PAYMENT TIMES REPORTING (CONSEQUENTIAL AMENDMENTS) BILL 2020 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

[Index] [Search] [Download] [Bill] [Help]

PAYMENT TIMES REPORTING (CONSEQUENTIAL AMENDMENTS) BILL 2020

2019-2020 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES PAYMENT TIMES REPORTING BILL 2020 PAYMENT TIMES REPORTING (CONSEQUENTIAL AMENDMENTS) BILL 2020 EXPLANATORY MEMORANDUM (Circulated by authority of the Minister for Employment, Skills, Small and Family Business, Senator the Hon Michaelia Cash)

GLOSSARY Abbreviation Definition Act Payment Times Reporting Act 2020 Bill Payment Times Reporting Bill 2020 Consequential Amendments Bill Payment Times Reporting (Consequential Amendments) Bill 2020 ICCPR International Convention on Civil and Political Rights Regulator Regulator of the Payment Times Reporting Framework RPA Regulatory Powers (Standard Provisions) Act 2014 Rules The rules made under section 58 of the Act from time to time. Scheme Reference to the Payment Times Reporting Scheme 1

PAYMENT TIMES REPORTING BILL 2020 PAYMENT TIMES REPORTING (CONSEQUENTIAL AMENDMENTS) BILL 2020 OUTLINE The Payment Times Reporting Bill (the Bill) introduces a new Payment Times Reporting Scheme (the Scheme) which requires large businesses and large government enterprises with an annual total income of over $100 million to publicly report on their payment terms and practices for their small business suppliers. In identifying small business suppliers, the Scheme will draw on a taxation legislation definition of small business as those entities with an annual turnover of less than $10 million. The objective of the Scheme is to improve payment outcomes for small businesses by creating transparency around the payment practices of large business entities. By providing access to information on large business payment performance, small businesses will be able to make a more informed decision about their potential customers. Greater transparency on payment practices and performance will also create pressure for cultural change to improve payment times. To complement the Bill and ensure the Scheme operates as intended, consequential amendments will be made to the Taxation Administration Act 1953. The Payment Times Reporting (Consequential Amendments) Bill amends the Taxation Administration Act 1953 to enable the Commissioner of Taxation to disclose certain tax information to the Payment Times Reporting Regulator for the purpose of administering the Scheme. Impact of payment times on Australian small businesses Long (after 30 days) and late payments (after the due date on the invoice) are a significant problem for Australia's 3.4 million small businesses, with negative impacts not only on these businesses but also more broadly across the economy as small business that are paid slowly pay their suppliers more slowly in turn. A 2019 study by AlphaBeta highlights the importance of addressing the issue of long and late payments from large to small business. Analysis of over 10 million invoices from more than 76,000 small businesses estimated the quantum of long payments from large business is $77 billion per year. More than a third of small business invoices are paid after 30 days, and these invoices take an average of 63 days to be paid. This was estimated to equate to $7 billion in working capital that is transferred from small to large business every year. On-time payments will boost small business growth Long and late payment times affect the cash flow of small business owed the outstanding debt. The need to cover the shortfall in their working capital constrains the ability of small businesses to hire, invest and grow, and leads to higher bankruptcy and exit rate. It also impacts the mental health of small business owners. According to AlphaBeta's research, normalising a 30 day payment time from large business to small business would have an estimated net benefit to small business of $522 million per 2

year. It would also create an estimated net benefit to the Australian economy of $313 million per year. Widespread improvement in payment times is unlikely without government action. That is because small businesses lack the market power to negotiate better payment terms and times. Large businesses also have little incentive to improve their payment performance. Payment Times Reporting Requirement The Bill establishes a payment times reporting requirement for eligible entities to provide bi-annual reports on their small business payment terms and practices to the Payment Times Reporting Regulator (the Regulator). These reports will be published by the Regulator on a central public register, known as the Payment Times Reports Register. Large businesses who are constitutionally-covered, carry on an enterprise in Australia, and meet the income threshold of over $100 million per year are required to submit a report on their payment terms and practices each six months of an income year. The Scheme will also require Commonwealth government corporate entities who meet the income threshold to report. Businesses who do not meet these requirements may choose to voluntarily submit a report. Charitable and not-for-profit entities are exempt from the reporting requirements. Amendments to the Taxation Administration Act 1953 will allow for the Taxation Commissioner to disclose certain taxation data to the Regulator for the purpose of administering the Scheme. The new reporting requirements will be supported by a Payment Times Reporting Small Business Identification Tool to assist reporting entities in identifying their small business suppliers. The development of the tool responds to stakeholder feedback about the challenges in identifying suppliers that are small businesses, as this information is not publicly available and is costly for businesses to collect and verify. The tool is intended to reduce the compliance burden for reporting entities by automating the small business identification process. As part of the tool, a large business will be able to enter identifying information about their suppliers, with the tool returning a negative result for suppliers that are large or medium businesses. The Rules, once made, intend to define a small business as any business that is identified as a small business by the tool. As identified above, the tool will draw on the taxation legislation definition of small business as an entity with less than $10 million annual turnover. A Payment Times Report will include aggregated data on the reporting entities payment terms and practices, identify the entity, and other relevant information. The Payment Times Report must be approved by a responsible member for the entity, be provided to the entities' principal governing body (e.g. their Board) and be submitted to the Regulator within three months of the end of the bi-annual reporting period. The Regulator, who will administer the Scheme, will publish the submitted reports on the public register. The Regulator will also have the ability to enforce compliance with the reporting requirements. The Regulator is a Senior Executive Service role, appointed by the Secretary of the Department of Industry, Science, Energy and Resources. 3

Entities who fail to give a report, fail to maintain payment records, or provide false and misleading information in a report may contravene a civil penalty provision. The Regulator will have powers to monitor compliance, investigate suspected non-compliance, impose infringement notices for breaches, and apply to a court for civil penalty orders against entities. Reporting entities may also be directed to undertake independent audits where there is a reasonable suspicion of an entity's wrongdoing in relation to the reporting requirements. The penalty arrangements in the Bill reflect the serious economic impacts of late payments and the Government's commitment to address this issue through the scheme. The Regulator will adopt a graduated approach to enforcement, which will include engaging in outreach and education activities as a first step and working with the reporting entity to address issues ahead of either imposing infringement notices or commencing court proceedings for a civil penalty. These more coercive tools will be used if reporting entities demonstrate repeated failure to comply with the Act. Reporting entities will be given an 18-month penalty free transition from the implementation date of the Scheme to enable them to familiarise themselves with the scheme and transition effectively. Date of effect: 1 January 2021 (or, if passage occurs after that date, the first 1 January or 1 July to occur after the Act receives Royal Assent). Proposal announced: This Bill implements the Payment Times Reporting Framework Implementation measure from the 2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO) and the Prime Minister's policy announcement on 21 November 2018. FINANCIAL IMPACT STATEMENT $10.million over four years from 2019-20 (including $3.4 million in capital funding), $2.6 million in 2023-24 and $2.4 million per year ongoing from 2024-25. REGULATION IMPACT STATEMENT Compliance cost impact: This proposal will increase compliance costs for reporting entities by an average of $22.5 million per year, on an annualised basis. The Office of Best Practice Regulation (OBPR) has certified the Final Regulation Impact Statement (RIS) included at the end of this Explanatory Memorandum. 4

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Payment Times Reporting Bill 2020 Payment Times Reporting (Consequential Amendments) Bill 2020 Both Bills are compatible with the human rights and freedoms recognised or declared in the international instruments listed in clause 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview The Payment Times Reporting Bill requires large businesses with over $100 million in annual total income to biannually report on their small business payment times and practices. The Scheme will draw on a taxation legislation definition of small business as entities with annual turnover of less than $10 million. These reports will be published on a public website, the Payment Times Reports Register, allowing small businesses to make more informed decisions about which large businesses they will supply to. Greater transparency will also incentivise large businesses to pay their small businesses on time. A Payment Times Reporting Regulator will be established to administer the Scheme. The Regulator will have powers to gather information and publish it on the register, along with the ability to enforce compliance with the reporting requirements. Large businesses who fail to give a report, fail to maintain payment records, or provide false and misleading information may contravene a civil penalty provision. Reporting entities may also be directed to undertake independent audits where there is a reasonable suspicion of an entity's wrongdoing in relation to the reporting requirements. To complement the Payment Times Reporting Bill and ensure the Scheme operates as intended, consequential amendments will be made to the Taxation Administration Act 1953. The Payment Times Reporting (Consequential Amendments) Bill (the Consequential Amendments Bill) amends the Taxation Administration Act 1953 to specify the circumstances in which certain tax information can be disclosed by the Commissioner of Taxation to the Regulator of the Scheme. Human rights implications The Payment Times Reporting Bill engages the following human rights:  the right to protection from arbitrary or unlawful interference with privacy;  the right to a fair and public hearing;  the right to be presumed innocent until proved guilty according to law;  the right to work; and  the right to freedom of opinion and expression. The Consequential Amendments Bill engages the following human rights:  the right to protection from arbitrary or unlawful interference with privacy. 5

Penalty provisions Assessment of civil penalties Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (the ICCPR) regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR. The inclusion of civil penalties and infringement notices in the Payment Times Reporting Bill enables the Regulator to enforce compliance with the reporting requirements by pursuing financial penalties rather than through prosecuting criminal offences. The penalties could be characterised as regulatory in nature as they primarily seek to deter non-reporting and misreporting, and aim to encourage compliance with the Scheme. Further, the penalties are restricted to people in a specific regulatory or disciplinary context, rather than being directed at the public at large. Lastly, the nature of the penalties is proportionate to the size of the industry being regulated, which means they are not so severe or high as to be considered 'criminal'. They are proportionate to the size and resource level of eligible entities, noting that entities obliged to report under the Scheme are those with an annual total income of over $100 million. Given the size of businesses that will be covered by these provisions, this approach will ensure that the penalties retain a deterrent effect for large entities. Accordingly, the civil penalty provisions in the Payment Times Reporting Bill should not be considered 'criminal' for the purposes of international human rights law. Right to privacy Article 17 of the ICCPR forbids arbitrary or unlawful interference with a person's privacy. However, interference may be permissible if it is in accordance with the provisions, aims and objectives of the ICCPR and is reasonable in the circumstances. To this extent, any limitations proposed by the either the Payment Times Reporting Bill or Consequential Amendments Bill must have a legitimate objective, be rationally connected to this objective and be proportionate. This Payment Times Reporting Bill establishes a requirement for large business to report their payment terms and practices for small business, to be published on a public register. Allowing information to be made public fulfils the transparency objective of the Payment Times Reporting Bill by ensuring small business and others have access to information on large business payment performance, so they can make informed financial decisions on who they provide goods or services to. The information to be included in a Payment Times Report will be restricted to aggregate payment information and does not identify a large businesses' payment practices at the individual small business supply level. In so doing, the Payment Times Reporting Bill 6

encourages rights to privacy under Article 17 by protecting the commercial interests of the large businesses' supply chain while also protecting small business from potential commercial disadvantage in being identified as 'small'. The Payment Times Reporting Bill also includes specific information management provisions that are designed to give large businesses confidence that the information they give to the Regulator outside of a Payment Times Report, such as evidence substantiating their total income if they want to cease being a reporting entity, will not be disclosed except in certain circumstances. Further, the Payment Times Reporting Bill includes a power for the Regulator to not publish information on the register if it is not in the public interest, and specifically having regard to whether the information is 'personal information' under the Privacy Act 1988. This will give the Regulator the ability to not publish personal information given to the Regulator as part of a Payment Times Report. The right to privacy under Article 17 may be limited where the limitation is lawful and not arbitrary and where it is reasonable, necessary and proportionate to achieving a legitimate objective. The Payment Times Reporting Bill limits the right to privacy in that it allows for personal information to be released in certain circumstances, for example, for the purpose of proceedings before a court or tribunal, enforcement related activities or to meet a requirement under another Australian law. The Payment Times Reporting Bill's limitation of the right to privacy has a clear legal basis. The legislation will be publicly accessible and accompanied by detailed guidance so that affected persons have adequate information about how the Bill may limit their right to privacy. The Payment Times Reporting Bill does not confer unfettered discretion on those who will administer the Scheme. Information can only be used and disclosed as specified in Division 2 of Part 5 of the Bill. The information that can be used and disclosed is clearly prescribed and limited to that information of most importance to achieving the legitimate objectives of the Bill. The Consequential Amendments Bill will allow for the Taxation Commissioner to disclose certain taxation data to the Regulator for the purpose of administering the Scheme. This information will be subject to important privacy and confidentiality safeguards. Both Bills are compatible with the right to privacy. Right to a fair and public hearing This Payment Times Reporting Bill proposes the use of civil penalty proceedings and infringement notice provisions as compliance mechanisms. These draw upon Parts 4 and 5 of the Regulatory Powers (Standard Provisions) Act 2014, such that infringement notices must display the right to bring the matter to a court and the entity is able to elect to have the matter heard by a court instead of paying the fine. Further, civil penalties can only be applied upon the order of a Court after a public hearing on liability under the relevant civil penalty 7

