There is a persistent trend in Australia where big business imposes payment periods on small businesses that are longer than the usual industry standard of 30 days. Too often big businesses impose 60, 90 or 120 day payment periods, are late making payments, and appear content to leave the smaller supplier chasing payments – all adding to productivity inefficiencies and cash flow problems for smaller suppliers.
In recent times, the Australian Small and Family Enterprise Ombudsman Ms Kate Carnell identified extended payment terms as a material issue for the economy, commenting that:1
- SMEs would generate more revenue if cash flow was improved, particularly as late payments accounted for a 43% downturn in cash flow. Fast payment times could unlock faster economic growth and improve competition amongst suppliers;
- large businesses often apply these policies to improve their own working capital efficiencies at the expense of their smaller suppliers, who must find ways to finance their working capital elsewhere (adding to uncertainty and costs); and
- extended payment terms place stress on smaller businesses with growth and employment stymied, and with significant ramifications for solvency and mental health.
The government's proposed new laws
Under proposed new Federal laws, large businesses and government entities who acquire products and services from small business suppliers will soon be required to report on the timing of their payments to those small businesses.
The Payment Times Reporting Bill 2020 (Cth) was introduced into the Commonwealth House of Representatives in May 2020 and establishes a framework which is designed to improve trading terms for small businesses, give small businesses a better ability to decide who they will do business with, and incentivise large businesses to improve their small business payment terms.
The bill is not yet fully passed, however it is intended to pass later this year with the scheme set to commence on 1 January 2021. These new laws are not COVID related or temporary in application.
Reporting Entities and Small Businesses
For the purposes of this legislation, a Reporting Entity is a large Australian business (including a business run by a foreign company or a corporate government entity) that:
- has an income of at least $100 million for the previous financial year; or
- is a 'controlling corporation' whose group has a combined income of at least $100 million for the previous financial year; or
- is a member of a group with $100 million combined income and has itself an income of at least $10 million for the previous financial year; or
- voluntarily elects to report.
Note that the test for a large business being a Reporting Entity under this legislation differs from the standard test for a large proprietary company under the Corporations Act (which takes revenue, assets and employees into account).
Charities registered on the Australian Charities and Not-for-Profits Commission are not required to report.
The threshold for a business to be classified as a "small business" is an annual turnover of less than $10 million.
Reporting Entities have a reporting period of six months starting from 1 January 2021, and reports are to be submitted within three months of the end of each six-month period.
A Reporting Entity will be required to include the following information in each report:
- its shortest and longest standard payment periods and any change to those periods during the reporting period;
- the proportion of small business invoices paid within certain time frames (being less than 21 days after invoice, 21-30 days, 31-60 days or more than 60 days);
- details of corporate control over it (by another entity);
- changes to its accounting period or business name; and
- any other information specified by rules made under the legislation.
Consequences of non-compliance
Fines of up to $73,500 may be imposed for failure to comply or for giving false or misleading reports. Further, the names of non-compliant entities may be published.
What happens with the reported information?
Information reported by a reporting entity will be publicly available on an online Payment Times Reports Register. It appears that the information to be made public will not include names and details of the suppliers or that commercially sensitive terms will be made known, other than showing whether the relevant named big business is a fast or slow payer. It is intended that with better transparency, there will be better competition amongst big business to secure suppliers at faster payment terms which will have better outcomes for small business and for the flow of cash through the broader economy.
1 "Review of payment terms, times and practices" delivered by the Australian Small and Family Enterprise Ombudsman Kate Carnell, March 2019
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