Purpose of the bills
2.1
The Payment Times Reporting Bill 2020 (the Reporting Bill) creates a requirement for large businesses and government enterprises with a total annual income of over $100 million to report their payment terms and times in respect of their small business suppliers by introducing a new Payment Times Reporting Scheme (the Scheme).
2.2
The Payment Times Reporting (Consequential Amendments) Bill 2020 (the Amendment Bill) amends the Taxation Administration Act 1953 and the Payment Times Reporting Act (when enacted) to ensure the Scheme operates as intended.
2.3
The purpose of the Scheme is to improve payment outcomes for small businesses by making the payment practices of large business entities more transparent. The explanatory memorandum outlined:
By providing access to information on large business payment performance, small business 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.
2.4
The bills 'implement the government's commitment to require large businesses and government enterprises with a total annual income of over $100 million to report on their small business payment terms and times'. This commitment was made in November 2018 when Prime Minister Scott Morrison announced the government's plan to implement this measure, while also announcing a new procurement policy which would require large businesses to commit the Government’s own 20-day payment policy in order to be eligible to tender for federal government contracts.
2.5
Since July 2019, all Commonwealth agencies have paid invoices for contracts up to $1 million within 20 calendar days or paid interest on any late payments.
2.6
The date of effect for the Payment Times Reporting Act is 1 January 2021 (or, if passage of the bill occurs after that date, the first 1 January or 1 July to occur after the Act receives Royal Assent).
Background
The problem of late payment and extended payment times—work by the Australian Small Business and Family Enterprise Ombudsman
2.7
The payment practices of large business in respect of their small business suppliers have concerned the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) for some time. Indeed, the ASBFEO has noted that problematic payment practices are a 'perennial' and growing problem in Australia. Problematic practices include both late payments (where suppliers are paid after the agreed time) and extended payment times (where 'agreed' payment times exceed industry standards).
2.8
The ASBFEO undertook an inquiry into payment times and practices between November 2016 and March 2017. This inquiry was undertaken in conjunction with the Council of Small Business Organisations Australia, the Australian Institute of Credit Management, the Institute of Public Accountants and in partnership with the Small Business Commissioners of New South Wales, Victoria, South Australia and Western Australia. The ASBFEO's final inquiry report was released in April 2017, and connected the two problems to the practice of trade credit—that is, 'supplying goods and services…with payment at an agreed later date'.
2.9
In November 2018, the Minister for Small and Family Business, Skills and Vocational Education requested advice from the ASBFEO on the effect of payment practices on Australia's small and family businesses. This review of payment terms, times and practices was provided to the Minister in March 2019.
2.10
In the course of its 2016 inquiry, the ASBFEO identified that the misuse of supply chain finance played a role in the growing prevalence of extended payment terms between large businesses and their small business suppliers. The ASBFEO undertook a review into the impact of supply chain financing on the small business and family enterprise sector between October 2019 and March 2020. The final report of the Supply Chain Finance Review was released in April 2020.
Impact of late payments and extended payment times
2.11
Late payments and extended payment times have deleterious impacts not only on the small businesses waiting longer to be paid, but on the Australian economy as a whole. Late payments affect cash flow for the business owed the debt, which in turn forces it to seek (more expensive) ways to finance the resulting shortfall in working capital rather than using the cash flow to grow their business. This has flow-on effects for the whole economy as both Australian and overseas studies have found evidence of impacts on employment, growth, investment and insolvencies. Late payments are essentially a drain on and a diversion of creditor businesses’ resources; they ‘further add to the cost of transactions as businesses are forced to spend the time and money to chase late payments or write off the amounts as bad debts’.