provisions. No procedural or criminal process rights that currently exist are amended by this Bill. This Payment Times Reporting Bill is compatible with access to a fair and public hearing by a competent, independent and impartial tribunal established by law. Right to be presumed innocent until proven guilty Article 14(2) of the ICCPR recognises the right to be presumed innocent until proven guilty according to law when charged with a criminal offence under. Strict liability offences are those in which guilt can be established regardless of intent, and therefore are potentially in violation of 14(2). The Payment Times Reporting Bill creates one strict liability offence: this is the offence relating to unauthorised disclosure of protected information. The Strict and Absolute Liability Report tabled by the Australian Law Reform Commission notes that the imposition of strict liability may be justified for various reasons. The applicable reason here is to ensure the integrity of a regulatory regime. Additionally, the strict liability created by the Payment Times Reporting Bill meets the consideration that it should only apply for offences where the penalty does not include imprisonment and is less than 60 penalty units for monetary penalties. In strict liability offences where there is public interest in regulation being observed and it can be reasonably expected that the relevant entities are aware of their duties and obligations, the prosecution only needs to prove the physical elements of the offence. A reverse burden then exists for the reporting entity to make out a defence. This is appropriate as the elements of the offence are objective and the penalty is minor and deterrent in nature. This is particularly the case for the offence in this Bill, where Commonwealth officials should be aware of their obligations regarding use of disclosure of protected information. A strict liability offence may in principle be consistent with Article 14(2) of the ICCPR if it is clear that it pursues a legitimate objective and is reasonable, necessary and proportionate in achieving that objective. The Australian Government Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers indicates this test is met when the matter is peculiarly within the knowledge of the defendant and where it is significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. This Payment Times Reporting Bill is compatible to the right to be presumed innocent until proven guilty. Right to work Article 6 of the International Covenant on Economic, Social and Cultural Rights recognises the right to work, which includes the right to gain a living through freely chosen or accepted work. Article 7 recognises the right of everyone to the enjoyment of just and favourable conditions of work, including remuneration which provides all workers with fair wages and a decent living for themselves and their families. 8

Long (after 30 days) and late payment times affect the cash flow of small businesses owed the outstanding debt. A 2019 analysis of more than 76,000 small business by AlphaBeta, showed the quantum of long payments from large to small businesses is around $77 billion per year. This equates to a $7 billion transfer of working capital transferred from small to large business each year. The need to cover this shortfall in their working capital constrains the ability of small business to hire, invest and grow, and leads to higher bankruptcy and exit rates. It also impacts the mental health of small business owners. Accordingly, late payments can limit the extent to which small businesses and their employees can access just and favourable conditions of work. It is intended that the publication of large business' payment times information will encourage large businesses to improve their payment performance, and enable small business to make more informed decisions about potential customers. This will transmit benefits across the economy as smaller businesses paid on time are able to pay their own suppliers on time. This Payment Times Reporting Bill promotes and is compatible with the right to work. Right to freedom of expression Article 19(2) of the ICCPR protects freedom of expression in any medium, for example written and oral communications, the media, public protest, broadcasting, artistic works and commercial advertising. The right protects not only favourable information or ideas, but also unpopular ideas including those that may offend or shock, subject to limitations. The Payment Times Reporting Bill limits the right under 19(2) by imposing criminal and civil penalties to unauthorised use or disclosure of protected information. In particular, the Bill aims to restrict a person's ability to use and disclose information gathered in administering the Scheme. The right to freedom of expression is not absolute, and Article 19(3) of the ICCPR specifies the legitimate aims which any restriction on freedom of expression should pursue. In this case, this Bill's limitation is necessary to the scheme's operation and directed at a legitimate objective. The objective is to protect a reporting entity's privacy and reputation, in particular, information that is not already authorised under this Act to be released publicly. Entities who give such information are entitled to understand the circumstances in which it can be disclosed, and in which it cannot be, and to have associated penalties associated with unauthorised disclosure. It is also proportionate to the level of reputational damage that could be caused to the business through the unauthorised use and disclosure of information which is not authorised by this Act to be disclosed, except for in certain circumstances. Further, this restriction is proportionate in that it only limits the freedom of a select class of persons (persons who receive information as part of administering this Act, rather than the public at large) from releasing certain kinds of information (protected information) in certain circumstances (those which are not authorised under this Act). This Payment Times Reporting Bill is compatible to the right to freedom of expression. 9

Conclusion Both Bills are compatible with human rights because they promote the protection of human rights and to the extent that they may limit human rights, those limitations are reasonable, necessary and proportionate. Minister for Employment, Skills, Small and Family Business, Senator the Hon Michaelia Cash 10

PAYMENT TIMES REPORTING BILL 2020 NOTES ON CLAUSES Part 1--Preliminary Section 1: Short title 1. Section 1 is a formal provision specifying the short title of the Act as the Payment Times Reporting Act 2020. Section 2: Commencement 2. The table in this section sets out the dates for when the provisions of the Act will commence. 3. The whole of the Act will commence on 1 January 2021 if the Act receives Royal Assent before 1 January 2021. If the Act receives Royal Assent on or after 1 January 2021, the whole Act will commence on the first 1 January or 1 July to occur after the day the Act receives Royal Assent. Section 3: Objects of this Act 4. Section 3 sets out the objectives of the Act. The first objective is to provide for the reporting on payment terms and practices by large businesses, certain government entities and volunteering entities about their small business suppliers. The second objective is to create greater transparency around these payment terms and practices by making them publicly available. The purpose of providing this transparency is so that small businesses will be able to make more informed decisions about their potential customers. Greater transparency on payment practices and performance will also create incentives for reporting entities to improve their payment terms and practices. Section 4: Simplified outline of this Act 5. Section 4 provides a simplified outline of the Act to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. Section 5: Definitions 6. Section 5 defines key terms found within the Act. Certain key terms of this Act are outlined below. 7. "carrying on an enterprise" - The meaning of this phrase is intended to be similar to the phrase as it is used in other legislation (such as the Business Names Registration Act 2011). It is intended to be broader than the meaning of the phrase "carrying on a business". 8. "controlling corporation" -- The reference to "controlling corporation" in section 5 is drawn from concepts in the Corporations Act 2001. A controlling corporation is intended to be a business that is not a subsidiary to another corporation; however, a controlling corporation can have subsidiaries. 9. "entity" -- The definition of an "entity" in section 5 is based on the concept in section 960.100 of the Income Tax Assessment Act 1997, where an entity is said to include the 11

following kinds of legal persons: an individual; a body corporate; a body politic; a partnership; any other unincorporated association of body of persons; a trust; a superannuation fund; and an approved deposit fund. 10. "foreign entity" -- The reference to "foreign entity" in section 5 is intended to cover entities based overseas that are not otherwise constitutional corporations; that is, businesses geographically external to Australia and that carry on an enterprise in Australia, within the scope of the external affairs power in the Constitution. 11. "income year" -- An "income year" for an entity has the same meaning as section 4.10 of the Income Tax Assessment Act 1997 and is based on the financial year used for tax purposes. For example, if an entity has a standard financial year for tax purposes, this will be the same income year used to determine when a Payment Times Report is due; if they have a non-standard financial year for tax purposes they will use this non- standard financial year to determine when a Payment Times Report is due. However, it is not intended that the proviso in section 4.10(2)(a) regarding previous income years will be relevant for the purposes of the Payment Times Reporting Act. As such, "income year" refers to an entity's most recent financial year, not the previous financial year. 12. "issuing officer" -- An "issuing officer", for the purpose of warrants under the RPA, can either be a magistrate or Federal Court Judge. Both are included as issuing officers, because there is the possibility that a warrant would need to be issued against a Government Business Enterprise (GBE). In such circumstances a Federal Court judge may be a more authoritative person to issue such a warrant. However, the appropriate issuing officer for any warrant will be considered on a case-by-case basis. 13. "member" --The definition of "member" draws upon concepts in the Corporations Act 2001. In that Act, a "member" of a corporate group is one where the controlling corporation controls the composition of the member's board or is in a position to cast, or control the casting of, more than one- half of the maximum number of votes that might be cast at a general meeting of the member's shareholders. 14. "protected information" -- This refers to any information obtained under, or in accordance, with this Act. This would include, for example, information given under section 14 in a Payment Times Report. It is also intended to include any other information the Regulator obtains when administering the Act, such as when making a determination under section 7 (ceasing to be a reporting entity) or section 13 (application for further time to give a report). 15. "small business" -- The definition of a "small business" means an entity prescribed by the Rules. 16. "small business invoice" - This is intended to be based on the definition of "invoice" in the Income Tax Assessment Act 1997 and the A New Tax System (Goods and Services Tax) Act 1999. 17. "small business supplier" -- A "small business supplier" means a small business that supplies goods or services to the reporting entity. 18. "total income" -- The definition of "total income" draws upon section 3C of the Taxation Administration Act 1953. It is intended that total income for the purpose of this Act will be calculated in the same way as total income under the Taxation 12

Administration Act 1953. Like in that Act, "total income" for the purposes of this Act is based on accounting concepts, and refers to gross income. Section 6: Meaning of constitutionally covered entity 19. Section 6 describes a constitutionally covered entity. These are the broad categories of entities that may be required to report their payment times and practices to the Regulator, if they meet the definition of reporting entity in section 7. 20. These include a constitutional corporation, a foreign entity, and a corporate Commonwealth entity, or a Commonwealth company, within the meaning of the Public Governance, Performance and Accountability Act 2013. 21. This definition is intended to cover all entities apart from those that lie outside the constitutional power of the Commonwealth to regulate. Section 7: Meaning of reporting entity 22. Section 7 sets out the criteria for determining whether a constitutionally covered entity is a reporting entity, and is therefore required to provide a Payment Times Report to the Regulator under Division 2 of Part 2. 23. Entities that are registered under the Australian Charities and Not-for-profits Commission Act 2012 are explicitly excluded from becoming a reporting entity. The reason for this approach is the Act focuses on the payment terms and practices of entities which have a commercial purpose. Becoming a reporting entity 24. Subsections 7(1) and (2) describe the criteria that a constitutionally-covered entity must meet in order to be required to report. 25. An entity meets these criteria if it carries on an enterprise in Australia, and for its most recent income year: a. the entity had a total income of more than $100 million, or b. if the entity is a controlling corporation - the combined total income for all members of the controlling corporation's group was more than $100 million; or c. if the entity is a member of the group of a controlling corporation to which paragraph b applies--the total income for the entity was at least $10 million. 26. These conditions are intended to capture all members of a corporate group who have a total income of at least $10 million where the combined total income of the group is more than $100 million. 27. Example: Corporation X is a controlling corporation. Its total income was $80 million. It has three members: Member A's total income was $50 million, Member B's total income is $40 million, and Member C's total income was $5 million. The total of the group's income was $175 million. Corporation X, Members A, B and C all carry on an enterprise within Australia. Each of Corporation X, Members A and B is a reporting entity, because the combined total income of their group is $175 million and each entity has total income above $10 million. They will all have to submit their own separate 13

Payment Times Report. Member C has total income of less than $10 million and is therefore not a reporting entity and does not need to submit a Payment Times Report. 28. The more than $100 million income threshold reflects the size of business that must be captured by the Act if it is to achieve its policy intent of improving payment times from large to small businesses. Large businesses captured by the $100 million income threshold have the capacity to meaningfully comply with the reporting requirements and have the market influence to effect change in their supply chains. 29. Removing smaller entities who operate within larger groups but have a total income of less than $10 million is designed to reduce the regulatory burden on reporting entities. There are a large number of small entities which are members of groups and many do not actively trade externally. The less than $10 million threshold is consistent with the Australian Taxation Office definition of a small business. 30. Under subsection 7(1)(b) a constitutionally covered entity who does not meet the criteria for a reporting entity in subsection 7(2) may volunteer to provide Payment Times Reports by writing to the Regulator prior to the beginning of an income year. A reporting entity who elects under subsection 7(1)(b) to report is referred to as a "volunteering entity". Ceasing to be a reporting entity 31. Subsection 7(3) states that a reporting entity continues to be a reporting entity unless the Regulator has determined in writing that it is no longer a reporting entity. 32. An entity may cease to be a reporting entity if it does not meet the relevant thresholds set out in subsection 7(2) for two consecutive income years. The requirement that income must fall below the threshold for both of the two most recent income years (as opposed to only the most recent income year) is intended to provide certainty and alleviate the administrative burden that would arise from entities regularly entering and exiting the Scheme should their income fluctuate around either the $100 million or $10 million thresholds. 33. A determination by the Regulator that the entity must continue to report can be reconsidered through an internal review process and then by application to the Administrative Appeals Tribunal under Division 3 of Part 6. 34. Entities that are part of a corporate group but have total income individually of less than $10 million for two income years will not be required to seek a determination from the Regulator to cease reporting. This is designed to reduce the regulatory burden of large numbers of small entities seeking decisions from the Regulator on their reporting status. Application for a determination 35. Subsection 7(5) states that a reporting entity must apply in writing to the Regulator for a determination to cease being a reporting entity. Under subsection 7(6), the Minister has the ability to prescribe rules regarding what information and documents must accompany an application to cease to be a reporting entity. 14

