ROBERT GOTTLIEBSEN
JUNE 24, 2020
AFR
Most of the 3000 large enterprises in Australia are likely to be looking to substantially change the way they pay their bills in the 2020-21 financial year.
And that financial year starts next week. I suspect few boards understand what legislation before the parliament – part of the measures to help Australia through the COVID-19 pandemic and beyond – requires them to do.
For years too many Australian large enterprises have been starving small enterprises of capital by delaying the payment of invoices. This issue was actually raised in the last election campaign by Prime Minister Scott Morrison.
Now in the light of COVID-19 recovery plan, small business and employment minister Michaelia Cash has been given the task of implementing the Prime Minister’s base election policy.
In the process she rejected the idea of mandating a 30 day minimum payment term for small business invoices, fearing that those enterprises that currently pay faster than 30 days will revert to the minimum standard.
Instead, what the government proposes is that from January 1, all enterprises with income above $100 million will be required to assemble data on how fast they pay small enterprises from the date of receiving an invoice.
Time to start now
Chief executives and boards will need to get started now so the data collection systems are in place by January 1 – only some six months away.
Boards will also be required to set out what their base payment policy is so that it can be compared to how they actually pay. They will also be required to report on their use of supply chain financing practices.
This data must be reported publicly during the first quarter of 2021-22 and thereafter every half year. Australians will then see very clearly which companies are doing the right thing by small enterprise suppliers – and the nation – and those that are lagging in their payments. It will be possible for journalists and members of public to check on the performance of individual chairman and directors in paying corporate bills.
My guess is that there will be patterns of good and bad behaviour.
Michaelia Cash clearly believes disclosure will be an incredible incentive for directors to do the right thing. But, of course, there are also penalties for non disclosure and inaccurate information. Those providing misleading information will be fined 0.6 per cent of the annual income of the business.
New regulator
The legislation was the subject of a second reading speech in the most recent parliamentary sitting and a detailed bill will be submitted in the August parliamentary session.
A significant feature of the government proposal is the establishment of Payment Times Reporting Regulator to administer the legislation and enforce compliance as necessary. The regulator will determine whether a small business enterprise has turnover of less than $10 million and is therefore regarded as a small business for the purposes of the disclosure legislation.
Accordingly, large enterprises will not need to determine which of their suppliers are covered by the disclosure requirement.
While it is possible that the Labor will reject the legislation, that is not likely because the ALP, like the government, is conscious of the importance of small business to the community and employment
It is possible that large enterprises, led by the powerful Business Council of Australia, will try to block the legislation. The BCA itself tried a voluntary fast payment system which was well meaning but it didn’t work.
Given that the the legislation is in line with the government’s election undertakings, it’s unlikely that protests will change the thrust of what is planned. If disclosure works, the impact on the economy will be profound.
Long time frames
In 2017-18, payments from large to small business were worth around $281bn, with $77 billion of those payments paid later than 30 days.
When payments were paid late, the average length of time for small businesses to be paid was 63 days. Many of those companies will not change but their directors will be branded as bad payers. If they all speed up payments some $77bn in extra working capital will be required. This will require many large enterprises to change their financing model and not rely on small enterprises for working capital.
The government believes longer payment times hurt small business cash flow and this harms their ability to hire, invest and grow. Cash-constrained small businesses are often forced to seek out expensive forms of financing in order to sustain their business operations and many small businesses in turn pay their suppliers more slowly
The government calculates that if all large businesses in Australia paid small businesses within 30 days, it would result in a transfer of working capital from large to small businesses of approximately $7bn and create an overall net benefit to the Australian economy of $313m per year. Accordingly, if disclosure fails to change director habits then stronger measures will be required.
The commonwealth has started the speed up process. In 2018-19 it awarded contracts worth $16.7bn to small and medium enterprises, Since July 2019, Commonwealth agencies have paid invoices for contracts up to $1m within 20 calendar days or paid interest on any late payments.
In addition, from 1 January 2020, e-invoicing capable government agencies have paid e-invoices valued up to $1m within five days. If they don’t deliver, they pay interest. Commonwealth agencies will be progressively coming on board with e-invoicing capability throughout 2020.
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