2.12
The damaging impact of extended payment times also flows from the businesses directly affected to the rest of the economy: ‘it slows down the flow of cash through supply chains and raises costs for businesses which are financing longer trade credit to their customers’. Greensill, a non-bank supplier of working capital finance to companies globally, argues that whilst late payments are a cause of significant stress to any business, it is important to distinguish the difference between payments that are overdue versus those payments that are agreed to by a customer and their supplier that include terms over 30 days. Further adding:
Many businesses will have valid industrial, contractual, seasonal and commercial reasons for seeking extended payment terms from their suppliers or their customers. Examples of these could be seasonal industries, such as agriculture, progress or milestone payments on construction contracts and export manufacturing where payments from customers are delayed while goods are being shipped.
2.13
The advent of the global COVID-19 pandemic and the economic challenges it poses has placed additional pressure on supply chains and the cash flow of small businesses. This has made the need to address payment practices which delay and extend payments even more pressing.
Supply chain finance
2.14
Supply chain finance describes a range of financing products which facilitate earlier payment times for suppliers in exchange for discounted payment rates for buyers. The ASBFEO noted that 'when used correctly', and by the genuine choice of suppliers, such products can be a mutually beneficial option to help with cash flow for small businesses, for which other financing options may be prohibitively costly.
2.15
However, the 2019 review also found that there was a common practice of large business debtors using supply chain financing arrangements to effectively 'bully' small business suppliers. One abuse of supply chain finance has been its use as a way of offsetting extended payment terms which have been imposed by large business buyers and far exceed standard industry payment times.
Recommendations of the Australian Small Business and Family Enterprise Ombudsman
Legislating transparency: a National Payment Transparency Register
2.16
The ASBFEO's 2016 inquiry of payment times and practices highlighted 'the hesitancy of many large corporations to be transparent about their payment terms and, more importantly, how often they actually meet those terms'. As such, the ASBFEO identified 'increasing transparency around business behaviour and practice with regards to late payments and extended payment times' as a key measure for improving these practices.
2.17
To this end, the ASBFEO recommended the development of a 'National Payment Transparency Register'—a public register which would publish information on businesses' payment times and practices, and compare these against a benchmark for good performance. This would provide greater understanding of what constitutes acceptable payment terms based on industry standards, and allow small business suppliers to make more informed business decisions.
Legislating payment terms —mandatory 30-day terms
2.18
During the 2019 review, the ASBFEO conducted a survey of other countries' experiences of mandated payment terms, especially those which had legislated for these after initially introducing a voluntary code of conduct. This survey led to the conclusion that voluntary measures are not effective in effecting change in payment practices, and that legislative measures are needed to meet this goal.
2.19
The ASBFEO recommended that Australia legislate a mandatory payment term of 30 days, applying only to small business suppliers. However, it was acknowledged that some businesses which pay on terms less than any proposed maximum 'may see that legislated terms as a recommended term and increase their terms to the legislated maximum', thereby producing the opposite effect of that intended.
2.20
The view that a mandatory term should be limited to small businesses was informed by feedback from both large and small business suppliers, at that time. While large businesses felt that regulation was not required in their case as they are able to negotiate payment terms on a commercial basis, 'feedback from small business owners…was overwhelmingly in favour of mandated payment times'.
2.21
Essentially, regulatory intervention to prevent the misuse of extended payment terms and supply chain financing options is only needed in situations where such arrangements are not genuinely agreed to and do not benefit both parties due to an imbalance of commercial power. As such, the ASBFEO recommended that, 'if mandated 30 day payment terms were to be introduced, these should initially be limited to payments made to small businesses'.
Definition of 'small business' and implementation review
2.22
It was the ASBFEO's 'strong recommendation' that a 'small business' be defined as having an annual turnover of $10 million or less. Due to the unavoidable arbitrariness of choosing this (or any) threshold for legislative protection, the ASBFEO also recommended that the legislation setting mandatory payment terms be reviewed within two years of its implementation, 'with a view to expanding the coverage should large business payment terms worsen'.
