, the roles and responsibilities that the entities have in a public key infrastructure, and what liability ramifications will exist if these roles and responsibilities are not properly discharged.
Concept of Operations (CONOPS)
CONOPS is a broad statement of the relationships within the CA chain of trust from the Root Certification Authority to the Subscribers.
Certificate Policy Statement (CP)
Each CP describes the arrangements for the issue and management of a particular class of certificates.
The CP also sets out the obligations and liabilities of all the participants in the PKI to the other participants as they carry out their respective roles in the PKI. (The participants are the Root Certification Authority, the CA, the Registration Authority, the Subscriber and the Relying Party.)
Certificate Practice Statement (CPS)
The CPS is a statement of practices which a CA employs in issuing certificates. This document also describes the obligations and liabilities of each of the participants.
The Subscriber Agreement is designed to describe the obligations and responsibilities of a subscriber, in particular in relation to the management of its private key. The Subscriber Agreement is also the place where the subscriber will be required to consider the issues of consent to the use of their personal information, and also any limitations on liability.
In some circumstances (eg. private implementations – see below) agencies will have an important role in tailoring the Subscriber Agreement to the needs of their own clients. While AGS performs a number of evaluation roles in relation to these documents, it does not evaluate or ‘pre-negotiate’ the commercial terms on which CAs deliver their services. The position taken by the Office for Government Online (OGO) is that CAs should be free to set their own commercial terms and that if agencies wish to modify these terms to suit their own circumstances as part of a private implementation, they are able to do this as part of the review of all the relevant documentation.
In circumstances where agencies do not want to get involved in a ‘private’, agency-specific implementation of the technology, and simply wish to refer their clients to a CA to obtain a certificate (public implementation), it would be the clients (subscribers) who would make an assessment of the suitability of these commercial terms.
Public Key Infrastructure ‘Private’ Implementation
In a private implementation, an agency is able to become involved in tailoring the delivery of certification services specifically to their own client’s needs. This is a very complex process and involves a range of legal and other documents.
Many contracts (including licences) are required to enable an agency to set up and make the PKI operational. Unique legal issues arise in each agency’s implementation (eg. the legislative environment in which the agency operates). These are sometimes very complex and can go to the heart of the enforceability of important contractual obligations and risk management strategies.
Not all agencies will have a requirement for a private implementation. The needs of many agencies will be satisfied by the availability of a range of Gatekeeper Certificates that CAs have been accredited to provide.
One of these that is being developed at the moment is the ABN-DSC. The specification for this certificate is being developed by OGO and it will be designed for use by agencies with the businesses that they deal with.
This is a key issue for all participants in a PKI. The relationships in a PKI are myriad and complex and there is no case law in this area. For example, in what circumstances will subscribers (your clients) be liable, and should you provide a ‘safety net’ for them in relation to the loss or damage that they may suffer when dealing with a CA? What liability issues arise as between the agency and the CA in a public and a private implementation? What contractual structures need to be put in place to enable an agency to deliver its own certification services?
As in any complex project, legal and other risk management should be an integral part of your implementation strategy.
Legal Status of Administrative Procedures made under the EPIP Act
Randwick City Council v Minister for the Environment
Full Federal Court, 4 November 1999
(1999) 167 ALR 115
This decision of the Full Federal Court will be of interest to both environmental and administrative lawyers.
Randwick City Council v Minister for the Environment (1999) 167 ALR 115 considered the legal status of the Administrative Procedures which are made under the Environment Protection (Impact of Proposals) Act 1974 (EPIP Act). The case concerned decisions made by the Commonwealth in relation to the long-term operating plan for Sydney airport.
In broad terms, the Administrative Procedures apply to a proposed Commonwealth action that is an ‘environmentally significant action’, a term which is defined to include an action that will, or that is likely to, affect the environment to a significant extent, or result in such an effect. The Administrative Procedures provide for the designation of a proponent in relation to an action, the supply of information to the Minister for the Environment, a determination whether an environmental impact statement (EIS) or public environment report (PER) is required, and matters to be dealt with in such statements and reports. In particular, paragraph 2 of the Administrative Procedures requires certain information to be given to the Minister before the Minister makes a decision about the necessity for an EIS or PER in relation to a proposed action. In the Randwick City Council case, the Council argued that the proponent (the then Department of Transport and Regional Development) had not provided sufficient information about alternative options in relation to the proposal, and that therefore all subsequent decision-making by the Minister was beyond power.
Procedures a Form of ‘Quasi Legislation’
At first instance, Finn J rejected this argument both on the facts before him, and also because the Administrative Procedures had the character of simple administrative procedures relating to government decision-making which related to executive action and therefore carried no statutory duty. On appeal, however, the Full Court found that the Administrative Procedures may be viewed as a form of ‘quasi-legislation’.
This characterisation is important because ever since the introduction of the EPIP Act in 1974, there has been considerable uncertainty about the justiciability of the Administrative Procedures. Their status may have been left deliberately vague in the EPIP Act because of concerns over the possibility that there would be extensive litigation in relation to their operation, along the lines of what had occurred in the United States under its National Environmental Policy Act 1969 (NEPA). Although justiciability arguments may not be necessary in light of the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) because compliance with procedures laid down by law is a specific ground of review, there have been ongoing arguments that the Administrative Procedures do not create enforceable rights. This issue has now been considered by the Full Federal Court.
The unanimous decision of the Court noted that:
The Administrative Procedures may not create legal rights and duties in quite the same way as do regulations under the EP(IP) Act, or under other legislation for the reasons given by Finn J. Those Procedures are, in our opinion, a hybrid between legislative and executive acts. We are not, however, persuaded that the Administrative Procedures, in combination with the Act, do not impose upon the relevant Minister a duty to ensure that the decision-making processes under the Act are properly administered.
The duty to be performed by the Minister is to ensure, within the relatively minor limitations provided for by s 8, that procedures approved under the Act are given effect. This emerges from a combination of ss 5, 6, and 8 of the EP(IP) Act. Section 8 is explicit in its imposition of a duty to give directions for ensuring that procedures are given effect to, while s 5 contains a powerful statement of the object of the Act.
There may be circumstances in which it might be said that the Minister had failed to perform such a duty. That might be so if, for example, he had purported to make a determination under Administrative Procedure 3.1.1(b) cognisant of a failure by a proponent to comply with the requirements of paras 2.1 and 2.2. It might be open to a party aggrieved to complain that the Minister had ignored non-compliance with the Administrative Procedures by a proponent when those paragraphs were plainly included in order to ensure that the Minister was properly instructed on relevant matters before making a determination under para 3.1.1(b).
Thus, if to the Minister’s knowledge, the requirements of para 2 have not been met it may follow, in an appropriate case, that a determination made by the Minister thereafter would be reviewable, being a decision that did not conform with the requirement that the Minister perform his or her duty, and being a decision not made in accordance with the processes and procedures required by and under the EP(IP) Act.
Implications for Clients
Although the EPIP Act and Administrative Procedures will be repealed when the Environment Protection and Biodiversity Conservation Act 1999 commences later this year, the decision is important for existing actions that have been or are being taken by the Commonwealth and which are still covered by the EPIP Act. The decision is also of interest to administrative lawyers as it discusses again the sometimes difficult distinction between legislative and administrative acts. It should be noted, however, that the decision is currently the subject of a special leave application for an appeal to the High Court.
Text of the decision is available through Scaleplus at http://scaleplus.law.gov.au/html/feddec/0/994/0/FD001350.htm
Contact for further information:
Senior Government Solicitor
Tel: (02) 6253 7066
Fax: (02) 6253 7301
ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)
The material in these notes is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in these notes.