3.1
This chapter explores the extent of general support for the introduction of a Payment Times Reporting Framework before examining the specific concerns about the bills that were raised by participants through the inquiry process.
General views on the bills
3.2
There was broad support for the policy intent of the bills to increase the transparency of payment reporting times to small businesses through the introduction of a Payment Times Reporting Framework.
3.3
In a joint submission, Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia were generally supportive of the proposed framework.
3.4
Similarly, Xero, a cloud-based accounting services provider, strongly supported the introduction of the Payment Times Reporting Framework 'as another tool to reduce late payments to small business'.
3.5
The Institute of Public Accountants welcomed the focus on payment practices:
Whilst it is critical to report payment times, it is also important to focus on payment practices. There is evidence that some large businesses will blame inaccurate invoicing, missing invoices, make changes to contract terms or to terms and conditions, to essentially extend the payment time. If the legislation can achieve the objective of changing behaviour in terms of payment times and practices, then this will be a significant benefit for small business.
3.6
A number of industry associations also provided support for the bills. For example, the Australian Fresh Produce Alliance supported the legislation, noting that payment times in the fresh produce industry are well established and often within 30 days. Similarly, the National Farmers Federation (NFF) considered that this legislation would put significant downwards pressure on the length of payment terms offered to horticulturalists by supermarkets.
3.7
Representing the interests of many owner operators and small trucking businesses, the Australian Trucking Association (ATA) argued that the bills would enable small businesses to make informed decisions about their potential customers while directors and executives of larger businesses would come under cultural pressure to match their peers.
3.8
The Housing Industry Association (HIA) also gave in-principle support to the objects of the bill:
Moves that facilitate prompt cash flow and the timely payment of progress claims are worthwhile and greater transparency of payment arrangements between contractors is one way of achieving this outcome.
3.9
The National Electrical and Communications Association (NECA) commended the Government for seeking to legislate greater transparency, equity and accountability for large business payment times. The NECA proposed a number of additional protections including improving security of payments, trust account schemes for construction industry project work and enhanced unfair contract term protections.
3.10
Greensill, a non-bank supplier of working capital finance to companies globally, noted that it:
…agrees with the purpose of the legislation to monitor the performance of large companies against their own payment terms. Late payments are a significant source of stress on any business.
3.11
The Australian Institute of Credit Management supported the bills but suggested that the framework be extended to include payment information to all suppliers, both large and small.
3.12
In expressing its support for the legislation, the Australian Chamber of Commerce and Industry also added that, for the first time, data and information which will be able to scrutinise the payment times and practices of large businesses will be publicly available. At the hearing, Dr Ross Lambie stated:
I think that's important for two reasons. One is naming and shaming. In terms of this culture change, we are heading into a world that may be less tolerant of some of these business activities than it was before. The second thing is that it also means that these companies are identified in a way that does allow the regulator to work with them, in terms of looking at why their behaviours are such as they are and seeing what can be done to really bring them into line.
3.13
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the South Australian Small Business Commissioner both strongly supported the introduction of the Payment Times Reporting Framework.
3.14
Despite the support for the objects of the bills, stakeholders raised a number of general concerns about the establishment and of operation the Payment Times Reporting Framework.
3.15
While being supportive of the objects of the bills, the HIA noted that:
The content of a payment times report, the requirement to report every 6 months and the proposed compliance framework that includes penalties for, for example, a failure to report, are just a few ways in which the bill sits at odds with the original scope of a PTRF [Payment Times Reporting Framework].
3.16
Further, the HIA also questioned whether the residential building industry should be covered by the Payment Times Reporting Framework. The HIA outlined the extensive existing regulatory arrangements that already apply to this industry through unfair contract laws, security of payments laws and the building code.
3.17
Several submitters, including the Australian Fresh Produce Alliance, were concerned that the reporting framework might 'impose additional burden for business for no discernible benefit'. Similarly, the HIA considered it likely that the Payment Times Reporting Framework 'will increase regulatory burden for all parties involved in [residential building] supply chains'.