Payment Times Reporting Bill 2020
Establishment of the Payment Times Reporting Register
2.23
Part 2 of the Reporting Bill relates to the reporting of payment times and requires the Payment Times Reporting Regulator (the Regulator) 'to maintain a register of payment times reports, to be known as the Payment Times Reports Register' (the Register). The Register must be publicly available on the internet and free of charge.
Reporting requirements
Who must report?
2.24
The Reporting Bill establishes a requirement for a 'reporting entity' to give the Regulator a payment times report for each 'reporting period'. Any constitutionally-covered entity which carries on an enterprise in Australia and had an income in the previous income year of more than $100 million is a reporting entity. The reporting requirement is imposed at an entity rather than at a group level; any controlling corporation of a corporate group with a combined income of $100 million or more, as well as any subsidiary member of such a group with an income in the previous income year of $10 million or more, is a distinct reporting entity.
What must be reported and when?
2.25
The timeframe for reporting must be within three months after the end of each reporting period for the entity. There are two reporting periods per year for every reporting entity; the first six months of the income year, and the remainder of the income year.
2.26
Reports are intended to fulfil the bill's purpose of creating transparency around businesses' performance when it comes to payment times. Reports are required to include details of any changes to the shortest or longest standard payment periods for the reporting entity during the relevant reporting period. Reports are also required to state separately the proportion of small business invoices paid within 21 days; between 21 and 30 days; between 31 and 60 days; and over 60 days after the invoice was issued.
2.27
Reports are also intended to reflect concerns about the misuse of supply chain finance. Accordingly, reports require the inclusion of any other information or documents prescribed by the Minister's Rules, as well as information or documents that may be related to a reporting entity's payment terms or practices, explicitly citing the use of supply chain financing as one such possible practice.
Establishment of the Payment Times Reporting Regulator
2.28
Part 3 of the Reporting Bill establishes the Regulator. The Secretary of the Department is required to designate a position within the department of Payment Times Reporting Regulator. The position may only be filled by a Senior Executive Service (SES) employee.
Powers and functions of the Regulator
2.29
The Regulator is granted the power to do all things necessary or convenient for, or in connection with, the performance of their functions. Such functions include:
to administer the Payment Times Reporting Act (the Act) (when enacted)
any functions conferred on the Regulator by the Act (when enacted)
any other function prescribed by the Minister's rules
any other function conferred on the Regulator by any other Commonwealth law
to advise the Minister about matters relating to any of the Regulator's functions
to do anything incidental or conducive to the performance of the Regulator's functions.
Delegation powers
2.30
The Reporting Bill confers on the Regulator a limited power of delegation. The Regulator may not delegate their powers of appointment, and certain functions and powers may only be delegated to an SES employee, or acting SES employee. The latter functions and powers include:
making a determination that a reporting entity is no longer a reporting entity
granting extra additional time to submit a report
the power to publish information about non-compliance with the Act
requiring a reporting entity to arrange an audit.
2.31
The Regulator may delegate other functions and powers in writing to an SES employee or acting SES employee, or a person holding an Executive Level 2 position or equivalent, or is acting in such a position.
Monitoring powers
2.32
The Reporting Bill applies the monitoring powers in Part 2 of the Regulatory Powers (Standard Provisions) Act 2014 (Regulatory Powers Act) to empower the Regulator to monitor compliance with the Act. The Regulator's monitoring powers apply to any provision of the Act; any offence against the Crimes Act 1914 or the Criminal Code that relate to the Act; and information given in compliance or purported compliance with any provision of the Act.
2.33
The Regulator may enter, subject to the consent of the occupier or with a warrant, any premises for the purposes of either determining whether a provision to which the monitoring powers apply has been complied with, or whether information to which the powers apply is correct. The Regulator (or an authorised officer) may then exercise various powers in relation to premises outlined in the Regulatory Powers Act, including searching premises, and the inspection and/or seizure of objects or documents found on premises.