36. Subsection 7(7) describes the circumstances under which the Regulator must determine that a reporting entity is no longer a reporting entity. The Regulator must be satisfied that the total income for the reporting entity has fallen below $100 million for both of the two most recent income years, or, if the entity is part of a group, that the combined total income for all members of the group has fallen below $100 million for both of the two most recent income years. The "two most recent income years" is intended to refer to the two most recent income years immediately before the entity applies for the determination. 37. Example: On 4 April 2026, Entity Trixi applies to the Regulator for a determination that it has ceased to be a reporting entity. Entity Trixi reports in financial years (1 July to 30 June). It should provide evidence that its total income has been less than $100 million for the income years 1 July 2023 to 30 June 2024 and 1 July 2024 to 30 June 2025. These are the two most recent income years from the date it applied for its determination. The entity's application should include sufficient evidence to substantiate their application. For example, the application may include documents from an independent and suitably qualified auditor certifying their total income for the past two income years. 38. This section also allows volunteering entities under paragraph 7(1)(b) to 'opt out' of reporting. As with entities for whom reporting is required, the application must be in writing and include information and documents prescribed by the Rules. The reason for having these entities write to the Regulator to 'opt out' is so that the Regulator is aware that they have left the Scheme and this can be reflected in the public-facing register and any internal systems in place for tracking reports. When the determination has effect 39. Subsection 7(8) outlines when a determination from the Regulator that an entity is no longer a reporting entity will take effect. The reporting obligations of an entity which has successfully applied to the Regulator for a determination that it no longer qualifies as a reporting entity, shall cease immediately before the start of the income year in which the Regulator makes the determination. This means the entity would not need to report for the income year in which the Regulator made the determination. 40. Example: Entity Archie has been a reporting entity for several years. Its income years have been regular financial years (1 July to 30 June). It experiences a downturn in income over a few years and, on 1 September 2023, it applies to the Regulator for a determination that it has ceased to be a reporting entity. The Regulator makes a determination that Entity Archie has ceased to be a reporting entity on 1 January 2024. The determination is made in the middle of the 1 July 2023 to 30 June 2024 income year. Under subsection 7(8), the determination takes effect immediately before the start of that income year: specifically, it takes effect on 30 June 2023. Entity Archie does not need to report for the income year of 1 July 2023 to 30 June 2024. 15

Notice of decision 41. Subsection 7(9) requires the Regulator to respond in writing to an application for a determination that the entity has ceased being a reporting entity under subsection 7(3). The expected timeframes for determinations will be elaborated upon in guidance material from the Regulator. 42. If the Regulator is satisfied that an entity is no longer required to report, written notice will be provided to that entity advising that the entity has ceased to be a reporting entity. 43. If the Regulator is satisfied that an entity is still a reporting entity, it is intended that the entity will receive a written notice from the Regulator advising that they must continue to report with attendant penalties for late reporting, failure to report and incomplete reporting unless they can provide evidence otherwise. Section 8: Meaning of reporting period 44. Section 8 defines the meaning of "reporting period" for reporting entities. 45. Reporting entities will be required to provide a Payment Times Report for each six months of the income year. Reporting periods will be based on the income year for the reporting entity (the same as the financial year they use for tax purposes). The first report will include information as to the first six months of the income year and the second report will include information for the remainder of that income year. 46. Reporting entities must lodge a Payment Times Report within 3 months of the end of each six month reporting period, as specified in section 13. Section 9: Act binds the Crown 47. Section 9 provides that the Act will bind the Crown in each of its capacities. The intention is that the Crown in each of its capacities is bound by the requirement to provide a Payment Times Report, if they meet the definition of a "constitutionally- covered entity" in section 6 and a "reporting entity" in section 7. However, this section makes it clear that the Crown is not liable to be prosecuted for an offence, liable to pay a pecuniary penalty, or be given an infringement notice. This provision is not intended to cover those entities which do not enjoy the "shield of the Crown"; that is, it is the intention that the Act is intended to bind entities that do not enjoy the "shield of the Crown". Section 10: Extension to external territories 48. Section 10 makes it clear that the Act extends to all external Territories of Australia. For example, reporting entities will need to consider payments times and terms related to any operations and supply chains existing in any of the external Territories. This also means an entity based in any of Australia's external Territories must comply with the reporting requirements if it fits the definition of a "reporting entity" in section 7. 16

Part 2--Reporting payment times Division 1--Introduction Section 11: Simplified outline of this Part 49. Section 11 provides a simplified outline of this Part to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. Division 2--Reporting Payment Times Section 12: Reporting entities must report payment times 50. Section 12 specifies that reporting entities are required to provide a Payment Times Report for the relevant reporting period. Section 13: When report must be given 51. Section 13 outlines the timeframe for reporting and provides for extensions to be granted by the Regulator. 52. Generally, reports must be given to the Regulator within 3 months after the end of a reporting period. A reporting entity may make a written application to the Regulator requesting an extension of time to provide its report. The written application must explain the circumstances explaining why further time is required, including evidence of those circumstances, and any other information that is prescribed in the Rules. 53. The Regulator's power to grant extensions under subsection 13(4) is intended to be discretionary. The Regulator may provide further time to a reporting entity if the Regulator has considered the written application and any matters prescribed in the Rules, and the Regulator is satisfied that the extenuating circumstances were exceptional or they were outside the control of the reporting entity. This is intended to limit the circumstances in which an entity can be granted an extension. 54. If the Regulator allows the reporting entity further time, this will be confirmed in writing, along with the amount of additional time granted to submit the Payment Times Report. 55. In providing additional time, subsection 13(5) provides that the Regulator must not specify more time than the Regulator considers appropriate having regard to the severity of the circumstances and the strength of the evidence included in the application. 56. The ability of the Regulator to allow further time to a reporting entity will alleviate the regulatory burden of reporting, by ensuring that reporting entities are not subject to compliance action where extenuating circumstances have reasonably prevented them from reporting on time. The intention is that further time will only be granted having regard to the nature and severity of the circumstances that prevented the reporting entity from submitting a report on time. 17

57. A decision by the Regulator not to grant further time to a reporting entity is reviewable. See the discussion on section 51. Section 14: Reporting requirements 58. Subsection 14(1) describes the content required to be included in a Payment Times Report. The report is required to include details such as the relevant reporting period, as well as specific information about payment terms and practices to small business suppliers. 59. Information required to be included in a report include details of the shortest and longest standard payment periods offered by the reporting entity, as well any changes to these standard periods during the reporting period. The report should also state the proportion of small business invoices paid by the entity between certain ranges of time, including invoices paid in less than 21 days, between 21 and 30 days, between 31 and 60 days and more than 60 days after the invoice was issued. 60. The report must include details of the principal governing body, and whether the entity is a member of a controlling group. Information about the entity's principal governing body and corporate structure will assist the Regulator in identifying and monitoring entities as part of its administration of the Payment Times Reports Register. 61. The report must also include a declaration by the responsible member that the report has been provided to the principal governing body. Visibility of reports at this level of seniority recognises the importance of ensuring that reporting accurately on payments time and practices is given sufficient regard in the organisation, but balances this by reducing the regulatory burden associated with full approval by the entire principal governing body. 62. The report must detail any notifiable events that have occurred since the last Payment Times Report and also include any other information or documents that are prescribed in the Rules. This rule-making power is intended to allow for flexibility to respond to changing business and industry practices, so that, for example, the Rules can take into account changes to accounting practices and terminology. It is intended that any Rules made under this provision are consistent with Australia's obligations with respect to privacy under Article 17 of the ICCPR. 63. Subsection 14(2) provides that the Rules may prescribe how certain contents of the report, such as the proportion of small business invoices paid within a certain period, is calculated. This is intended to allow the Rules to, for example, prescribe an approach for working out how to calculate the contents of reports, including when the payment period for a small business invoice begins and when it concludes. 64. Subsection 14(3) provides that information or documents prescribed by the Rules may relate to the entity's payment terms or practices, including supply chain finance arrangements to small business suppliers. "Supply chain financing arrangements" is not expressly defined in the Act, with its meaning to be provided in the Rules. Supply chain financing is intended to be synonymous with other terms used to describe this practice such as reverse factoring. Defining supply chain financing in the Rules is appropriate 18

given the range and complexity of supply chain financing products, and the need for the Rules to provide flexibility for new and emerging products as they arise. Reporting on these types of arrangements will provide greater transparency to small businesses about larger entities that use these financing arrangements. This in turn will allow small businesses to make more informed and considered decisions about their large business customers. 65. Subsection 14(4) provides details of certain notifiable events that must be included in the report. These events include changes to an entity's applicable accounting period, or where the entity has a different business name. Other notifiable events may also be prescribed in the Rules. 66. Subsection 14(5) outlines the approval requirements for a Payment Times Report. The report must be signed by a responsible member of the entity or a responsible member of the controlling corporation. Section 15: Civil penalty provision for failure to report 67. Section 15 makes the failure to provide a Payment Times Report a civil penalty provision. 68. This section will not apply to volunteering entities who elect to report under the Scheme under section 6. 69. The maximum penalty is 60 penalty units for an individual, and a maximum of 300 penalty units for a body corporate (calculated by reference to subsection 82(5) of the RPA). These are the maximum penalties that a court could impose if civil penalty proceedings were brought before it. The Regulator also has the power to impose infringement notices for breach of this provision (see discussion on section 34). 70. As continuing contravention penalties (section 93 of the RPA), they will be applied for each day of non-compliance from the end of the three month lodgement period of the report. 71. These penalties will ensure that entities covered by the Scheme provide compliant reports to the Regulator in a timely manner. This is important to the success and integrity of the Scheme as it will allow small businesses to make more informed decisions about their potential customers and will create pressure for cultural change to improve payment times. 72. Further information on the approach to compliance and enforcement under this Act is outlined in Part 4. Section 16: Reporting entities must not give false or misleading reports 73. Section 16 makes the submission of false or misleading Payment Times Reports to the Regulator by a reporting entity a civil penalty provision. While these penalties do not apply to a volunteering entity, subsection 16(3) provides that a volunteering entity must not provide a Regulator a false or misleading report. 74. The maximum penalty in subsection 16(1) is 350 penalty units for an individual. 19

75. The maximum penalty in subsection 16(2) is 0.6 per cent of the total income for the income year in which the contravention occurred for a body corporate. 76. This is a modification to subsection 82(5) of the RPA. The reason for this modification is to provide a sliding scale of penalty amounts to ensure that penalties retain a deterrent effect for the very large entities which are covered by this Act. The penalty should be large enough to have a deterrent effect on businesses and not simply be viewed as a "cost of doing business". There are a number of precedents in other Commonwealth legislation that apply multiple of gain penalties to certain contraventions of these Acts, including in relation to certain cartel and corporate and financial sector misconduct (see for example, subsection 1317G(4) of the Corporations Act 2001, and subsection 12GBCA(2) of the Australian Securities and Investments Commission Act 2001). 77. These are the maximum penalties that a court could impose if civil penalty proceedings were brought before a court. The Regulator also has the power to impose infringement notices for breach of this provision (see discussion in Part 4). 78. It is important that small business can be assured that data on large entity's payment practices is accurate to allow them to make informed business decisions, as the Scheme's purpose is to make this information transparent. The integrity of the data provided is central to the Scheme working as intended. 79. Further information on the approach to compliance and enforcement under this Act is outlined in Part 4. Division 3--Access to Payment Times Reports Section 17: Payment Times Reports Register 80. Section 17 establishes the Payment Times Reports Register. 81. The Regulator is responsible for maintaining the Payment Times Reports Register (in addition to the functions conferred under section 25 of the Act). The Payment Times Reports Register will be a publicly accessible and free of charge website, where information from Payment Times Reports submitted by reporting entities will be published. 82. Making information from these reports publicly available and without charge, will enable small business suppliers to view and assess the payment times and practices of potential large business customers in one place. Improved transparency will assist small businesses to make more informed decisions when engaging with these large businesses. Publishing the payment performance of large businesses may also lead to improved performance in payment times and practices. Section 18: Registration of Payment times Reports 83. Section 18 requires the Regulator to register Payment Times Reports that are submitted to the Regulator pursuant to Division 2 of Part 2 of the Act. 20