3.18
On this point, the Business Council of Australia noted that:
The reporting requirements must be carefully designed to achieve the objectives of faster payment to small business without unnecessarily adding to the regulatory burden.
3.19
The Business Council of Australia also suggested that governments should report payment times consistent with the framework to allow small businesses to access payment performance data for all large customers, thereby lowering the costs of sourcing payment information for small business suppliers.
Extent of delegated legislation
3.20
There was some debate around the extent to which the Payment Times Reporting Framework relied on delegated legislation, in this case the Payment Times Reporting Rules.
3.21
The ASBFEO expressed concerns that reporting entities will continue to exert pressure on government to weaken the framework both before and after its introduction. To counter this, the ASBFEO contended that:
…all essential provisions should be set out in the Bill and not relegated to the Rules, where they can be more easily changed.
3.22
Xero acknowledged the advantages and risks of using delegated legislation in achieving policy objectives:
If the balance between legislation and Rules is managed appropriately, the Framework should be an agile and effective small business tool.
3.23
Xero noted that the flexibility created by using rules allows versatility without complicated and time consuming legislative benefits, but creates uncertainty for businesses that are required to report. On balance, Xero concluded that:
In the case of the Payment Times Reporting Framework, Xero is comfortable that delegated legislation is an appropriate mechanism to ensure the smooth operation of the Framework.
3.24
Optus raised concerns about the potential for 'scope creep' of the reporting framework where it noted that:
…certain elements of the circulated draft rules went beyond the aim of reducing the payment times of small businesses.
For example, the rules governing the structure of reports stated that reporting entities would have to include the percentage of their vendors [who] were small businesses, which Optus considers to be sensitive information.
3.25
The Business Council of Australia advocated for the definition of a small business to be included in the primary legislation. As it currently stands, the definition is contained in the Rules which:
…increases the risk of a sudden change in the turnover definition in the future at the Minister’s discretion and without consultation, which would be highly disruptive. It would be preferable to safeguard the turnover definition of a small business in the legislation.
3.26
In response to the concerns about the extent of delegated legislation, the Department of Industry, Science, Energy and Resources (the Department) stated that:
A rule-making power is necessary to allow the legislation to respond flexibly to changing circumstances and to provide substance to the operation of the Act. As legislative instruments, the Rules will be tabled in Parliament, subject to scrutiny and disallowance.
3.27
The Department went on to note that:
It is a common arrangement for schemes that are underpinned by legislation to include administrative and technical detail in delegated legislation.
Mandated payment times
3.28
The ASBFEO and the Institute of Public Accountants raised concerns that the Payment Times Reporting Framework would not, in itself, reduce payment times to small business and advocated for the introduction of a mandated payment time of 30 days.
3.29
In supporting a 30-day mandated maximum payment time, the Institute of Public Accountants argued that:
Without a prescribed period of time there will be room for ambiguity or arbitrage which can be exploited by large businesses.
3.30
However, most organisations expressed in their submissions and evidence a number of risks associated with mandated payment times, both in terms of unintended consequences and the regulation it may have on the business sector. In his submission to the Committee, Mr Ken Phillips representing Self-Employed Australia summarised:
There is currently debate as to whether payment terms for small business should be mandated. That is, that large firms be required by law to pay small business suppliers within [say] 30 days. However, we see this issue as a debate for another day. The first priority needs to be the implementation of the Morrison Government’s phase three election promise as described above.
3.31
The Council of Small Businesses of Australia (COSBOA), noted that mandated maximum payment times was a subject discussed greatly with organisation members and received with mixed feedback. At the hearing, Mr Peter Strong from COSBOA stated:
…my members include small business reps, accountants, bookkeepers, newsagents and hairdressers, and commercial asset finance brokers are there who sponsor loans for people who are dealing with big business. They’ve said, “We’re not ready for mandating, because that would potentially create problems for small business that we haven’t seen yet.”
3.32
Industries where payment times are generally less than 30 days already were concerned that a 30-day mandate would, in practice, become the default payment time. For example, the Australian Fresh Produce Alliance noted the potential unintended consequences that could increase payment times for farmers, stating that:
If large purchasers of fresh fruit and vegetables, such as retailers, moved to default 30 day payment terms for all of their purchases of goods this will be detrimental for the fresh produce industry and have the opposite effect to the stated intention of the legislation.