Investigation powers
2.34
The Reporting Bill applies the investigation powers in Part 3 of the Regulatory Powers Act to empower the Regulator to investigate non-compliance with the Act. The Regulator's investigation powers apply to any civil penalty provision of the Act, and any offence against the Crimes Act 1914 or the Criminal Code that relate to the Act.
2.35
Part 3 of the Regulatory Powers Act creates a framework for the gathering of evidence relating to offence and civil penalty provisions. The Reporting Bill confers on the Regulator (or an authorised officer) the investigation powers outlined in the Regulatory Powers Act. These include powers to, with the consent of the occupier or an investigation warrant, enter any premises where there are reasonable grounds to suspect there may be evidential material. The Regulator or authorised officer may then, depending on whether the entry is by consent or under a warrant, search the premises for either the evidential material which they suspect may be on the premises, or for the kind of evidential material specified in the warrant. The Regulator or authorised officer may only seize evidential material if the entry and search was made under a warrant.
2.36
Neither the monitoring powers nor the investigation powers come into effect until the 'enforcement day', 18 months after the commencement of the Act.
Compliance and enforcement
2.37
The Reporting Bill creates numerous civil penalties for non-compliance, outlined in Part 4, and enforceable under Part 4 of the Regulatory Powers Act. The bill's civil penalty provisions are enforced through an infringement notice, which can be issued according to Part 5 of the Regulatory Powers Act. Infringement notices can be issued by either the Regulator or an infringement officer appointed by the Regulator.
2.38
An infringement notice may be given if an infringement officer believes on reasonable grounds that a person has contravened a civil penalty provision of the Act. This must take place within 12 months of the day on which the contravention is alleged to have occurred.
2.39
The Reporting Bill imposes certain obligations and prohibitions on reporting entities, failure to comply with which attracts liability to a civil penalty. These include:
the reporting requirements (with a maximum civil penalty for non-compliance of 60 penalty units)
giving false or misleading reports (350 penalty units for an individual;
0.6 per cent of income for the relevant income year for a body corporate)
record-keeping requirements (200 penalty units for an individual;
0.2 per cent of income for the relevant income year for a body corporate)
failure to comply with a notice requiring an audit given by the Regulator incurs 60 penalty units
failure to provide all reasonable facilities and assistance necessary for the carrying out of an audit incurs 200 penalty units for an individual,
and 0.2 per cent of income for the relevant income year for a body corporate.
2.40
The civil penalty provisions do not apply to 'volunteering entities'.
Minister's rule making power
2.41
The Reporting Bill prescribes those matters about which the Minister may and may not make rules. The Minister may make rules prescribing matters which the Act specifically requires or permits it to, as well as rules prescribing matters which are 'necessary or convenient' for the operation of the Act. The Reporting Bill also specifies what the Rules may not do, which includes: create an offence or penalty; provide powers of arrest or detention, or of entry, search or seizure; impose a tax; set an amount for an appropriation under the Act; and directly amend the text of the Act.
Payment Times Reporting (Consequential Amendments) Bill 2020
2.42
The Payment Times Reporting (Consequential Amendments) Bill 2020 (the Amendment Bill) makes necessary amendments to the Taxation Administration Act 1953 (the ITAA 1953) to facilitate the operation of the Reporting Bill.
Amendments to the Tax Administration Act
2.43
Part 1 of the Amendment Bill inserts a new item 4 in the table in sub-section 355-65(8) in schedule 1 of the ITAA 1953, providing for the exemption from section 355-25 of the ITAA 1953 of the disclosure of information relating to whether an entity is a reporting entity made to or for the Regulator in order for the Regulator to administer the Act.
Contingent Amendments to the Payment Times Reporting Act
2.44
Part 2 of the Amendment Bill repeals the definition of 'Federal Circuit Court' in section 5 of the Act, and substitutes further references to the Federal Circuit Court in section 5 with references to the Federal Circuit and Family Court of Australia (Division 2).