Section 19: Registration of revised Payment Times Reports 84. Section 19 allows a reporting entity to request the Regulator to register and publish a revised Payment Times Report. 85. The updated version of the Payment Times Report must show the date of revision and describe any changes made, as well as meet the minimum requirements for Payment Times Reports set out in Division 2 of Part 2. 86. Allowing a reporting entity to register a revised Payment Times Report will allow them to correct any false or misleading statements or other errors made in its preparation. 87. The Regulator must register the revised Payment Times Report if circumstances prescribed by the Rules exist in relation to the request to register the revised Payment Times Report, and the revised report complies with the reporting requirements set out in section 14 of the Act. The intention is that the Rules made under subsection 3(b) will prescribe the circumstances in which a revised report can be registered. 88. The ability of a reporting entity to submit revised reports will ensure that the Register is accurate and up to date, with any changes to the Register made transparent. 89. It is not intended that publication of a revised report will limit the ability of the Regulator to, for example, publish information about non-compliance (under section 22) or engage any other compliance and enforcement powers under Divisions 3 and 4 of Part 4. Section 20: Decision not to publish certain information 90. Section 20 provides the Regulator with the discretion to not publish certain information contained in a Payment Times Report where the Regulator considers the publication of this material is not in the public interest. 91. In making this decision, the Regulator must consider whether the information is personal information, commercial-in-confidence or any other information as prescribed by the Rules. 92. For information to be considered commercial-in-confidence, subsection 20(3) provides that the Regulator must be satisfied that the publication of the information would cause competitive detriment, is not already in the public domain, is not required to be disclosed under Australian law, or is not readily discoverable. 93. This recognises that while the purpose of the Payment Times Reports Register is to enhance transparency about payment times and practices, there are circumstances where the publication of certain kinds of information provided in a Payment Times Report would not be in the public interest. The intention of this provision is to limit disclosure of information that is not central to the Scheme, but is provided in the report - for example, the personal details of contact officers of a reporting entity, or commercial-in-confidence information that is not related to the content requirements in section 14 but is inadvertently provided in the report due to a technological error. 21

94. Given the objective of the Scheme, whilst its publication may cause competitive detriment, poor payment time performance or information about payment terms, are not considered commercial-in-confidence. Section 21: Decision not to publish Payment Times Reports for volunteering entities that fail to comply with Act 95. Section 21 applies in circumstances where the Regulator is reasonably satisfied that a volunteering entity fails to comply with the Act. 96. Where a volunteering entity is non-compliant with its obligations under the Act, the Regulator has the power to decide not to publish a Payment Times Report from the entity until the Regulator is satisfied that the entity has undertaken remedial action. 97. The rationale for this provision is to provide an incentive for volunteering entities to comply with the obligations under the Act, understanding that there are good reasons why civil penalties should not apply to those who have volunteered. Ensuring volunteering entities comply with the obligations under the Act is necessary to ensure the integrity of the data on the register and the successful administration of the Scheme by the Regulator. Section 22: Publication of information about failure to comply with Act 98. Section 22 allows the Regulator to publish the identity of non-compliant reporting entities, including details on the failure to comply with their obligations under the Act. These details may be published on the Payment Times Reports Register, or in another way that the Regulator considers appropriate (or both). Due to the definition of 'reporting entity', this section allows publication of non-compliance by both entities who report on a mandatory basis and volunteering entities. 99. Before the identity of an entity and details of non-compliance are published, the Regulator must give notice of its intention to publish to the entity and invite a written response from the entity be provided within 28 days. The Regulator must have regard to any response provided by the entity. This is intended to provide procedural fairness to the relevant entity and allow it an opportunity to respond before the Regulator makes a decision to publish. The threshold of being 'reasonably satisfied' is intended to be interpreted in line with previous court decisions on this threshold in similar regulatory contexts. In order to be 'reasonably satisfied,' the Regulator will need to have reasonable, objective grounds upon which to base their satisfaction that a reporting entity has not complied with the Act. 100. It is intended that the Regulator will use this power to 'name and shame' entities who egregiously disregard their obligations under the Act, rather than to publish the details of non-compliance which has resulted from an inadvertent mistake or error. This is intended to deter wilful non-compliance with the Act. 101. The Regulator's power under this section is intended to promote the proper functioning and encourage compliance with the Scheme, in line with the Regulator's role. The Regulator coming to the view that an entity has not complied with the Act is a 22

necessary step it needs to take before it makes a decision about whether to publish that non-compliance information. In being reasonably satisfied that an entity has not complied with the Act, it is not intended that the Regulator will be conclusively determining the rights and liabilities of a reporting entity. 102. The Regulator must not publish information if the non-compliance occurred before the enforcement day. See the discussion at section 37. 103. A decision by the Regulator to publish the identity or details of non-compliance by an entity is a reviewable decision. See the discussion at section 51. 23

Part 3--Payment Times Reporting Regulator Division 1--Introduction Section 23: Simplified outline of this Part 104. Section 23 provides a simplified outline of this Part to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. Division 2--Payment Times Reporting Regulator Section 24: Payment Times Reporting Regulator 105. Section 24 establishes the position of the Payment Times Reporting Regulator. 106. The Payment Times Reporting Regulator is a designated position in the Department of Industry, Science, Energy and Resources and is appointed by the Secretary of the Department. The Regulator is required to be a Senior Executive Service (SES) employee in the Department. Given the role of the Regulator is to administer the Scheme and monitor and enforce compliance with the Act, it is appropriate that these functions are exercised by a senior officer in the Department. 107. Subsection 24(4) confirms that a written designation of the position of Payment Times Reporting Regulator by the Secretary made under subsection 24(1) is not a legislative instrument and is merely declaratory of the law. The instrument is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. An instrument of appointment under subsection 24(1) is classed as an instrument of appointment, engagement or employment, which is explicitly excluded from legislative instrument status by table item 8 in section 6 of the Legislation (Exemptions and Other Matters) Regulation 2015. Section 25: Functions of the Regulator 108. Section 25 establishes the functions of the Regulator. The Regulator must administer the Act, including by monitoring and enforcing compliance, as well as any other functions prescribed by the Rules or conferred on it by any other law of the Commonwealth. 109. The Regulator must also provide advice to the Minister on the activities undertaken to administer the Act, including its monitoring and compliance functions, and other functions. The intention of advising the Minister is to ensure that the Scheme is operating as intended and the Minister is informed of any significant issues arising from the operation of the Scheme. 110. Section 25 also empowers the Regulator to do those things that are incidental or conducive to the Regulator's performance in undertaking its functions. This may include, for example, functions related to the maintenance of the Payment Times Reports Register, and educational material and guidance. 24

Section 26: Powers of the Regulator 111. Section 26 empowers the Regulator to do only those things necessary or convenient for, or related to, their functions under section 25. 112. The intention is to allow flexibility for ancillary powers that are needed for the Regulator to perform its functions under section 25, but which were not foreseen at the time of drafting, or to provide for powers that are necessary for the Regulator to practically carry out its functions under section 25 (for example, the ability to maintain and administer the online Payment Times Reports Register including registering Payment Times Reports). Section 26: Powers of the Regulator 113. Section 26 provides the Regulator with the power to do all things necessary or convenient to exercise its functions. Section 27: Delegation by the Regulator 114. Section 27 allows for the delegation of any or all of the Regulator's powers and functions under the Act (except for those specified in subsection 27(2)). It is appropriate for the Regulator to be able to delegate certain powers and functions to ensure the Scheme can be administered effectively and efficiently, as it would not be practical for the Regulator to personally administer the entire Scheme. 115. Subsection 27(1) provides for the Regulator to formally delegate the powers and functions under the Act. The approach taken to delegations is based on the degree of discretion involved in the decision, the nature of the decision and the potential impact on the reporting entity, and the anticipated volume of decisions. 116. The following powers may be delegated to the level of Senior Executive Service (SES), or acting SES employee in the Department: a. decisions to determine whether an entity has ceased to be a reporting entity under subsection 7(3); b. decisions not to allow further time to give a payment times report under subsection 13(4); c. decisions to publish the identity or details of non-compliance of a reporting entity under subsection 22(1); and d. directing that an audit be undertaken under subsection 30(2). 117. It is appropriate that these powers are limited to the SES level due to the significant nature of the decisions that underpin the operation of the Scheme, the degree of discretion involved and the consequential impact on the reporting entity. For example, in deciding whether to exercise its compliance functions to publish the identity or details of non-compliance of a reporting entity, the Regulator would likely need to consider a range of factors in coming to this decision. 25

118. To ensure that the operational aspects of the Scheme are administered effectively, certain powers may be delegated to the level of Executive Level 2 (EL2), or acting EL2 employee in the Department: a. maintenance of the Payment Times Reports Register under section 17; b. registration of Payment Times Reports on the Payment Times Reports Register under section 18; and c. the power to do anything incidental or conducive to the performance of any of the other functions in section 25. 119. These decisions are potentially high volume but of low significance and complexity, and so it is appropriate to delegate these powers to the EL2 level. This will ensure Departmental employees are able to manage the day-to-day administration of the Scheme, including receiving, processing and registering new and revised Payment Times Reports and ensuring that the Payment Times Reports Register is maintained and functioning. 120. Subsection 27(2) prevents the Regulator from delegating the functions described in section 35 (appointment of authorised officers) or section 36 (appointment of infringement officers). This means that the Regulator must personally appoint all authorised officers and all infringement officers. 121. Subsection 27(4) makes it clear that, where an SES employee is carrying out delegated powers or functions under the Act, the employee must comply with any directions the Regulator makes. 26

Part 4--Compliance and Enforcement Division 1--Introduction Section 28: Simplified outline of this Part 122. Section 28 provides a simplified outline of this Part to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. Division 2--Obligations of reporting entities Section 29: Record-keeping requirements 123. Section 29 requires reporting entities to keep records of information used to prepare Payment Times Reports for at least seven years after the end of the relevant reporting period. 124. A maximum penalty of 200 penalty units applies to an individual for a failure to keep records for a period of seven years under subsection 29(1). This penalty does not apply to volunteering entities who elect to report under the Scheme under section 6. 125. For a body corporate, the maximum penalty is 0.2 per cent of the total income for the income year in which the contravention occurred for a body corporate. This is a modification to subsection 82(5) of the RPA. The reason for this modification is to provide a sliding scale of penalty amounts to ensure that penalties retain a deterrent effect for the very large entities which are covered by this Act. The penalty should be large enough to have a deterrent effect on businesses and not simply be viewed as a "cost of doing business". There are a number of precedents in other Commonwealth legislation that apply multiple of gain penalties to certain contraventions. 126. These are the maximum penalties that a court could impose if civil penalty proceedings were brought before a court. The Regulator also has the power to impose infringement notices for breach of this provision as discussed in relation to section 34 of the Act. 127. The rationale for this penalty is that it is important that payment data is retained by reporting entities for a sufficient period of time, to provide the Regulator with historical information about payment times. Without this information it would not be possible to ensure that the information provided is accurate, which may compromise the integrity of the Scheme. 128. The requirements to keep records for this duration is consistent with record-keeping requirements in other Commonwealth legislation, for example, the obligation for a company to keep financial records as required by section 286 of the Corporations Act 2001. 129. These penalties have been designed to encourage large reporting entities to meet their record-keeping requirements under the Scheme and to ensure that the Regulator can undertake compliance or enforcement activity, where appropriate. It is intended that penalties would only be imposed in cases of wilful non-compliance, and not where a 27

failure to keep records results from a genuine mistake or an event beyond the reporting entity's control (such as a natural disaster). Section 30: Compliance audits 130. If the Regulator reasonably suspects that a reporting entity has contravened a provision of the Act, the Regulator may give notice under section 30 for the appointment of an auditor. The requirement to have a "reasonable suspicion" is an important safeguard to ensure that the Regulator has reasonable grounds for requiring the appointment of an auditor. The threshold of having a reasonable suspicion is intended to be interpreted in line with previous court decisions on this threshold in similar regulatory contexts. In order to have a reasonable suspicion, the Regulator will need to have reasonable, objective grounds upon which to base its suspicion that a reporting entity has contravened the Act. 131. The ability to compel an audit will work in concert with the Regulator's monitoring and investigation powers (see discussion at Division 4). The audit will identify if there is an issue with non-compliance, and depending on the outcomes, further investigation will be required to be undertaken. After investigation, decisions may be made to enforce any non-compliance, for example by imposing infringement notices or court proceedings. 132. Subsection 30(2) provides that the Regulator must notify the entity in writing that the entity must appoint an auditor. The auditor may be a person nominated by the entity and approved by the Regulator. In cases where the Regulator does not approve the nominated person, the Regulator may appoint, in writing, a different person as an auditor. This is intended to provide the Regulator with the ability to ensure that an auditor has the appropriate level of expertise, experience and independence from the entity. 133. The Regulator can require the entity to arrange an auditor to undertake an audit of the entity's compliance with the Act or aspects of the Act, and to provide the Regulator a written report outlining the results of the audit within a specified time period. 134. To provide certainty to reporting entities, subsection 30(3) provides that the Regulator must specify in writing the required qualifications and independence of the auditor, the scope of the audit, and the form and content that must be included in the audit report. It is also anticipated that this written notice will provide information on administrative aspects of the audit, such as who to send the audit to and the timeframe in which the audit report must be given to the Regulator. 135. An entity is required to comply with the notice under subsection 30(4). Subsection 30(5) provides that the entity must provide the auditor, and persons assisting the auditor, with all reasonable facilities and assistance necessary in exercising its functions. 136. Subsection 30(6) provides that the entity is required to pay the reasonable fees and expenses of the auditor for preparing the audit report. It is expected that the amount the entity will pay for the audit will be negotiated between the entity and auditor, and it will be based on the value of the audit services. 28