3.33
The NFF also indicated in its submission that the organisation currently did not support the introduction of mandated payment terms.
3.34
The Business Council of Australia also did not support the introduction of mandated 30-day payment times due to the considerable compliance costs and risks for business of all sizes in addition to the government costs associated with administration and enforcement. At the hearing, Mr Simon Pryor from the Business Council of Australia stated that:
There hasn't been an opportunity really to consult on this or engage on this particular proposition other than through the ombudsman's supply chain financing report. We would agree that there are some potential unintended consequences from setting a 30-day standard and having businesses move to that.
3.35
Xero noted that if the proposed Payment Times Reporting Framework did not address the problem of late payments, it would ‘support further legislation to ensure small businesses are paid on time’. However, Xero also indicated that:
Intervention in the form of legislated payment times would be disruptive for big business. Therefore, it is Xero’s view that the looming transparency provided by the Payment Times Reporting Framework will likely lead to reduced payment times.
3.36
The Department contended that the introduction of mandated payment times in other jurisdictions has been largely ineffective and can even harm the small businesses it is designed to help through increasing payment times and/or discrimination in procurement decisions. In the Department’s submission to the Committee, it added:
Analysis of the EU late payment directive concluded “there was little evidence it had an impact on payment behaviour and the practice of late payment”. Enforcement is rare as it relies on the small business seeking interest on late payments from its large business customer.
3.37
The Department also noted that mandating payment times would not be straightforward and would need specific and in-depth consultation with both small and large businesses across all industries to ensure the scheme was effective and did not have unintended consequences.
Specific concerns with the bills and rules
3.38
All stakeholders expressed support for the bills. The specific concerns raised by stakeholders are mainly technical in nature.
Definition of a small business
3.39
Stakeholders raised concerns about the definition of a small business and potential inconsistencies in the rules regarding how small businesses were to be identified.
3.40
Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia argued that total income should be defined by reference to accounting concepts:
Section 7 of the Bill defines a reporting entity by reference to its 'total income'. Section 5 of the Bill then defines total income by reference to section 3C of the Taxation Administration Act (TAA). However, that section does not define total income, and says that any undefined term is to be sourced from the Income Tax Assessment Act (IT AA).
Paragraph 3.29 of the Explanatory Memorandum to section 3C T AA states "'Total income' is not defined in the tax law; it is based on accounting concepts, and refers to gross income." To provide clarity this definition should be amended to define total income by reference to accounting concepts. Such an amendment would require other amendments in the Bill, such as references to financial years rather than income years (which is a tax concept rather than a financial reporting concept).
3.41
CAANZ and CPA Australia noted that using accounting concepts to define 'total income' would:
provide greater consistency in how the bill is drafted
allow payment times reporting to be a part of financial reporting
eliminate the need for payment times reporting to be linked to the tax system
make information available more quickly as financial statements are typically prepared well before tax returns.
3.42
A number of stakeholders, including the Business Council of Australia, argued that entities which are subsidiaries of larger corporate groups should be excluded from the reporting requirements even if they have a turnover of less than $10 million:
If these so-called ‘small’ businesses are not removed by the look-up tool, there is a risk that reporting entities will report longer payment times that are skewed by payments to multinationals and other large businesses. This is not in keeping with the intended spirit of the reporting times framework.
3.43
The Department noted that the definition of a small business in the Reporting Bill is prescribed by the Rules and that small businesses will be identified by the Small Business Reporting Identification Tool:
It is intended that the Rules will provide that a ‘small business’ for the purpose of the Scheme is a business that is described as a small business in the Small Business Identification Tool (the Tool), which will be where that entity’s annual turnover is less than $10 million.
Small Business Reporting Identification Tool
3.44
The Small Business Reporting Identification Tool (the Tool) is intended to reduce the administrative burden on small and large businesses and has been adopted as the way to identify small businesses for the purpose of the Scheme.
