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Payment times reporting for large business

Payment times reporting for large business

As discussed by Vince Dimasi, the proposed regime aims to create transparency around the payment practices and times of a large business in paying its small business suppliers.

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Vince Dimasi

National Lead, Working Capital Advisory & Payment Times Reporting

KPMG Australia

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The Federal Government has introduced legislation into Parliament which seeks to implement the requirement for large businesses groups and government enterprises with annual total income of over $100 million to publicly report on their small business payment terms and times via a public Payment Times Reports register.

It has been estimated that over 9,000 entities from large business groups would be required to file reports with the new Payment Times Reporting Regulator on a bi-annual basis.

The two Bills to implement this regime (the Payment Times Reporting Bill 2020 and the Payment Times Reporting (Consequential Amendments) Bill 2020) were recently the subject of a Senate committee review. The committee has ultimately recommended that the Bills be passed (with additional comments from the Opposition).

Contemporaneously with the introduction of the Bills, public consultation on Exposure Draft Legislative Rules to accompany the final legislation has occurred. More recently, the development of Regulator guidance material for reporting entities has commenced.
Parliamentary debate on the Bills should resume in late August, early September. If passage of the Bills occurs this calendar year then the start date for this new reporting regime will be 1 January, 2021, with some large businesses anticipated to have their first six reporting period ending on 30 June 2021, with reports due to the regulator by 30 September 2021.

Provided below are a number of KPMG observations surrounding the proposed reporting regime and the content of the Bills.

Transparency framework to be adopted for the payment times reporting regime

  • The proposed regime does not mandate that small businesses must be paid within a certain period (albeit the Explanatory Memorandum accompanying the Bills infers that payment terms of greater than 30 days are viewed as ‘problematic’ in any dealings with small business suppliers).
  • Rather, the proposed regime adopts an approach that creates transparency around the payment practices and times of a large business in paying its small business suppliers.
  • The freely available Payment Times Reports register will contain comparable data sets for each named, large business reporting entity. The data sets will include, inter alia, the reporting entity’s payment terms; its aggregated payment performance against pre-set benchmarks; as well as any other relevant information incorporated into the legislative rules (e.g. supply chain financing).
  • The perceived benefits of the public register are:
    • small businesses will be able to make a more informed decision about their potential customers
    • civil society transparency on payment practices is also expected to incentivise large businesses to pay their small businesses on time
    • over time, it will improve payment times as large businesses move to best practice standards.
  • The hefty penalties that can be imposed on contravention of the regime, together with the Regulator’s ability to publicly ‘name and shame’ non-compliant reporting entities, highlight both the financial and reputational risks associated with this proposed reporting regime. 

Group income defines a reporting entity but reporting is not on a group basis

  • The scope of the ‘reporting entity’ definition warrants close analysis because it is those entities that are required to provide a payment times report bi-annually. Moreover, once an entity becomes a reporting entity it is more difficult to cease being one.
  • A ‘constitutionally covered entity’ becomes a reporting entity at the start of its income tax year if it carries on an enterprise in Australia; satisfies a ‘total income’ threshold for the most recent income tax year; and, is not a registered charity or not for profit.  Alternatively, if before the start of that income year, the constitutionally covered entity gives notice to the Regulator, it may elect into the regime.
  • A constitutionally covered entity is intended to cover most entities (both domestic and foreign entities), apart from those that lie outside the constitutional power of the Commonwealth to regulate.
  • The total income threshold is defined by reference to the concept of total income in the ATO’s tax transparency reporting regime which is basically gross accounting income. A constitutional covered entity meets the criteria if it carries on an enterprise in Australia, and for its most recent income year:
    • the entity had total income of more than $100 million, or
    • if the entity is a controlling corporation (e.g. Australian parent company) – the combined total income for all members of the controlling corporation’s group was more than $100 million; or
    • if the entity is a member of the controlling corporation’s group – the total income for the entity was at least $10 million.
  • Thus, the total income threshold is intended to capture all members of a corporate group who individually have total income of at least $10 million, where the combined total income of the group is more than $100 million.
  • It would appear therefore, a covered entity with say a 31 December tax year end would determine whether it satisfied the total income threshold for the year ended 31 December 2020 and if so, it would then have bi-annual reporting from 1 January 2021 (assuming the regime starts from this date). A covered entity with a 30 June tax year end looks to its income for the year ended 30 June 2020 to see if it has a payment times reporting obligation (but presumably it only starts reporting bi-annually from the assumed start date of 1 January, 2021).
  • The payment times reporting obligation is imposed on each reporting entity, notwithstanding it might be part of a larger group (possibly with uniform payment terms).

Immediate actions to consider

  • We recommend businesses start to prepare early given the likely first reporting window commencing on 1 January 2021.
  • In our experience, we expect that many corporates will find the reporting requirements challenging. For example, some large groups already have to contend with multiple purchase to pay processes and practices. These systems will all now need to feed into new and pre-determined reporting parameters for a small business sub-set of total accounts payable. In addition, the requisite information will need to be capable of being reported at an entity level. We believe numerous factors will exist for reporting businesses that will make the preparation of accurate, consistent and reliable payment times data challenging. These factors will heighten the compliance risk for many reporting entities and may require processes and procedures to be adapted for many clients.

KPMG’s Payment Times Reporting specialists can help you prepare to comply with the new requirements.

This article was first published to KPMG Tax Now. 

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