Labor Senators welcome the Payment Times Reporting Bill 2020 and are supportive of practical efforts to improve payment outcomes for small businesses. Labor Senators recognise and understand how important cash flow and payment times are to the survival of Australian small businesses.
However, Labor Senators are concerned that while the Bill is a step in the right direction, it will have limited efficacy on implementation.
Like the majority of stakeholders and witnesses to this inquiry, Labor Senators of the committee support the Payment Times Reporting Scheme as a first step to better payment practices by large businesses to their small business suppliers. However, like the majority of stakeholders and witnesses to the inquiry, Labor Senators note that there are widespread concerns about the design of the Bill itself, the implementation of the reporting framework, and on its efficacy in improving payment practices in any meaningful way.
In the economic recovery following the COVID-19 health crisis, prompt payment times will play a role of even greater importance to the cash flow of small businesses. Unlike large businesses, small businesses do not have a diverse range of financing options like bond markets or issuing equity. Rather, expensive bank finance and prompt payments from customers are the driving forces of cash flow for small businesses.
Unfortunately, during the COVID-19 crisis, stakeholders and Labor Senators have witnessed particularly egregious behaviour from some large firms who have unilaterally extended payment times to small business suppliers, often in excess of 120 days of the month of invoicing; behaviour that flies in the face of fairness and the stated intention of the Scheme.
The Problem of Self-Regulation
The Payment Times Reporting Scheme is, in reality, a transparency initiative to support self-regulation. The efficacy of self-regulatory regimes is usually poor to questionable unless backed by a genuine threat of heavier-handed regulation. To date, the Government has argued that transparency will incentivise better payment practices in two main ways: ‘naming and shaming’ firms with poor practices, and allowing small business suppliers to ‘shop around’ for customers.
In holding the belief in these two outcomes, the Government’s position is optimistic and not grounded in the reality that markets in Australia are concentrated, often with less than a handful of large firms dominating. Nor does it reflect the power imbalance large firms have over small suppliers. As the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) told the committee, some large firms simply ignore bad publicity about their practices. In concentrated markets, small business suppliers can’t ‘shop around’ when there are very limited buyers. In any case, small businesses are rightly fearful of reprisals—even if this simply means no further contracted work—from large businesses due to the power imbalance between them.
The potential for transparency to invigorate ‘naming and shaming’ and ‘shopping around’ also appears oblivious to the information networks within small business communities. If a large firm is a bad payer, it is likely small business suppliers already know from their own experiences or those of others. Yet poor payment practices of large firms persist.
Labor Senators remain concerned that this transparency initiative to support self-regulatory payment practices will not result in faster average payment times.
In-principle the transparency regime should be given a limited time to demonstrate its efficacy; however, Labor Senators are of the belief that complementary ‘backup’ measures are necessary to ensure the Payment Times Reporting Scheme improves general payment times to small businesses.
Targets and Mandated Payment Times
The Payment Times Reporting Scheme does not mandate payment times, nor does it set a goal or target of what better payment times to small suppliers would look like. Labor Senators are of the view that some goal or target, such as “reporting entities pay small suppliers in less than 30 days, on average”, would ground the Scheme in a tangible outcome and help guide the review proposed in Recommendation 1 of this report. Chartered Accountants Australia & New Zealand (CAANZ) and Chartered Practicing Accountants (CPA) have suggested amending the Objects Clause of the Bill to reflect such an intention.
The Committee has heard diverse testimony about mandated payment times. Jurisdictions like the United Kingdom and New Zealand have implemented, or are actively considering implementation of, mandated payment times. Given current behaviour from some large firms and the likelihood that the Reporting Scheme will not substantively improve payment times, it should not be surprising to the Government that small business advocates such as the Institute of Public Accountants (IPA), the Australian Trucking Association, and the ASBFEO have called for mandated payment times or bans on excessive payment times.
The Australian Trucking Association (ATA) testimony was a clear example of a sector with significant small business members affected by long payment times. 98 per cent of trucking operators are small and family businesses, operating with tight margins and significant upfront costs. The trucking industry has also been significantly affected by the use of supply chain financing. The ATA highlighted international legislative action on late payments, and called for maximum payment times of 30 days subject to reasonable and fair exceptions. Labor Senators urge the Government to consider the views of the Australian trucking industry, including their concern the Bills will not fix the payment time issues their industry faces, and that better data could be extracted under the Scheme.
Labor Senators note the views that legislating mandatory payment times may not be immediately possible through this Bill, and consideration should be given to some sectors where a strict payment regime may distort existing and acceptable practices. However, Labor Senators also note the aforementioned concerns about the efficacy of the Bill and tangible targets and believe consideration should be given to how to strengthen the Bill to tangibly improve payment times of broadly 30 days or less to small businesses.
Big Businesses Can Still Hide Long Payment Times
Labor Senators have significant concerns that egregiously long payment times from large businesses can remain hidden in the structure of the regime as drafted. Reports are required to state 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.
It is clear that a reporting entity that pays small business suppliers in periods greater than, for example, 90, 120, or 180 days is reported as being in the same bracket as a 61 day payment.
For firms that are already paying in excess of 61 days, there is no discernible incentive to lower payment times. Indeed, the brackets as drafted could create an incentive for many large firms to increase their payment times in the knowledge that as far as the transparency regime goes, there is no more ‘shame’ in a 180 day payment as a 61 day payment.
