Explanatory Memorandum(Circulated by authority of the Minister for Employment, Skills, Small and Family Business, Senator the Hon Michaelia Cash)
The Payment Times Reporting Bill (the Bill) introduces a new Payment Times Reporting Scheme (the Scheme) which requires large businesses and large government enterprises with an annual total income of over $100 million to publicly report on their payment terms and practices for their small business suppliers. In identifying small business suppliers, the Scheme will draw on a taxation legislation definition of small business as those entities with an annual turnover of less than $10 million.
The objective of the Scheme is to improve payment outcomes for small businesses by creating transparency around the payment practices of large business entities. By providing access to information on large business payment performance, small businesses will be able to make a more informed decision about their potential customers. Greater transparency on payment practices and performance will also create pressure for cultural change to improve payment times.
To complement the Bill and ensure the Scheme operates as intended, consequential amendments will be made to the Taxation Administration Act 1953. The Payment Times Reporting (Consequential Amendments) Bill amends the Taxation Administration Act 1953 to enable the Commissioner of Taxation to disclose certain tax information to the Payment Times Reporting Regulator for the purpose of administering the Scheme.
Impact of payment times on Australian small businesses
Long (after 30 days) and late payments (after the due date on the invoice) are a significant problem for Australia's 3.4 million small businesses, with negative impacts not only on these businesses but also more broadly across the economy as small business that are paid slowly pay their suppliers more slowly in turn.
A 2019 study by AlphaBeta highlights the importance of addressing the issue of long and late payments from large to small business. Analysis of over 10 million invoices from more than 76,000 small businesses estimated the quantum of long payments from large business is $77 billion per year. More than a third of small business invoices are paid after 30 days, and these invoices take an average of 63 days to be paid. This was estimated to equate to $7 billion in working capital that is transferred from small to large business every year.
On-time payments will boost small business growth
Long and late payment times affect the cash flow of small business owed the outstanding debt. The need to cover the shortfall in their working capital constrains the ability of small businesses to hire, invest and grow, and leads to higher bankruptcy and exit rate. It also impacts the mental health of small business owners.
According to AlphaBeta's research, normalising a 30 day payment time from large business to small business would have an estimated net benefit to small business of $522 million per year. It would also create an estimated net benefit to the Australian economy of $313 million per year.
Widespread improvement in payment times is unlikely without government action. That is because small businesses lack the market power to negotiate better payment terms and times. Large businesses also have little incentive to improve their payment performance.
Payment Times Reporting Requirement
The Bill establishes a payment times reporting requirement for eligible entities to provide bi-annual reports on their small business payment terms and practices to the Payment Times Reporting Regulator (the Regulator). These reports will be published by the Regulator on a central public register, known as the Payment Times Reports Register.
Large businesses who are constitutionally-covered, carry on an enterprise in Australia, and meet the income threshold of over $100 million per year are required to submit a report on their payment terms and practices each six months of an income year. The Scheme will also require Commonwealth government corporate entities who meet the income threshold to report. Businesses who do not meet these requirements may choose to voluntarily submit a report. Charitable and not-for-profit entities are exempt from the reporting requirements.
Amendments to the Taxation Administration Act 1953 will allow for the Taxation Commissioner to disclose certain taxation data to the Regulator for the purpose of administering the Scheme.
The new reporting requirements will be supported by a Payment Times Reporting Small Business Identification Tool to assist reporting entities in identifying their small business suppliers. The development of the tool responds to stakeholder feedback about the challenges in identifying suppliers that are small businesses, as this information is not publicly available and is costly for businesses to collect and verify. The tool is intended to reduce the compliance burden for reporting entities by automating the small business identification process. As part of the tool, a large business will be able to enter identifying information about their suppliers, with the tool returning a negative result for suppliers that are large or medium businesses. The Rules, once made, intend to define a small business as any business that is identified as a small business by the tool. As identified above, the tool will draw on the taxation legislation definition of small business as an entity with less than $10 million annual turnover.
A Payment Times Report will include aggregated data on the reporting entities payment terms and practices, identify the entity, and other relevant information. The Payment Times Report must be approved by a responsible member for the entity, be provided to the entities' principal governing body (e.g. their Board) and be submitted to the Regulator within three months of the end of the bi-annual reporting period.
The Regulator, who will administer the Scheme, will publish the submitted reports on the public register. The Regulator will also have the ability to enforce compliance with the reporting requirements. The Regulator is a Senior Executive Service role, appointed by the Secretary of the Department of Industry, Science, Energy and Resources.
Entities who fail to give a report, fail to maintain payment records, or provide false and misleading information in a report may contravene a civil penalty provision. The Regulator will have powers to monitor compliance, investigate suspected non-compliance, impose infringement notices for breaches, and apply to a court for civil penalty orders against entities. Reporting entities may also be directed to undertake independent audits where there is a reasonable suspicion of an entity's wrongdoing in relation to the reporting requirements.
The penalty arrangements in the Bill reflect the serious economic impacts of late payments and the Government's commitment to address this issue through the scheme. The Regulator will adopt a graduated approach to enforcement, which will include engaging in outreach and education activities as a first step and working with the reporting entity to address issues ahead of either imposing infringement notices or commencing court proceedings for a civil penalty. These more coercive tools will be used if reporting entities demonstrate repeated failure to comply with the Act.
Reporting entities will be given an 18-month penalty free transition from the implementation date of the Scheme to enable them to familiarise themselves with the scheme and transition effectively.
Date of effect: 1 January 2021 (or, if passage occurs after that date, the first 1 January or 1 July to occur after the Act receives Royal Assent).
Proposal announced: This Bill implements the Payment Times Reporting Framework Implementation measure from the 2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO) and the Prime Minister's policy announcement on 21 November 2018.
FINANCIAL IMPACT STATEMENT
$10.million over four years from 2019-20 (including $3.4 million in capital funding), $2.6 million in 2023-24 and $2.4 million per year ongoing from 2024-25.
REGULATION IMPACT STATEMENT
Compliance cost impact: This proposal will increase compliance costs for reporting entities by an average of $22.5 million per year, on an annualised basis. The Office of Best Practice Regulation (OBPR) has certified the Final Regulation Impact Statement (RIS) included at the end of this Explanatory Memorandum.