137. It is intended that before an audit is required, the Regulator will engage with the entity regarding their non-compliance, through methods such as education and voluntary information requests. If these approaches are not successful, the Regulator may request the reporting entity to undertake an audit where there is a reasonable suspicion about the accuracy of the information provided by that entity. 138. It is not unreasonable for a reporting entity to bear the costs of an auditor. There are a number of precedents in other Commonwealth legislation where this is the case, such as section 262 of the Fair Work (Registered Organisations) Act 2009. 139. Failure to comply with a notice to appoint an auditor under subsection 30(4) attracts a maximum penalty of 60 penalty units for an individual and 200 penalty units for a body corporate. This reflects the serious nature of a direction to conduct an audit by the Regulator. While volunteering entities still have an obligation to comply with an audit notice, these financial penalties do not apply to them. 140. The obligation under subsection 30(4) is intended to include compliance with any time period specified in the notice in which the audit report is to be provided. Failure to comply with the time period for an audit report contained in a notice is intended to be a continuing contravention under section 93 of the RPA, so that each day a final audit report is late will constitute a separate contravention. This ensures that entities subject to audit provide the report in a timely manner. 141. Failure to provide an auditor with all reasonable facilities and assistance necessary under subsection 30(5) attracts a maximum penalty of 200 penalty units for an individual. For a body corporate, the maximum penalty is 0.2 per cent of the total income for the income year in which the contravention occurred. This is a modification to subsection 82(5) of the RPA to provide a sliding scale of penalty amounts to ensure that penalties retain a deterrent effect on businesses. As stated in the discussion for Part 2, there are a number of precedents in other Commonwealth legislation that apply multiple of gain penalties to certain contraventions of these Acts. While volunteering entities still have an obligation to provide reasonable facilities and assistance to an auditor, these financial penalties do not apply to them. 142. These are the maximum penalties that a court could impose if civil penalty proceedings were brought before a court. These penalties do not apply to volunteering entities who elect to report under the Scheme under section 6. The Regulator also has the power to impose infringement notices for breach of these provisions. Division 3--Regulatory powers Section 31: Monitoring powers 143. The RPA provides for a standard suite of provisions in relation to monitoring, investigation and enforcement powers and are an accepted baseline of powers for an effective Commonwealth regulatory regime. This is in line with the broader Commonwealth policy to adopt the powers in the RPA for all new Commonwealth Acts which require regulatory powers. The intention in adopting the RPA powers in this Act is to contribute to a coherent, consistent body of law across Commonwealth regulators. 29

It helps make it easier for stakeholders who are subject to these powers to understand and comply with the law and to know their rights and responsibilities. 144. Section 31 triggers Part 2 of the RPA (Monitoring) in relation to provisions of this Act and offences against the Crimes Act 1914 or the Criminal Code that relate to this Act. 145. These imported powers include: the power to enter premises, with either the occupier's consent or under a monitoring warrant (section 18 of the RPA), to inspect documents, make copies, operate electronic equipment, and secure evidence once on the premises (sections 18 to 23 of the RPA), and to ask questions and seek the production of documents once on the premises (section 24 of the RPA). 146. In order to effectively administer the Act, the Regulator requires these monitoring powers to verify that reporting entities are complying with the Act. 147. Subsection 31(2) provides that information given in compliance with the Act is subject to monitoring under Part 2 of the RPA. It is intended, for example, that the Regulator would use its monitoring powers to ensure that reporting entities provide correct and relevant information in a Payment Times Report. 148. Monitoring powers are used so that the Regulator in administering and enforcing the Act, can 'check' compliance with the Act. These powers can be used, for example, to examine documents upon which Payment Times Reports are based. 149. Under the RPA, monitoring powers may be used to determine whether a provision has been, or is being complied with, and/or to determine whether information subject to monitoring under the Act is correct. Monitoring powers can only be exercised with the consent of an occupier of a relevant premises, or with a monitoring warrant issued by an issuing officer (who is either a Magistrate or a Federal Court judge) (see sections 18 and 19 of the RPA). 150. Note 2 to subsection 31(1) provides that the monitoring powers do not commence before the enforcement day (18 months after the commencement of the Act at subsection 37(5)). 151. Subsection 31(3) provides for a number of aspects for the purposes of Part 2 of the RPA, including specifying who the authorised applicant and authorised person is, the issuing officer, the relevant chief executive and the relevant court. 152. Subsection 31(4) has been included so that a person can assist an authorised person in performing the monitoring powers, functions or duties outlined in subsections 31(1) or (2). Under paragraph 23(1)(a) of the RPA, a person exercising monitoring powers may only be assisted by another person if it is necessary and reasonable to do so. For example, it may be necessary and reasonable for a person to assist the authorised officer when making copies of documents and securing evidence on a premises. 153. Subsection 31(5) clarifies that Part 2 of the RPA, as it applies under the provisions mentioned in subsection 31(1) and the information in subsection 31(2), applies to every external Territory. 30

Section 32: Investigation powers 154. Part 3 of the RPA provides powers to investigate (that is, gather material in relation to) contraventions of offence provisions and civil penalty provisions. 155. Section 32 triggers Part 3 of the RPA (Investigation) in relation to civil penalty provisions in this Act and offences against the Crimes Act 1914 or the Criminal Code that relate to this Act. 156. These powers include the power to enter into premises by consent or under an investigation warrant, and the search and seizure of evidential material (see section 49 of the RPA) An investigation warrant is applied for by an authorised applicant, and issued by an issuing officer (who is either a Magistrate or a Federal Court judge). 157. The Regulator will require these investigation powers to enable the entry of premises and exercise of investigation powers where the Regulator suspects on reasonable grounds that there may be evidential material on the premises related to the contravention of a civil penalty or offence provision under this Act. This is an important part of the Regulator's core functions under the Act: to monitor compliance and ensure the integrity of the Scheme. 158. Note 2 to subsection 32(1) provides that the monitoring powers do not commence before the enforcement day (18 months after the commencement of the Act at subsection 37(6)). 159. Subsection 32(2) provides for a number of aspects for the purposes of Part 3 of the RPA, including specifying who the authorised applicant and authorised person is, the issuing officer, the relevant chief executive and the relevant court. 160. Subsection 32(3) has been included so that a person can assist an authorised person in performing the investigation powers, functions or duties outlined in subsection 32(1) or (2). Under section 53 of the RPA, a person exercising investigative powers may only be assisted by another person if it is necessary and reasonable to do so. For example, given the volume of information and data a reporting entity relies on in preparing a Payment Times Report, it may be reasonable and necessary for a person to assist the authorised offer when examining and seizing evidential material on the premises. 161. Subsection 32(4) clarifies that Part 3 of the RPA, as it applies under the provisions mentioned in subsection 32(1), extends to every external Territory. Section 33: Civil penalty provisions 162. Section 33 provides that each civil penalty provision in this Act is enforceable under Part 4 of the RPA. This provision triggers Part 4 of the RPA, which allows court proceedings to be commenced, seeking an order for a person to pay a monetary penalty for the contravention of the provision. 163. The provisions subject to a civil penalty in this Act are: failure to provide a report (section 15); providing false and misleading reports (section 16); record-keeping 31

requirements (section 29) and failure to comply with requirements regarding compliance audits (section 30). 164. The Regulator requires the ability to bring civil penalty proceedings against reporting entities (who are not volunteering entities) to ensure compliance with the provisions of the Act. The success and integrity of the Scheme depends on entities providing accurate reports to the Regulator in a timely manner. This will allow small businesses to make more informed decisions about their potential customers and will create pressure for cultural change to improve payment times. The ability to bring civil penalty proceedings reflects the serious nature of the obligations under the Act, which requires enforcement by the Courts in appropriate cases. 165. Subsections 33(2) and (3) set out that the authorised applicant and relevant court are those defined in section 5. 166. Subsection 33(4) provides that Part 4 of the RPA does not make the Crown in the right of the Commonwealth liable to a pecuniary penalty for breach of a civil penalty provision of this Act. It is intended that any entity that enjoys "the shield of the Crown" will not be liable for a pecuniary penalty for contravention of the Act. It is intended that any entities that do not enjoy the "shield of the Crown" will be liable to pay a pecuniary penalty (such as, for example, a corporate Commonwealth entity). 167. Section 95 of the RPA provides a defence to a contravention of a civil penalty provision where a person has made a mistake about the facts involved. Specifically, it states that a person who makes a mistake of fact is not liable for a civil penalty if they considered whether the facts existed and they were under a mistaken but reasonable belief about those facts. 168. Subsection 33(5) is intended to clarify the operation of section 95 of the RPA to apply to body corporates. It draws upon similar text from section 12.5 of the Criminal Code, which provides a mistake of fact defence specifically for body corporates. 169. Subsection 33(6) provides further detail on what a failure of due diligence may be substantially attributed to for the purposes of subsection 33(5), but it is not intended to be exhaustive or prescriptive. This provision is also based on section 12.5 of the Criminal Code. 170. Subsection 33(7) clarifies that Part 4 of the RPA, as it applies to civil penalty provisions in this Act applies, to every external Territory. Section 34: Infringement notices 171. Subsection 34(1) triggers Part 5 of the RPA, to allow the imposition of infringement notices in relation to the civil penalty provisions in this Act. An infringement notice is a written notice to pay a monetary penalty which is imposed on a person by a regulator, on the basis of an alleged contravention of a law. 172. Each civil penalty provision in this Act does not apply to conduct engaged in before the enforcement day. See the discussion at section 37. 32

173. Subsection 34(1) creates an ability for an infringement officer--the Regulator or someone appointed under subsection 36(1)--to impose infringement notices when they believe on reasonable grounds that a person has contravened a provision (subsection 103(1) of the RPA). 174. Under section 103 of the RPA, infringement notices must be given within 12 months after the day the alleged contravention happens, and a single infringement notice must relate only to a single provision. However, a single notice can be given for multiple contraventions if the Act requires a thing to be done by a particular time and the person fails to do that on more than one day. This means that it would be possible for an infringement officer to, for example, issue one infringement notice per day for every day a Payment Times Report is not submitted. 175. For example, a body corporate could be issued nine infringement notices for being nine days late in submitting a Payment Times Report. The amount of each infringement notice would be capped at either 60 penalty units per infringement notice or one-fifth of the maximum penalty units a court could impose, whichever amount is lower (s 104(2) of the RPA). The alternative option for the Regulator would be to issue one infringement notice covering all nine contraventions - the amount of this infringement notice would be calculated in accordance with s 103(3) of the RPA. 176. The reason why Part 4 of the RPA has been triggered is to provide for a standardised approach to regulatory powers across the Commonwealth. Infringement notices provide a cost effective and less administratively complex mechanism for the Regulator to enforce obligations under the Act, and they are particularly suitable for some contraventions where the nature and seriousness of the contravention may not justify initiating court proceedings. 177. Subsection 34(2) provides that the Regulator, or a person appointed under subsection 36(1), are infringement officers. An infringement officer has the power, if they reasonably believe that a provision of this Act has been contravened, to issue an infringement notice under section 103 of the RPA. 178. Subsection 34(3) provides that the Regulator acts as the chief executive for the provisions mentioned in subsection 34(1) for the purposes of Part 5 of the RPA. 179. Subsection 34(4) clarifies that Part 5 of the RPA, as it applies to the provisions mentioned in subsection 34(1) of this Act, applies to every external Territory. Section 35: Appointment of authorised officers 180. Subsection 35(1) provides the Regulator the power to appoint APS employees at the Executive Level 1 (EL1) or higher as authorised officers for the purposes of the Act. 181. A person appointed as an authorised officer under subsection 35(1) has powers under Parts 2 to 5 of the RPA. The reason this is limited to the EL1 level is because authorised officers exercise a wide range of powers, some of which are high volume and low complexity and which would be impractical to be exercised by someone at a higher designation. For example, investigative powers including searching premises, 33

taking photos, inspecting and making copies of documents, examining or measuring evidential material. 182. While some of these powers are more significant in nature (such as applying to a court for a warrant), other frameworks will limit the exercise of these powers to higher designations within the Department (such as the Public Governance, Performance and Accountability Act 2013, and the Legal Services Directions 2017). 183. An authorised officer, for the purposes of this Act, can exercise the powers of an 'authorised person' or an 'authorised applicant' under the RPA. The Regulator must not appoint someone as an authorised officer unless the Regulator is satisfied that the person has the necessary knowledge or experience needed to perform the role. This is intended to limit the scope of people who can exercise these powers to those who are qualified to do so. The authorised officers must comply with any directions given by the Regulator under subsection 35(3). 184. Subsection 35(4) is included to clarify that a written direction made under this section is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. Section 36: Appointment of infringement officers 185. Subsection 36(1) allows the Regulator to appoint an APS employee at the level of Executive Level 2 (EL2) or higher as infringement officers for the purposes of this Act. 186. A person appointed as an infringement officer under subsection 36(1) has powers under Part 5 of the RPA (see the discussion at section 34). If an infringement officer reasonably believes that a provision of the Act has been contravened, they may issue an infringement notice under section 103 of the RPA. Their name and contact details are required to be included on the infringement notice (paragraph 104(1)(d) of the RPA). 187. The reason this is limited to EL2 or higher is because infringement notices involve a high degree of discretion and are a significant form of enforcement action, involving the imposition of a penalty on reasonable grounds without Court involvement. In addition, someone must not be appointed an infringement officer unless the Regulator is satisfied they have the necessary knowledge or experience needed to perform the role. This is intended to limit the scope of people who can exercise these powers to those who have the necessary skills and experience to do so. The infringement officers must comply with any directions given by the Regulator (subsection 36(3)). 188. Subsection 36(4) is included to assist readers, and an instrument made under this provision is not a legislative instrument within the meaning of subclause 8(1) of the Legislation Act 2003. Division 4--Delayed compliance and enforcement powers Section 37: Delayed compliance and enforcement powers 189. Section 37 provides that there will be an 18-month period where compliance and enforcement powers will not apply to the obligations in the Act. 34

