To improve cash flow pressures for small business, the Federal Government has established a public Payment Times Reporting Scheme (the Scheme) whereby businesses and Government enterprises with total annual income of over $100 million will need to bi-annually report on their payment terms and times for their small business suppliers.
The Scheme draws on a taxation legislation definition of small businesses as those entities with an annual turnover of less than $10 million.
The Scheme aims to improve payment outcomes for small businesses through transparency around the payment practices of large entities, along with pressure to improve payment times in Australia due to the public nature of the reporting requirements. This transparency will allow small businesses to make an informed decision when it comes to working with potential customers that are large businesses and ultimately deciding who they will supply. This is seen as an important step in driving cultural change in business payment performance across the entire economy.
The two Bills currently before Parliament to implement these reporting requirements are the Payment Times Reporting Bill 2020 (the Bill) and the Payment Times Reporting (Consequential Amendments) Bill 2020. The Senate passed the Bill and the Scheme rules on 3 September 2020. The Scheme will commence from 1 January 2021.
Which entities will be defined as a ‘reporting entity’?
The reporting requirement applies to entities that are constitutionally covered, that carry on an enterprise in Australia and, its income in the most recent income year was greater than $100 million or more than $10 million if the entity is a part of a corporate group with a combined total income more than $100 million. Entities are to self-assess if they are a reporting entity.
Constitutionally covered entities can include private companies, public companies, trusts, partnerships, joint ventures, sole traders, foreign entities, a Commonwealth corporate entity or Commonwealth company and a body corporate incorporated in a Territory.
Entities which are not for profit and are registered under the Australian Charities and Not-for-profits Commission Act 2012 are exempt from the Scheme.
Constitutionally covered entities with less than $100 million total annual income and other types of businesses (i.e. non constitutionally covered entities) can volunteer to be part of the Scheme.
How is the income test determined?
The income threshold is based on the Australian Taxation Office’s definition under its tax transparency reporting regime. That is, total income is gross accounting income, which means revenue earned from all sources (both assessable and non-assessable income). If an entity is part of a group where the controlling entity aggregates income for the group for tax purposes, then the gross income of each entity is to be used.
Payment times reporting requirements
From 1 July 2021, eligible entities will need to submit bi-annual reports to the Payment Times Reporting Regulator (the regulator). The regulator will publish these reports on a central public register known as the Payment Times Reports Register.
To reduce the burden of these new reporting requirements, a Payment Times Reporting Small Business Identification (SBI) Tool will be available to help businesses identify which of their suppliers are small businesses. The tool allows businesses to enter supplier information, with the tool returning a negative result for suppliers that are large or medium businesses.
Once it’s produced, the reporting entity’s Payment Times Report must be approved by a responsible member for the entity, provided to its governing body (e.g. the Board) and be submitted to the regulator within three months of the end of the bi-annual reporting period (based on the entity’s financial year).
What information will need to be reported?
The information on how and when a business pays their small business suppliers will include, amongst other things:
- standard payment periods including the most frequent, shortest and longest, that the business offers to small businesses
- the proportion, determined by total number and total value, of small business invoices paid by the business during the reporting period within certain payment periods
- the proportion (by value) of procurement that was from small business suppliers during the reporting period.
Penalties for non-compliance
Entities which fail to provide a report, don’t maintain the required payment records, or provide false and misleading information may contravene a civil penalty provision. The regulator will have powers to monitor the compliance of reporting entities, investigate suspected non-compliance, issue infringement notices for breaches, and apply to a court to impose civil penalty orders against non-complying entities.
Maximum civil penalties can be applied for non-compliance under the Payment Times Reporting Scheme. As of 1 July 2020, a penalty unit equals $222. The current maximum penalties for incorporated entities (body corporate) are as outlined below.
|Nature of contravention||Maximum penalties for incorporated entities (body corporate)|
|Failure to report||300 penalty units (can be applied per day of non-compliance)|
|False or misleading reports||0.6 per cent of the total income year in which the contravention occurred|
|Failure to keep records||0.2 per cent of the total income for the income year in which the contravention occurred|
|Failure to comply with audit notice||200 penalty units (can be applied per day of non-compliance)|
|Failure to reasonably assist the auditor||0.2 per cent of the total income for the income year in which the contravention occurred|
Source: Payment Times Reporting Bill 2020.
Reporting entities may also be directed to undertake and pay for independent audits where there is a reasonable suspicion of an entity’s wrongdoing in relation to the reporting requirements. In these cases:
- The business can appoint an auditor, but it must be approved by the regulator. If the regulator does not approve of the business’s choice of auditor, the regulator may appoint an auditor.
- The regulator can request a business’s compliance with the legislation, for example, requesting that the auditor investigate whether the information provided by the business is correct.
- The regulator must stipulate the required qualifications and independence of the auditor, matters to be covered in the audit and the form and content required in the audit report.
- The business must provide reasonable facilities and assistance for the auditor to complete their duties effectively.
The regulator will not enforce the compliance and enforcement provisions for the first 12 months of the Scheme’s implementation. This provides time for businesses to familiarise themselves with the Scheme.
What do I need to do next?
You should assess whether the legislation will impact you. In other words, are you caught as a constitutionally covered entity, and if so, do you meet the income test? If so, you should direct your finance teams to implement processes to enable you to comply with the Scheme.
We will continue to monitor the progress of the legislation and its impact on those clients that will be defined as reporting entities. We will be happy to discuss your obligations and assist you so that you have the correct reporting mechanisms in place.
If you have any questions about the Scheme and how it impacts your business, please contact your Pitcher Partners specialist.