Labor Senators believe that the reporting brackets should be more reflective of the egregious payment practices by large firms to their small business suppliers.
Definitions
Labor Senators do not believe the Government has sufficiently responded to diverse stakeholder views on definitions, both in the legislation and the Minister’s Rules.
For example, the Government has not addressed concerns raised by CAANZ and CPA about the legislation’s use of definitions such as ‘total income’ with reference to the Taxation Administration Act 1953 where no such definition exists, or why the Bill uses an inconsistent mix of taxation and accounting principles throughout.
Alarmingly, the definition of small business in the legislation is not fixed, but is entirely contingent on a definition in delegated legislation. Such a definition can be changed at any time by the Minister.
Labor Senators note that the Government has not clarified why it intends to use a definition (either in legislation or the Minister’s Rules) of small business that is not comparable to the manner in which it identifies its own small business suppliers. For example, the Government identifies a small business supplier through the de facto mechanism of invoice size; contracts of up to $1 million are paid in 5 days (with e-invoicing) or within 20 days otherwise. CAANZ and CPA have suggested that taking a similar approach to identifying smaller suppliers (total invoicing up to $7 million to a reporting entity) would reduce red tape burden for larger firms and relieve the Department of the need to create the Small Business Identification Tool.
Supply Chain Financing
Supply Chain Financing (SCF) has attracted scrutiny from the Opposition, small business stakeholders (including the ASBFEO who issued a critical report on the practice), and the media. Criticism has particularly focused on the practice of coupling ‘reverse factoring’ with extending contracted payment times, sometimes of 120 days or more from the date of invoicing. In such instances, a large business will push out contracted payment times to smaller suppliers, and offer a third-party financier who will pay the invoice earlier on their behalf at a discount—meaning the small business effectively pays a fee to be paid on time.
SCF has also attracted international regulatory scrutiny for obscuring the true debt position of firms using it, and for systemic economic risks. The European collapse of infrastructure firm Carillion is attributed to the firm’s use of supply chain financing. In Australia, the practice has attracted attention from regulators such as the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission.
In the Payment Times Reporting Bill, the definition of supply chain financing and the associated reporting requirements are wholly contained in the Minister’s Rules. The draft Rules require a large entity to report on whether they use supply chain financing, the details of those arrangements, and proportion of invoices paid under such arrangements.
However, Labor Senators remain concerned that the only legislative reference to supply chain finance is a passing reference to what the Minister ‘may’ include in the rules. Small businesses have no guarantee that a Minister won’t remove requirements to report on the use of such arrangements on a whim or from pressure by SCF proponents.
Further, Labor Senators note that this Bill does not prevent SCF arrangements being coupled with long payment times that effectively force small businesses to pay a fee to be paid on time.
Delegated Legislation and the Small Business Identification Tool
Labor Senators’ comments above regarding legislative definitions and supply chain financing are examples of the extensive use of delegated legislation (“Minister’s Rules”) throughout the scheme. Concerns about the extent of delegated legislation were raised from a broad range of perspectives, and add to uncertainty of how the Scheme will operate in practice. While not disagreeing with the Committee view that delegated legislation can have an advantage of flexibility and adaptability to a changing environment, Labor Senators draw attention to the increasing use of such delegated powers by the Government.
The Government is increasingly using delegated legislation to avoid or minimise Parliamentary oversight. For example, the JobKeeper program—part of the fiscal response to the COVID-19 crisis—saw the Government expecting Parliament pass enabling legislation, with virtually all inclusions and exclusions to the program detailed in delegated legislation (“Treasurer’s Rules”). Pertinently to the context of this Bill, many small business owners and operators were excluded from JobKeeper via the Treasurer’s Rules, and those small business people remain excluded.
The Department is still consulting on the development of the Small Business Identification Tool. Despite the Government repeatedly saying it expects the passage of this Bill by Parliament before the end of 2020 (to ensure a 1 January 2021 start date for the Scheme), it does not appear aware of the irony of not holding itself to similar expectations. Rather, the Government expects the stakeholders and Parliament to have faith in the Government that delivered Robodebt and CensusFail.
Labor Senators believe the Bill should be passed to ensure a 1 January 2021 start date, but have concerns about an effective Small Business Identification Tool being functional by that time, and the lack of certainty stakeholders will have without definitions and other detail in delegated legislation.
Labor Senators echo the near-universal stakeholder concerns that clarity of the Tool’s design and operation is urgently needed.
Role of the Small Business and Family Enterprise Ombudsman
During the hearing, the Committee heard from the Australian Small Business and Family Enterprise Ombudsman, Ms Carnell, about the differing roles of ASBFEO as a small business advocate and the Payment Times Reporting Regulator created in the Bill. Ms Carnell suggested that clarification surrounding the Ombudsman’s role, which includes powers to command documents from firms, could be beneficial to the legislation. Labor Senators urge the Government to consider this feedback.
Conclusion
Labor Senators call on the Government to do more to ensure faster payment times to small businesses.
Labor Senators are supportive of the legislation, but remain concerned that shortcomings in the Bill will limit its real impact and support for the cash flow of small businesses.
Senator Louise PrattSenator Deborah O’Neill
Deputy ChairMember