190. This is intended to allow time for reporting entities to become familiar with the Scheme without the threat of compliance and enforcement action while they are transitioning to the new arrangements. 191. The enforcement day is the day that the compliance and enforcement provisions will start to apply, and that day is 18 months after the commencement of the Act (subsection 37(2)). 192. Subsections 37(1) and (3) to (6) provide for the powers that do not apply before the enforcement day. These include the application of civil penalty provisions, publishing information regarding non-compliance, audit powers, monitoring and investigation powers. 35

Part 5--Protected information Division 1--Introduction Section 38: Simplified outline of this Part 193. Section 38 provides a simplified outline of this Part to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. 194. Note 1 provides that Division 2 constitutes an authorisation for the purposes of the Privacy Act 1988 and other laws (including the common law). It will also protect the entrusted person who uses or discloses the information from committing an offence under section 45 of the Act. 195. Note 2 refers the reader to the definition of use in section 5 of the Act, which provides that the term use, in relation to information, includes making a record of the information. Division 2--Authorised use or disclosure Section 39: Performing functions or exercising powers under this Act 196. Section 39 provides that an entrusted person who obtains protected information may use or disclose that information in performing functions or duties or exercising powers under the Act. The intention of this provision is to make it clear that protected information is only allowed to be disclosed or used for the purposes of this Act. 197. As defined in section 5, entrusted person means the Secretary, the Regulator, an APS employee in the Department, or any other person employed in or engaged by the Department. This definition establishes a cohort of persons to which Part 5 applies. 198. Protected information as defined in section 5 for the purposes of this Division refers to any information obtained under, or in accordance, with this Act. This would include, for example, information given under section 13 in a Payment Times Report. It may also include any information the Regulator obtains when making a determination under section 6 (ceasing to be a reporting entity) or section 13 (application for further time to give a report). 199. For example, this section will enable the Regulator who receives protected information in response to a reporting requirement under section 14 of the Act, to use that information for the purpose of administering the Act (for example, for publication on the Payment Times Report Register). Section 40: Policy development 200. Section 40 provides an entrusted person may use or disclose protected information to another entrusted person for the purposes of policy development. The intention is to allow the sharing of information for the purposes of developing related policies within the Department. Importantly, information may only be shared to another entrusted person and an entrusted person who is provided with information for this purpose will 36

commit an offence under section 46 of the Act if they engage in unauthorised use or disclosure of the information. Section 41: Proceedings etc. 201. Section 41 provides that an entrusted person may disclose protected information to a court, tribunal or coronial inquiry, or when required to do so by an order of a court, tribunal or coroner, for the purposes of proceedings before that court, or tribunal or for the purposes of a coronial inquiry. This is intended to make it clear that protected information can be disclosed if a court or other proceeding requires it. Section 42: Enforcement related activity 202. Section 42 provides a specific ground for an entrusted person to use or disclose protected information for the purposes of enforcement related activities, where the person reasonably believes that the use or disclosure is necessary for, or directly related to, enforcement related activities being conducted by, or on behalf of, that enforcement body. This is intended to make it clear that protected information received as part of, for example, administering this Act, may be disclosed to an enforcement body. 203. For example, a person who receives protected information may disclose the information to an enforcement agency if the person reasonably believes that it is reasonably necessary to do so for an investigation. The requirement for the person to have "reasonable belief" is an appropriate threshold test to ensure that information is protected while at the same time accessible for enforcement related activities. A reasonable belief will require both a subjective and an objective element. 204. Subsection 42(2) provides that an enforcement body that receives protected information may use or disclose the protected information for the purposes of conducting one or more enforcement related activities. Section 43: Information required by another Australian law 205. Section 43 provides that an entrusted person who obtains protected information may use or disclose the protected information when required to do so under an Australian law other than the Act. This is intended to make it clear that protected information received as part of, for example, the administration of this Act, may be disclosed if another Australian law requires that disclosure. Section 44: Person to whom information relates--disclosure and consent 206. Section 44 enables an entrusted person who obtains protected information to disclose protected information to the person to whom the information relates. This provision is intended to remove any doubt that such a disclosure is authorised and is not prevented by the disclosure regime that is set out in the Act. 207. Subsection 44(2) enables the first person who obtained the protected information to use or disclose the information if the person to whom the information relates expressly consents to the first person using or disclosing the information. 37

Section 45: Person who provided information 208. Section 45 will enable an entrusted person to disclose protected information to the person who provided the information. This provision is intended to remove any doubt that such a disclosure is authorised and is not prevented by the disclosure regime that is set out in the Act. Division 3--Unauthorised use or disclosure Section 46: Unauthorised use or disclosure Fault-based offence 209. Section 46 provides for a criminal offence where an entrusted person who has obtained protected information in the course of, or for the purposes of, performing functions or duties or exercising powers under the Act, uses or discloses that information in an unauthorised way. 210. The maximum penalty for contravening subsection 46(1) will be imprisonment for two years or a maximum penalty of 120 penalty units (or both). The level of the penalty is consistent with other similar Commonwealth offences. The penalty is intended to provide an effective deterrent to conduct that may result in the disclosure of protected information in circumstances that are not reasonable, necessary or proportionate. The penalty reflects the serious consequences for unauthorised use or disclosure of protected information. Exception for use or disclosure in good faith 211. Subsection 46(2) creates a defence to the offence in subsection 46(1), if the use or disclosure of protected information was done in good faith and in purported compliance with a provision in Part 5 of the Act or with the Rules. This is consistent with other Commonwealth protected information schemes. 212. A note to subsection 46(2) refers the reader to subsection 13.3(3) of the Criminal Code, providing that the defendant will bear the evidential burden in relation to this defence. The defendant bearing the evidential burden to make out their own defence is consistent with criminal law generally. 38

Part 6--Miscellaneous Division 1--Introduction Section 47: Simplified outline of this Part 213. Section 47 provides a simplified outline of the Act to help readers understand the substantive provisions. This simplified outline should not be taken as complete and readers should rely on the substantive provisions in the Act. Division 2--Treatment of certain kinds of entities Section 48: Treatment of partnerships 214. Section 48 clarifies how the Act applies to partnerships and how they are treated. This provision is necessary because a partnership is structured differently to a body corporate and it does not have its own separate legal personality. 215. Subsection 48(2) provides that any obligation that would otherwise fall on the entity is instead imposed on each partner and that obligations may also be carried out by any partner. 216. Subsection 48(3) outlines that civil penalty provisions of the Act are contravened by each partner who did, knew about, or aided, the act or omission. 217. Subsection 48(4) provides for the purposes of the Act, a change in the individual partners within the partnership does not affect the ongoing responsibility of the membership of the partnership. Section 49: Treatment of unincorporated associations or bodies of persons 218. Section 49 clarifies how the Act applies to unincorporated associations or bodies. This provision is necessary because an unincorporated association or body of persons is structured differently to a body corporate. 219. Subsection 49(2) outlines that any obligation that would otherwise fall on the entity is instead imposed on each member of the association's committee of management and that obligations under the Act may also be carried out by any member. 220. Subsection 49(3) outlines that civil penalty provisions of the Act are contravened by each member of the association's committee of management who did, knew about, or aided, the act or omission. Section 50: Treatment of trusts and superannuation funds and approved deposit funds that are trusts 221. Section 50 clarifies how the obligations in the Act apply to trusts and superannuation funds. 222. Trusts and superannuation funds or approved deposit funds that are trusts do not have legal personality. This provision is necessary to ensure that the obligations in the Act can be imposed on legal persons associated with those entities. Subsection 50(2) explains how obligations apply to an entity with a single trustee and subsection 50(3) applies to entity with two or more trustees. 39

Division 3--Reviewable decisions Section 51: Reconsideration and review of decisions 223. Section 51 sets out the decisions made by the Regulator under provisions of this Act that are subject to review. These are decisions regarding an entity ceasing to be a reporting entity, granting additional time to report or publication of an entity's non- compliance. Section 52: Application for reconsideration of reviewable decision 224. Section 52 provides that the Regulator must, in their written notice of a decision, include the reasons for the decision and information about the entity's rights of review. This ensures procedural fairness for the applicant and also is consistent with section 28 of the Administrative Appeals Tribunal Act 1975. 225. Subsection 52(2) provides the ability for a person whose interests are affected by a reviewable decision to apply in writing for the Regulator to reconsider the decision. It is intended that reconsideration by the Regulator is the first step in a requests for a decision to be reviewed. Allowing decisions to be reviewed internally by the Regulator provides reviews that are cost-effective, quick, and more accessible for applicants. 226. Under subsection 52(3) the applicant has 14 days from when they are notified of the decision to apply to the Regulator for a reconsideration of a decision. The application must explain the reasons why the applicant is requesting the decision be reconsidered. This enables the Regulator to understand the basis for the review and to respond to the specific grounds set out in the application. Section 53: Reconsideration of reviewable decision 227. Subsection 53(1) sets out the steps that the Regulator must take after receiving an application to reconsider a reviewable decision under section 52. 228. The Regulator must either personally reconsider the decision or assign it to a delegate who was not involved in making the decision and is at least the same designation as the original decision-maker, for reconsideration. The person who reconsiders the decision is known as the internal decision reviewer. 229. Under subsection 53(2), upon reviewing the decision, the internal decision reviewer must affirm the decision, or vary the decision, or set the decision aside and make a new decision. Under subsection 53(3) the internal decision reviewer must then inform in writing to the applicant of the reconsideration decision, including the date it will come into effect and why they came to their decision. 230. Under subsection 53(4) if the internal decision reviewer does not notify the applicant that it has made a reconsideration decision within 90 days after receiving the application, it is deemed to have affirmed the original decision. 231. Subsection 53(5) provides that the reconsideration decision is to be treated as a decision under the original provision that the decision was made under (other than for the purposes of section 52). 40

232. Subsection 53(6) provides that the Regulator must give a copy of an internal decision reviewer's decision as soon as practicable after it is made to the Secretary. The reason for notifying the Secretary is to provide transparency regarding the decisions of the Regulator. Section 54: Review by the Administrative Appeals Tribunal 233. Section 54 provides that an application may be made to the Administrative Appeals Tribunal (AAT) for a review of a reconsideration decision of an internal decision reviewer. This is intended to clarify that the AAT can only review an internal decision reviewer's decision, and not the original decision. Division 4--Other matters Section 55: Former reporting entities 234. Subsection 55(1) provides that reporting entities still have an obligation under section 12 of the Act to report if they have not yet provided a Payment Times Report for a reporting period, even if they have ceased to be a reporting entity since that period. This is intended to ensure that entities who cease to be a reporting entity after the end of a reporting period do not fail to provide their final report for the last reporting period in which they were required to report. 235. Example: Entity Peanut is a reporting entity for the income year 1 July 2026 to 30 June 2027. It has until 30 September 2027 to submit its Payment Times Report for the reporting period 1 January 2027 to 30 June 2027. Entity Peanut receives written notice from the Regulator that it has ceased to be a reporting entity on 10 September 2027. Even though from 10 September 2027 it has ceased to be a reporting entity, it is still required to submit a report for the period 1 January 2027 to 30 June 2027. 236. Subsection 55(2) provides for a number of other obligations that continue after an entity no longer meets the requirement to report. 237. The reason why these obligations continue is to ensure the integrity of the reports that are provided by the entity for the period they were required to report, despite not having to report thereafter. Section 56: Annual report 238. Section 56 provides that the Regulator will report annually on the operation of this Act, and the report will be included as part of the Secretary of the Department's annual report. This is an important accountability mechanism and provides the public and Parliament with information on the Regulator's performance. Section 57: Protection against civil liability 239. Section 57 protects the Regulator, their delegates, other APS employees, and the Commonwealth more broadly, from potential civil liability action arising from any actions taken or omitted in good faith, in the performance of their duties under the Act. The Act specifically provides immunity from actions for defamation, breaches of confidence or infringement of copyright. The purpose of this provision is to protect the 41