3.45
While not fully developed yet, Optus appreciated the consultation being undertaken in the development of the Tool, noting that:
…the effectiveness and accessibility of the small business lookup tool is a critical component for ensuring ease of compliance with the framework.
3.46
Similarly, the Business Council of Australia supported the need for:
A workable and accurate small business identification tool that will massively speed up the process for verifying small businesses and ensure all small businesses benefit from faster payment.
3.47
That said, stakeholders expressed concerns that information had not been forthcoming about the development and release of the Tool. Telstra outlined the need for the Tool to be made available as soon as practicable so as to enable the automatic identification of small business suppliers in accordance with the Reporting Bill.
3.48
The ASBFEO also encouraged the release of the Tool to provide clarity and how it would integrate with accounting and other systems.
3.49
The Department noted that the Tool will be regularly updated, for example, when small businesses are created, closed or their turnover increases to more than $10 million. The Department considered that:
The Tool will 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 identifying which of these businesses they need to report payment times for.
3.50
Mr Peter Cully from the Department of Industry, Science, Energy and Resources provided more detail on how the Tool would work at the public hearing:
It will be essentially a negative look-up tool. It identifies businesses that are over the $10 million and then everyone else is, by implication, a small business. So the big business will just enter the ABN into the tool and the tool will then say either, 'Yes, you need to report,' or, 'No, you don't need to report.'
Content requirements for payment times reports
Timing of invoices
3.51
Several stakeholders voiced concerns that reportable timeframes are to be calculated from when an invoice is 'issued'.
3.52
Optus considered that it would be appropriate for timeframes to be calculated from 'the satisfactory delivery of the goods or services and a correctly rendered invoice has been received'.
3.53
The Australian Institute of Credit Management argued that clear definitions are required regarding when an invoice is received. For example, their position is that timing should start when the invoice is actually received at a reasonable physical or virtual location, not when it is entered into a reporting entity's system:
Ensuring onus is on the reporting entity for accurate timing of invoices will address the current lack of focus by many organisations to ensure these processes are robust and accurate.
3.54
Telstra argued that the definition of a payment period should be consistent:
Section 14(1)(d) of the Bill is inconsistent with Section 9 of the draft Payment Times Reporting Rules regarding the definition of the commencement of a payment Period. Clarification of what is meant by the "issue" of an invoice versus the "receipt" is needed to remove ambiguity. Telstra recommends the Bill be amended to specifically reference the receipt of an invoice as the definition of the commencement of a payment Period.
Business industry codes
3.55
The ATA advocated for payment times reports to include more information about the business industry codes of small business suppliers. Such an approach would enable the identification of industry sectors where tailored action is needed. To facilitate this change, the ATA suggested that the Tool could also provide the Business Industry Code of each small business supplier.
3.56
However, any such change of this nature would also require the regulator to be given discretion not to publish information where it would cause competitive detriment to a small business.
Supply chain financing
3.57
Stakeholders held a variety of views on the incorporation of supply chain financing information in payment time reports. However, many stakeholders indicated broad support for reporting entities to include information on whether they had entered into any small business supply chain finance arrangements in their reports.
3.58
Xero supported the inclusion of information regarding supply chain financing:
This information will help a small business to understand the likely time in which it will take to be paid, and to plan accordingly. This information will also allow a deeper understanding of how supply chain financing is being used across the economy.
3.59
The HIA opposed the requirement to disclose information regarding supply chain financing, arguing that:
There is no legitimate basis on which these confidential business negotiations should be disclosed and may in fact jeopardise any beneficial terms secured.
3.60
The Business Council of Australia observed that:
Greater clarification is needed around defining supply chain finance for the purpose of the legislation and what would be acceptable to assist suppliers with managing their cash flow under the Bill. It would also be helpful to understand how suppliers using supply chain financing are to be included in reporting requirements, given they will be paid earlier than their contracted terms.
3.61
Greensill was also concerned that:
…the absence of a definition, or an incorrect definition, in the legislation would not capture the full range of products that supplier or customer would use to manage payments.
