Large companies have been able to ‘set the terms’ of business when dealing with their smaller counterparts. As a result, some small businesses can suffer, particularly with long payment times. In order to combat the long payment times and corresponding poor cash flow for small businesses the government has introduced a new legislative scheme which will commence 1 January 2021. This will not only impact large corporations but also small businesses. Accordingly, it is important that all clients review their terms and conditions to ensure compliance.

The new legislation commencing on 1 January 2021 will require large companies to report their payment terms to the government every 6 months. It is the hope that these reporting requirements will help provide much needed cash flow security for small businesses by establishing transparency in payment terms from large corporations with a focus on their small business suppliers.

The new Payment Times Reporting Act 2020 (Cth) and Payment Times Reporting (Consequential Amendments) Act 2020 (Cth) (collectively “the legislation”) creates a new reporting obligation scheme for large corporations, certain governments entities and volunteering entitles on their payments terms and practices.

The reporting scheme will mean large corporations must give the Payment Times Reporting Regulator a report for each 6-month period. These reports will be stored on a publicly available register where small businesses can look up the payment terms of their existing or potential customers to assist in making informed decisions for their cash flow management. 

Does your business classify as a ‘small business’?

According to the legislation, a ‘small business’ is a business that has an annual turnover in accordance with the Income Tax Assessment Act 1997 (Cth) of less than $10 million.

Does your business classify as a ‘large corporation’?

 A ‘large corporation’ is defined as an entity that carries on an enterprise in Australia and:

• had a total income in the most recent income year of more than $100 million; or
• had a total income in the most recent year of more than $10 million if the entity is part of a corporate group with a combined total income of more than $100 million.

A large corporation will then be a ‘Reporting Entity’ under the legislation. An entity that does not meet the above thresholds can still ‘volunteer’ for the scheme.

An entity registered under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) is excluded. However, trusts, partnership, joint ventures, sole traders, foreign entities and incorporated body corporates are included.

What information do large corporations have to report?

Reporting Entities must provide their report within 3 months of the end of each reporting period (every 6 months). A failure to do so may result in a civil penalty, and a fine up to $8,007.00 for each reporting period they fail to report on in the time frame required. If an entity provides a false or misleading report, they may be fined up to $46,707.50.

The legislation sets out what the report must include, including most notably:

• The reporting entity’s details;
• A statement of the standard payment periods for the entity (both the shortest and longest standard terms);
• Details and explanation for any changes to the standard payment period for the entity;
• The proportion (by number and total value) of small business invoices paid by the entity
  • Within 20 days after the invoice was issued;
  • Within 21 to 30 days after the invoice was issued;
  • Within 31 to 60 days after the invoice was issued;
  • Within 61 to 90 days after the invoice was issued;
  • Within 91 to 120 days after the invoice was issued; and
  • More than 120 days after the invoice was issued.
• The proportion of total value of all procurement from small business suppliers.

Entities must then keep this information for at least 7 years, or potentially face a fine of up to $26,690.00.

How do you prepare?

While small businesses will no doubt benefit from the transparency and certainty of payment terms with their large corporate clients, these new obligations are somewhat onerous for large corporates.

Accordingly, to prepare we recommend you:

1. get in touch with your accountant to ensure that you are prepared to start reporting (if necessary) from 1 January 2021; and
2. ensure your payment terms are clear and accurate. You may need to review your general terms and conditions/payment terms. At Hillhouse we are able to help with all of your terms and conditions.

If you are a small business or large corporation and wish to discuss the effects this new legislation could have on your business, please contact Ben Ryan at Hillhouse Legal Partners to assist you.