Regulator and their staff against personal civil liability where they are performing or exercising legislated requirements. 240. This is necessary because there are specific risks under this Act that actions done in compliance with the Act could be perceived as, for example, defamatory. For example, publication of non-compliance information under section 19, or publication of payment times reporting information that could be perceived as reflecting poorly on a reporting entity. This provision makes it clear that those who act in good faith in administering this Act are protected from these kinds of legal proceedings. Section 58: Rules 241. Section 58 provides the ability for the Minister to make Rules, in the form of legislative instruments that will be subject to consultation, tabled in Parliament and subject to disallowance, either because they are required or permitted by the Act, or because they are necessary and convenient to be prescribed for carrying out or giving effect to the Act. 242. The reason why a rule-making power is necessary is to allow the legislation to respond promptly and flexibly to changes in circumstances. 243. Apart from the restrictions at 58(2), this section enables the Minister to make rules which will provide substance to the operation of the Act. The matters which may be dealt with in Rules made under this section include, but are not limited to: a. any further information relating to the income year for the entity; b. any further information relating to the description of an entity; c. the meaning of a small business; d. additional information and accompanying documents required in an application for an entity to be determined as, and cease being, a reporting entity; e. information to be included in an application to the Regulator to extend time to submit a Payment Times Report; f. the required information and documents to be included in a Payment Times Report including details on supply chain financing arrangements; g. information on the types of small business invoices to be included when calculating payment times; h. information relating to decisions of the Regulator to not publish certain information; and i. additional functions of the Regulator. 244. These matters are dealt with in the Rules, rather than regulations, in accordance with the Office of Parliamentary Counsel's Drafting Direction No. 3.8--Subordinate legislation. That Drafting Direction states that 'OPC's starting point is that subordinate instruments should be made in the form of legislative instruments (as distinct from regulations) unless there is good reason not to do so'. 245. Consistent with the Drafting Direction, the approach of dealing with these matters in rules (rather than regulations) has a number of advantages including: 42

a. it facilitates the use of a single type of legislative instrument (or a reduced number of types of instruments being needed for the Act; and b. it enables the number and content of the legislative instruments under the Act to be rationalised; and c. it simplifies the language and structure of the provision in the Act that provide the authority for the legislative instruments; and d. it shortens the Act. 246. Due to these advantages, the Drafting Direction states that drafters should adopt this approach where appropriate with new Acts. 247. The Drafting Direction states that matters such as compliance and enforcement, the imposition of taxes, setting amounts to be appropriated, and amendments to the text of an Act, should be included in regulations unless there is a strong justification otherwise. This Act does not enable rules to provide for any of these matters. This is clarified by subsection 58(2) that specifically prevents rules from including these types of matters. 248. This section also clarifies that rules made under section 58 are a legislative instrument for the purposes of the Legislation Act 2003. Under that Act, legislative instruments and their explanatory statements must be tabled in both Houses of the Parliament within 6 sitting days of the date of registration of the instrument on the Federal Register of Legislation. Once tabled, the rules will be subject to the same level of parliamentary scrutiny as regulations (including consideration by the Senate Standing Committee for the Scrutiny of Delegated Legislation), and a motion to disallow the rules may be moved in either House of the Parliament within 15 sitting days of the date the rules are tabled. 249. Subsection 58(3) specifies that the definition of a small business in the rules may apply, adopt or incorporate any matter in an instrument or writing from time to time. It is envisaged that this will be necessary if, for example, a list of small business suppliers who meet the definition of having an annual total income of $10 million is incorporated into the Rules, and that list changes from time to time as small businesses are created or shut down. 250. Using the example of a list, the intention would be to reduce the regulatory burden on reporting entities by them having to cross-check their systems to determine which of their suppliers is a 'small business' as the document incorporated by reference could serve as a definitive source of information about this. Such a list would be subject to change frequently, and it would not be practical to draft a rule every time this list was updated. The ability to incorporate such a document "from time to time" gives reporting entities continuity of their obligations by ensuring the list (for example) is up to date, and so they can be certain about their obligations and rights under the Act. 43

PAYMENT TIMES REPORTING (CONSEQUENTIAL AMENDMENTS) BILL 2020 NOTES ON CLAUSES Section 1: Short title 251. Section 1 is a formal provision specifying the short title of the Act as the Payment Times Reporting (Consequential Amendments) Act 2020. Section 2: Commencement 252. The table in Section 2 sets out the commencement dates for when the provisions of this Act commence. 253. Sections 1 to 3 will commence on the day the Act receives Royal Assent. 254. The consequential amendments to the Taxation Administration Act 1953 contained in Part 1 of Schedule 1 commence at the same time as the Payment Times Reporting Act 2020, but will not commence at all if the that Act does not commence. 255. This will ensure that the amendments to the Taxation Administration Act 1953, which allow the Commissioner of Taxation to disclose information to the Payment Times Reporting Regulator, will only commence at the same time as the Payment Times Reporting Act 2020 commences. 256. The contingent amendments to the Payment Times Reporting Act 2020 contained in Part 2 of Schedule 1 commence immediately after both the main Act and the Federal Circuit and Family Court of Australia Act 2020 commences, whichever is later. Section 3: Schedules 257. This section gives effect to the provisions in the Schedules to this Act. 44

Schedule 1--Amendments Part 1--General amendments Taxation Administration Act 1953 Item 1: Subsection 355-65(8) in Schedule 1 (after table item 3) 258. This item inserts a new subsection in Schedule 1 of the Taxation Administration Act 1953 to allow the Commissioner of Taxation to disclose certain tax information to the Payment Times Reporting Regulator. This amendment will allow information relating to whether an entity is a reporting entity to be disclosed to the Regulator for the purposes of administering the main Act. 259. This information will assist the Regulator in identifying entities that will be required to report and is essential to the administration and operation of the new Scheme. Item 2: Application of amendments 260. This item makes clear that these amendments apply to records and disclosures of information made at or after its commencement, whether the information was obtained previously, at or after the commencement of the amendments. Part 2--Contingent amendments Payment Times Reporting Act 2020 Items 3 to 5: Section 5 (definition of Federal Circuit Court); Section 5 (paragraph (b) of the definition of issuing officer); and Section 5 (paragraph (b) of the definition of relevant court) 261. These items make a number of minor consequential amendments to the Payment Times Reporting Act 2020 to reflect changes being made as part of the Federal Circuit and Family Court of Australia Bill 2019. These changes will bring together the Family Court of Australia and the Federal Circuit Court of Australia to be known as the Federal Circuit and Family Court of Australia. 262. These amendments will be enacted after the commencement of the Payment Times Reporting Act 2020 and the Federal Circuit and Family Court of Australia Act 2020. 45

Payment Times Reporting Scheme Regulatory Impact Statement OBPR ID: 24466 4 May 2020 Supporting economic growth and job creation for all Australians | industry.gov.au

Copyright © Commonwealth of Australia 2020 Ownership of intellectual property rights Unless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Commonwealth of Australia. Creative Commons licence Attribution CC BY All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, save for content supplied by third parties, logos, any material protected by trademark or otherwise noted in this publication, and the Commonwealth Coat of Arms. Creative Commons Attribution 4.0 International Licence is a standard form licence agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from https://creativecommons.org/licenses/by/4.0/ The full licence terms are available from https://creativecommons.org/licenses/by/4.0/legalcode Content contained herein should be attributed as Report title, Australian Government Department of Industry, Science, Energy and Resources. ISBN: (add if required) Disclaimer The Australian Government as represented by the Department of Industry, Science, Energy and Resources has exercised due care and skill in the preparation and compilation of the information and data in this publication. Notwithstanding, the Commonwealth of Australia, its officers, employees, or agents disclaim any liability, including liability for negligence, loss howsoever caused, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon any of the information or data in this publication to the maximum extent permitted by law. No representation expressed or implied is made as to the currency, accuracy, reliability or completeness of the information contained in this publication. The reader should rely on their own inquiries to independently confirm the information and comment on which they intend to act. This publication does not indicate commitment by the Australian Government to a particular course of action. Payment Times Reporting Scheme RIS industry.gov.au 1

Contents Payment Times Reporting Scheme .................................................................................................. 0 Copyright .......................................................................................................................................... 1 Disclaimer......................................................................................................................................... 1 Contents ........................................................................................................................................... 2 Executive Summary.......................................................................................................................... 4 Background ...................................................................................................................................... 5 Long payment times from large to small businesses are a significant problem for Australian small businesses ........................................................................................................................................ 7 Long and late payment times negatively impact small business performance ............................... 8 Longer payment times also have negative economy-wide impacts ................................................ 9 Long payment times have a disproportionate impact on small businesses compared to large businesses ........................................................................................................................................ 11 There is an economic imperative for government action to improve payment times for small businesses in the near term ............................................................................................................. 12 Reducing payment times to small businesses would relieve constraints on small businesses' growth ......................................................................................................................................................... 15 Without Government intervention, payment times from large to small businesses are unlikely to materially improve ........................................................................................................................... 15 Market power asymmetries make it unlikely that payment times will improve without intervention ......................................................................................................................................................... 15 Voluntary efforts have made some progress, but their impact is limited by low take-up .............. 15 There are two policy options to reduce the length of payments from large to small businesses .. 17 Policy option 1: Business-as-usual ................................................................................................... 17 Policy option 2: Mandatory payment times reporting scheme for large businesses using a Small Business Identification Tool, with reporting at the entity level for individual entities and groups 18 Comparing the net benefits of the two policy options .................................................................... 19 Transferring capital from large to small businesses has a net economic benefit ........................... 19 Risks associated with the policy options.......................................................................................... 30 Consultations undertaken on this issue ........................................................................................... 31 The preferred option is the introduction of a Payment Times Reporting Scheme ......................... 33 The reporting scheme will have an effective implementation, compliance and evaluation program ......................................................................................................................................................... 35 Implementation overview................................................................................................................ 35 Payment Times Reporting Scheme RIS industry.gov.au 2

Appendix A - Administrative cost estimations ................................................................................ 39 Policy option 2 - Requiring entity-level reporting ........................................................................... 39 Payment Times Reporting Scheme RIS industry.gov.au 3

Executive Summary The Commonwealth Government has prioritised improving payment times from large to small business. This follows evidence that long and late payment times have a significant and negative impact on small businesses, and both governments and large businesses can improve their payment practices towards small businesses. On 21 November 2018, the Prime Minister announced the policy objective to improve payments times for small businesses. By January 2019, officers from the former Department of Employment, Skills, Small and Family Business and now part of the Department of Industry, Science, Energy and Resources (the Department), working in close consultation with stakeholders, commenced work to design the scheme. The policy design drew from analysis of comparable schemes in Australia and overseas, innovative data analysis on the prevalence of long and late payments to small business, and modelling of the economic impact of long and late payment times. The stakeholder consultation process was used to better understand issues related to payment times and to test preliminary policy options including a payment times reporting scheme. As part of this process, the Department directly engaged with businesses through expert working groups from industry and government, a discussion paper, multiple workshops and an online forum for small businesses. Following the initial policy design and stakeholder consultation phase, the Government reaffirmed its support for the policy by making an election commitment to improve payment times for small businesses. The election commitment stated the Government would require large businesses with a turnover of over $100 million to publish their payment information.1 The Department has since worked to build a detailed design of the framework, consult further with stakeholders, and develop an implementation and evaluation plan. Later phases of stakeholder consultations involved one on one interviews and meetings, additional workshops, second discussion paper, an expert industry advisory group and a small business survey. Across all consultation phases, a total of more than 400 organisations were consulted, spanning large and small businesses, industry associations, corporate government entities, and policymakers. Drawing on the findings of this work, the Department has developed draft model legislation to establish the scheme. An Exposure Draft of the Payment Times Reporting Bill was released on 21 February 2020 for public comment. This legislation is proposed for introduction in the 2020 autumn sitting of Parliament. This Final Assessment Regulation Impact Statement (RIS) presents the next stage in the development of the scheme. It builds upon the findings of these consultations and sets out additional evidence to support government intervention and further policy options that will refine its design of the scheme to better meet policy objectives. The RIS finds that long payment times from large to small businesses are a significant issue in Australia. In 2017-18, payments from large to small businesses were worth around $281 billion, with around $77 billion of payments paid later than 30 days.2 1 Coalition Government (2019), Backing Small Business Policy Statement 2 Small businesses are defined using the ABS definition, i.e. businesses with less than 20 employees. For 2017/18, this accounted for 2,182,065, although only a portion would hold trade credit with large businesses. Payment Times Reporting Scheme RIS industry.gov.au 4