3.62
Accordingly, Greensill advocated for the reporting requirements for supply chain financing to be aligned with international reporting requirements so as not to create additional burdens on businesses that use the service.
3.63
The Department acknowledged the difficulties in capturing supply chain financing and explained why supply chain financing is defined in the Rules:
This approach is appropriate and necessary given the range and complexity of these products, and the need to provide flexibility for new and emerging products as they arise in the marketplace. Defining the practice in legislation runs the risk of failing to capture new practices, thereby undermining the intent of the reform.
3.64
The Department further added:
As a result, the legislation does not prohibit the use of supply chain finance. Instead it seeks to increase transparency by providing small businesses with visibility on when and how a potential large business customer uses forms of supply chain financing. Large businesses will be required to report on whether they have used any small business supply chain finance arrangements during the reporting period. They will also be required to provide details of these arrangements, as well as a statement of the proportion, determined by total number and total value, of small invoices paid during the reporting period under those arrangements.
3.65
At the hearing, Mr Cully also advised that any regulation of supply chain finance as a financial product would fall outside the purview of the Department of Industry, Science, Energy and Resources and be a matter for the Treasury.
Group versus entity reporting
3.66
The proposed framework will require payment times reports from individual entities that had annual income of at least $10 million, where they are a member of a group with a combined total income of over $100 million for the most recent financial year.
3.67
A number of stakeholders voiced concerns about the increased regulatory burden and the usefulness of individual entity reporting.
3.68
The HIA argued that the entity reporting requirements are 'incongruent with the general approach to determining whether a business is required to submit a payment times report'. The HIA maintained that:
If individual entities are required to report individually, then it should be those individual entities that are required to meet the $100 million threshold notwithstanding that they may be part of a larger corporate group.
3.69
The Business Council of Australia noted that many corporate groups will typically use the same systems and processes, and the need to report for individual entities would burden corporate groups with costs that are unnecessary and disproportionate to the potential benefit to small suppliers. The Business Council of Australia went on to note that requiring reports from associated entities could increase the number of reports to be filed from around 3 400 to 9 100.
Allowing reporting by group will reduce the number of reports that need to be filed by business and administered by the Regulator and will simplify the provision of information to small business.
3.70
Optus expressed its disappointment that the regulatory burden will be increased for groups like itself as individual entities will be required to report separately, even if they are part of the one group of companies.
From Optus’ perspective – with a number of legal entities of varying size – the preference is for Optus to accept overall responsibility for reporting as a single entity and submit one report in each reporting cycle. This makes logical sense, given that almost all of these entities use the same centralised payment system within Optus.
3.71
To allow for group level reporting, Optus suggested the Reporting Bill be amended to allow for a group level report where a single payment system is used by multiple entities. They also recommended the Rules be modified to facilitate the regulator or Minister to ban a larger business from reporting at the group level where previous conduct warrants such action.
Reporting periods
3.72
The Business Council of Australia considered that the move to annual reporting would reduce compliance costs and align with the Australian Government's own annual reporting on payment performance in its Pay-On-Time Survey. In addition, the Business Council of Australia questioned whether there would be additional transparency benefits of reporting bi-annually compared to reporting once a year.
Penalties
3.73
Several stakeholders were concerned that the penalties associated with failing to meet the reporting requirements were unreasonable and excessive.
3.74
CAANZ and CPA Australia noted that the proposed penalties are significantly higher than other regulatory legislation. In particular, CAANZ and CPA Australia were concerned that the regulator would not have the power to remit penalties:
While we understand that it may be useful for the regulator to have the ability to apply punitive penalties to entities intentionally disregarding the law, not giving the regulator the express power to remit penalties in full or part for entities using their best endeavours to comply with the law seems inappropriate and not conducive to proportionate and sensible administration of the law.
3.75
Conversely, the Institute of Public Accountants supported the proposed penalty regime as having 'sufficient weight to have the desired objective of changing [payment] behaviour'.
3.76
The ASBFEO and the Institute of Public Accountants considered that the grace period to manage the transition should be reduce from 18 months to 12 months given the considerable notice already provided to large businesses and other allowances to help reporting entities mange the transition.
