The Payment Times Reporting Act 2020 (the Act) introduces a new requirement for large businesses and large government enterprises with an annual total income over $100 million to publicly report on their payment terms and practices for their small business suppliers.
The scheme starts on 1 January 2021 and applies to all companies and other constitutionally covered entities carrying on an enterprise in Australia where:
The Act cover most entities (both domestic and foreign entities), apart from those that lie outside the constitutional power of the Commonwealth to regulate. As a result, it applies to all companies, trusts, partnerships, unincorporated associations, and Commonwealth and Territory entities that are subject to the Commonwealth’s powers.
Nevertheless, the Act explicitly does not apply to entities registered under the Australian Charities and Not-for-profits Commission Act 2012.
P has three members, being subsidiaries A, B and C. P has standalone total income of $80 million. A’s total income is $50 million, B’s total income is $5 million. P, A and B all carry on an enterprise within Australia. C’s total income is $40 million but is a foreign entity that does not carry on an enterprise in Australia. The combined total income for all members of P’s controlling group is $175 million. Each of P and A are reporting entities because the combined total income of the group is more than $100 million and each entity has total income above $10 million. Each of P and A will all have to submit their own separate Payment Times Report. B has total income of less than $10 million and therefore does not need to submit a Payment Times Report. C is a foreign entity that does not carry on an enterprise in Australia and therefore does not need to submit its own Payment Times Report.
The Act refers to terms and concepts used in other legislation and requires careful analysis to determine which entities are within the scope of the Act. For example:
P has total income of $80 million and prepares financial statements that comply with Accounting Standards. P owns 47% of the issued capital and voting rights of A, which has total income of $50 million. Based on the absolute size of its holding and the relative size of the other shareholdings, P concludes that it has a sufficiently dominant voting interest to meet the power criterion and consolidates A in accordance with AASB 10. As a result, P’s annual financial report discloses consolidated total income of $130 million. As P does not own more than one-half of A’s issued capital or controls more than one-half of A’s voting rights, A is not a member of P’s controlling group. As a result, neither P or A is required to prepare a Payment Times Report.
The Act predominantly uses terminology and concepts derived from the corporations and tax legislation. However, those concepts and terms do not necessarily align with Australian Accounting Standards. Entities and groups will need to closely examine whether they, and which entities within an accounting consolidated group, are subject to the Act.
A small business is one that carries on an enterprise in Australia and its annual turnover (within the meaning of the Income Tax Assessment Act 1997) was less than $10 million for the most recent income year.
A Payment Times Small Business Identification Tool is being created by the Department of Industry, Science, Energy and Resources to assist entities identify which entities are determined to be small businesses. The Tool should be available in December 2020.
At present, a number of questions exist over how entities will identify their small business suppliers and we await details of the final payment times reporting Rules and further clarity over the Act’s implementation.
The Act does not mandate that small businesses must be paid within a certain period. Rather, affected entities will be required to prepare a Payment Times Report for each six months period which is designed to create transparency around the payment practices and times of a large business in paying its small business suppliers.
Reporting periods will be based on the income year for the reporting entity (the same as the financial year it uses for tax purposes). The first Payment Times Report will include information relating to the first six months of the year and a second report will include information for the remainder of that year. The reports will be lodged through a reporting portal with a new Payment Times Reporting Regulator, which will form part of the Department of Industry, Science, Energy and Resources.
The key items requiring disclosure in a Payment Times Report include:
Reporting entities must lodge a Payment Times Report within 3 months of the end of each six month reporting period. For 30 June financial years, the first reporting period relates to the 6 months ending 30 June 2021. The following describes an entity’s first reporting timetable.
* Note: where the entity is subject to income tax, the income year is its year for income tax purposes. If an entity has a non-standard financial year for tax purposes it will use this non-standard financial year to determine when a Payment Times Report is due.
The Act contains penalties for entities that fail to report on time. The maximum penalties are currently $66,600 per day for a body corporate and $13,320 per day for an individual.
As the first reporting window commences on 1 January 2021, affected entities will need to develop an action plan to:
If you require assistance preparing for these changes, or for any further information, please contact Jamie Dreckow or your local Nexia Edwards Marhsall Advisor.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.