3.77
The South Australian Small Business Commissioner also agreed that civil penalties associated with the framework provide a 'serious incentive for compliance'.
3.78
The Department explained that the penalty arrangements in the Reporting 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 ahead of using more coercive tools if reporting entities demonstrate a repeated failure to comply with the Act.
3.79
Indeed, the Department of Industry, Science, Energy and Resources considered that the penalty amounts are intended to provide a significant deterrent to any business that may attempt to circumvent the Scheme.
3.80
In relation to the 18-month grace period, the Department stated that:
The Bill provides reporting entities with an 18-month penalty free transition period from the implementation date of the Scheme to enable them to transition effectively to the new requirements.
Delayed start date
3.81
CAANZ and CPA Australia proposed that the start date of 1 January 2021 be delayed given the uncertainty about what is a small business and the technology required to determine it.
3.82
Similarly, Optus believed that significant administrative preparation is required by industry to implement the reporting regime, particularly as the legislation is yet to be passed and the Rule and Tool are not yet finalised.
3.83
The HIA voiced similar concerns regarding insufficient time for businesses to put in place mechanisms to comply with reporting requirements and the lack of timeframes regarding the development of the Tool.
3.84
However, the ASBFEO, Business Council of Australia, Institute of Public Accountants and Australian Trucking Association argued that the start date of 1 January 2021 should remain as there has been ample opportunity to prepare for reporting under the legislation; entities are not required to give their first report until September 2021; and, the compliance and enforcement provisions will not apply initially.
Implementation review
3.85
The ASBFEO advocated for a number of reviews of the scheme to assess whether it has achieved its objective:
A review should be held prior to the application of the compliance and enforcement powers, and then a subsequent review should be held 12-18 months later. This would provide additional evidence on the importance of penalties and effective enforcement in changing behaviour.
3.86
Similarly, the Institute of Public Accountants supported a post-implementation review within two years of commencement.
3.87
While supporting a review of the framework, the Business Council of Australia believed that this should occur after three years.
Committee view
3.88
The establishment of the Payment Times Reporting Framework will provide small business and the public with the transparency of payment times and practices to better identify and engage with large businesses that do the right thing.
3.89
The committee would like to thank all stakeholders for their engagement through the development of the Payment Times Reporting Framework. The committee notes the extensive consultation process leading to the design of the Payment Times Reporting Framework has involved over 400 stakeholders from small and big business, industry groups and government agencies since 2019.
3.90
In the committee's view, the appropriate balance has been struck between the legislation and delegated legislation underpinning the Payment Times Reporting Framework. The committee considers that the necessary flexibility is afforded by the Payment Times Reporting Rules to respond to changing circumstances while still enabling parliamentary oversight through scrutiny and disallowance.
3.91
The committee acknowledges the calls from some stakeholders to introduce mandatory payment times. However, the development of a mandatory payment time policy would require extensive consultation and consideration and is a distinctly different policy to one currently under consideration.
3.92
The committee also acknowledges the concerns raised regarding the definition of a small business and the development of the Small Business Reporting Identification Tool. However, the committee is confident that the use of a negative look-up tool is an appropriate mechanism by which to identify small businesses and that the significant resources being invested by the Department will result in the Tool being ready for the implementation of the reporting framework by 1 January 2021.
3.93
With regard to the proposed penalty regime, the committee considers it important that such penalties act as a sufficient disincentive for large business to comply with the reporting framework, noting there will be a penalty free transition period for the first 18 months following commencement.
3.94
In order to consider the effectiveness of the scheme, and opportunities to improve it, the committee sees value in the government undertaking a review of the scheme two years after its commencement.
3.95
In summary, the committee believes that the Payment Times Reporting Framework will have a positive impact on the conduct of large businesses and assist in improving payment practices and reducing payment times for small business suppliers.
3.96
The committee recommends that the government undertake a review of the Payment Times Reporting Framework two years after commencement.
3.97
The committee recommends that the bills be passed.
Senator the Hon James McGrath
Chair