As it stands, long payments times have significant and negative impacts to small businesses and the supply chains they operate within.3 Longer payment times place pressure on small businesses' cashflow, revenue and financing as they extend the period between a small business incurring the costs of producing a good or service and being paid for it. Longer payment times to small businesses produce flow-on effects throughout the economy with smaller firms paid more slowly and therefore paying their own suppliers later. The cashflow and financing pressures that arise from longer payment times in turn constrain small businesses' ability to hire, invest and grow - and are associated with higher bankruptcy and exit rates. These constraints are more significant to small businesses versus larger businesses, as smaller businesses are more likely to be credit-constrained and pay higher interest rates on financing compared with larger businesses. According to ABS data, these barriers are most impactful for innovative, fast-growing smaller businesses, who are critical to job creation, innovation and economic growth. This dynamic means that reducing payment times from large to small businesses, which is the equivalent of transferring working capital from large to small businesses, has a net economic benefit. Economics consulting firm AlphaBeta analysed over 10 million invoices from more than 76,000 firms that use Xero accounting software and concluded that if all large businesses in Australia paid small businesses in 30 days, it would be the equivalent of transferring an estimated $7 billion in working capital from large to small businesses. The difference in the cost and ability to access financing between large and small businesses, means that normalising 30 day payment times from large to small businesses produces a net benefit to small businesses of $522 million per year and $4,319 million over 10 years. It creates an estimated overall net benefit to the Australian economy of $313 million a year and $2,591 million over 10 years. While there is a net economic benefit associated with improving payment times from large to small businesses, this RIS concludes that marked improvement is unlikely without government action. That is because small businesses lack the market power to negotiate better payment terms and times, large businesses have little incentive for improvement, and voluntary efforts to date, whilst effective at the company level, have had limited take-up by Australia's approximately 3,400 largest businesses.4 The RIS identifies two policy options to incentivise improved payment times and practices, the cost of introducing a reporting scheme against the status quo and the net benefits of each option. Overall, it concludes that payment times are a significant problem for small businesses, and that a carefully designed reporting scheme which incentivises large businesses to improve payment times to small businesses would have a net benefit for the economy and for small businesses. Background In recent years, the Commonwealth Government has prioritised improving payment times from government agencies and large businesses to small businesses. The prioritisation of this issue followed findings from two inquiries into Payment Times and Practices, prepared by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), 3 Long payments are defined as payments made 30 days or more after the invoice data 4 Data provided by the ATO Payment Times Reporting Scheme RIS industry.gov.au 5

released in April 2017 and April 2019, which found payment times were an issue for small businesses. The need to act has been recognised by large businesses, with the Business Council of Australia (BCA) spearheading the introduction of a voluntary Australian Supplier Payment Code relating to payment times between large and small businesses. The Commonwealth Government has also introduced a number of measures to improve payment times to small businesses. The Government has shortened its own payment times for small businesses to 20 days and has committed to requiring large businesses seeking government contracts to do the same. The Government is also reporting on its own payment time performance to small businesses. Further, it introduced legislation to support e-invoicing, and to offer five day payment terms for contracts up to $1 million where both the government agency and lead contractor use e-invoicing. However, while these efforts are welcome, after consideration of ASBFEO's April 2017 report on payment times, the Commonwealth Government determined that more could be done to accelerate improvement in payment times to small businesses. Accordingly, the Commonwealth Government announced on 21 November 2018 that it would introduce a national large business reporting scheme to encourage fairer, faster payment times and terms for small businesses. Large businesses were defined as those with $100 million or more in annual turnover. The Department subsequently commenced a stakeholder consultation and policy design process into small business payment times in January 2019 that is ongoing. This work has informed the evidence base presented in this RIS. The objectives of the policy design and consultation process were to better understand issues related to payment times, and to test the design of the payment times reporting scheme. Stakeholder consultation has been conducted in three phases. It has sought feedback from a broad base of stakeholders, including over 400 large businesses, small businesses, corporate government entities and policymakers. Multiple consultation channels have been used, including expert working groups, public workshops, an online forum, one-on-one meetings, a small business survey and discussion papers. A subsequent Exposure Draft of the Payment Times Reporting Bill 2020 and an associated consultation paper were released on 21 February 2020. Thirty three submissions were received in response to the draft legislation. This RIS reports on the findings of that work, as well as independent modelling and policy research that has been commissioned to explore the election commitment and its costs and benefits. It starts by discussing the extent of a payment time problem for Australian small businesses and how payment length impacts small business performance and the broader economy. It then considers whether there is a case for government intervention, two policy options that could be considered to incentivise or mandate improved payment times and the net benefits of each option. Overall, it concludes that payment times are a significant problem for small businesses, and that a carefully designed reporting scheme to incentivise large businesses to improve payment times to small businesses would have a net benefit for the economy and for small businesses. Payment Times Reporting Scheme RIS industry.gov.au 6

Long payment times from large to small businesses are a significant problem for Australian small businesses Long payment times are a significant and costly issue for Australian small businesses offering trade credit. Trade credit is the practice of paying for goods and services after the date an invoice is issued. It is a common part of business transactions and accounts for a significant portion of trade flows within a modern economy. However, problems arise when trade credit payments extend beyond 30 days, or payments are made late. Analysis of long payments using anonymised and aggregated Xero Small Business Insights data from the 2017-18 financial year illustrates the extent of the problem. When data from 10 million invoices received or issued by 76,817 firms was analysed, it revealed 36 per cent of trade credit payments to small businesses take longer than thirty days to be paid. When payments are made in over 30 days, they take on average 63 days to be paid. Around 13 per cent of trade credit payments take more than 60 days to be paid. Australian small and medium businesses receive $281 billion per annum in income from large businesses, of which 77 per cent, or $216 billion, are made on trade credit. Assuming large businesses payment times are the same as the average for all businesses, each year $77 billion in payments to small businesses from large businesses take more than a month to be paid.5 Xero data shows that small businesses are also impacted by late payments. These are payments made later than the invoice due date. Fifty-three per cent of trade credit payments are paid late, and when paid late, are on average 23 days overdue. This means payments worth $115 billion a year from large to small businesses are paid late. A survey conducted by the ASBFEO also found evidence that late payments are hurting small businesses. In a survey of 2,783 businesses6 from December 2016 - February 2017, all respondents had experienced late payments in the prior financial year. More than half of respondents said that at least 40 per cent of their invoices were paid late. Forty-eight per cent respondents claimed late payments were on average over 30 days late. Further, one in two businesses had $20,000 in late payments owing to them, and 1 in 4 had payments over $50,000 owing to them. Twelve per cent of small businesses spent more than 6 hours chasing late payments a week. The ASBFEO undertook a second online survey of 2,500 small businesses in 2019. Just over half the respondents to the survey reported that 40 per cent or more of their invoices were paid late. Invoices were more likely to be paid late where the supplier had shorter (e.g. 30 day) payment terms, underscoring that shorter payment terms alone are insufficient to drive a change in practice.7 This is also emerging evidence of other payment practices that may adversely impact small businesses. ASBFEO has been examining the practice of large businesses offering supply chain 5 Large business payment times are typically longer than the average, reflecting large businesses greater market power. This estimate may also understate the problems as the Xero figures on trade credit include payments from consumers as well as businesses, and consumers are more likely to pay faster than businesses 6 The ASBFEO survey had 2,783 businesses with 2,597 satisfying the ABS definition of a small business 7 ASBFEO (2019), Review of Payment, Terms, Times and Practices Payment Times Reporting Scheme RIS industry.gov.au 7

financing (SCF) to small business suppliers. This practice most commonly involves a small business being paid earlier than the official payment term of a contract by a third party financier. This is done in exchange for the small business paying interest on the earlier payment, effectively reducing the amount they are paid. ASBFEO has found that "Many large businesses extend payment terms and times and then offer SCF which has a severe impact on small business where these longer payment terms and times apply and SCF must then be used to bring payment terms back within 30 days".8 Long and late payment times negatively impact small business performance Numerous studies and surveys have found that longer payment times negatively impact small business performance (see Exhibit 1). Impacts include disruption to hiring due to uncertain cashflow, a need to source additional financing, constraints on investment and therefore business growth, and a greater risk of insolvency in the case of already capital constrained firms. Exhibit 1 Studies also show long or late payment times negatively impact key areas of small business performance at the firm level Intrium ACCA YouGov & ACI Tungsten Justitia BACS Basware ASBFEO Graydon member Worldwide (2015, (2018, (2017) (2018, (2017, (2012, Area Why impacted survey -2015 (2016, n=100) n=1000) n=9600) n=2036) n=2679) n=498) Businesses require - - - additional 25% 53% 57% 29% financing to Used Needed Needed to Increase in overcome long or overdrafts personal funds borrow or bank fees Financing late payment in use credit from being times response cards overdrawn Disruptions in - cashflow can 54% 17% 21% 15% 18% 22% 17% affect decisions to more likely to Negative impact Unable to Affected Stopped Impacts Delayed retain or hire limit on salaries, hire staff staffing or recruitment salary hiring staff employment recruitment and bills payments Hiring people than a large expense & 13% business reimbursement let go of staff Disruptions to - - - cashflow can 47% 10% 28% 49% 23% impact investment more likely to Affected Hindered Stated Delayed decisions and limit capital investment in growth limits growth and subsequent expenditure equipment, growth of introduction growth than a large research, business of services Investment/ business product growth development Already capital- - - constrained SMEs 29% 23% 24% 25% 35% 16% may risk Said faster Risked Threat to Financial Increased Almost put insolvency through payments are insolvency survival viability was at risk of company out Insolvency poor payments crucial risk insolvency of business risk to success Source: ACCA Global Member survey, ACI & YouGov, Tungsten, Intrium Justita European Payment Report, BACS Q1 Report, Bas & YouGov Effect of Late Payments on Productivity 2018, ASBFEO Payment Times and Practices WP3 2017, Graydon Research on Payment Culture 2012 Analysis of Xero data shows that small firms that are paid later than average have lower revenue growth compared to firms paid faster than average (see Exhibit 2). 8 https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-SCF-position-paper.pdf Payment Times Reporting Scheme RIS industry.gov.au 8

Exhibit 2 Longer payment times also have negative economy- wide impacts Studies from Australia and overseas have also observed that payment times impact employment, growth, investment and insolvencies at the wider economy level. A 2018 study9 from the United States (US) evaluated the impact of the US Government paying small businesses 15 days faster, and the subsequent effect on firm employment. It found that for payments made 15 days faster, 10 per cent went to additional payroll spend, correlating with $6 billion increase after three years from a $64 billion procurement spend on small businesses. Another study from the US observed the impact of payment times on small business investment and growth.10 They found a 30-day delay in payments can reduce capital expenditure by 1.2 per cent to 2.1 per cent, which increases if bank credit is tight. A separate study11 on the high use of trade credit in economies and the effect of passing on financial distress was estimated to lower GDP by at least 0.4 per cent in the US and up to 2.3 per cent in recession years. 9 Barrot, J.N. & Nanda, R. (2018) The Employment Effects of Faster Payment: Evidence from the Federal QuickPay Reform, Harvard Business School Entrepreneurial Management Working Paper 10 Murfin, J. & Njoroge, K. (2015) The Implicit Costs of Trade Credit Borrowing by Large Firms, The Review of Financial Studies, Volume 28, Issue 1 11 Boissay, F. (2006) Credit Chains and the Progression of Financial Distress, ECB Working Paper No. 573 Payment Times Reporting Scheme RIS industry.gov.au 9

Studies from the European Union, which has trialled multiple interventions to improve payment times, have observed a relationship between insolvencies and payment times. One study from the EU found that removing late business to business payments would reduce firm exit rates by 2.8 per cent to 3.4 per cent in the worst paying EU member states.12 A second study in France examining the introduction of 30 day payment terms in the transport industry found that corporate insolvencies decreased by 25 per cent, focused on liquidity-constrained firms and also triggering an increase of entry of small firms.13 In Australia, analysis of Xero data shows that small business payment times are transmitted through supply chains, as small businesses pass on to their suppliers the payment times they receive.14 For example, small businesses paid faster than the average pay their own suppliers eight days faster than small businesses paid more slowly than the average (see Exhibit 3). Exhibit 3 12 Conell, W. (2014) Economic Impact of Late Payments, European Economy - Economic Papers, Directorate General Economic and Financial Affairs, European Commission 13 Barrott, J.N. (2015) Trade Credit and Industry Dynamics: Evidence from Trucking Firms, The Journal of Finance, Volume 71, Issue 5 14 Results from 241,967 observations for FY15-FY17 using data from Xero Small Business Insights. Performance of each year of the business was grouped into those above and below the average days taken to receive payments, and compared to the average time taken to pay their accounts payable. Payment Times Reporting Scheme RIS industry.gov.au 10

Long payment times have a disproportionate impact on small businesses compared to large businesses Long payment times place pressure on small businesses' cashflow and financing as businesses need to finance the period between paying for the cost of producing goods and services and being paid for the work. This is most problematic for small businesses because small businesses are already credit constrained. Credit constraints refer to difficulties in accessing capital, such as having a limited stock of capital to draw from or requiring a high price to access capital. Smaller businesses find it harder to access financing versus larger businesses (see Exhibit 4). Small businesses are more likely to be refused credit and face higher costs to borrow when they do access it. Their more volatile cashflow, lower levels and quality of collateral assets, and more limited information about their business, make it harder to pass credit risk assessments and to secure loans. Their small size and lower bargaining power means they have less ability to negotiate lower fees. Cashflow pressures on small businesses are likely to be amplified by the twin impacts of the 2019-20 bushfires and spread of the COVID-19 disease. Both events are expected by the Australian Treasury to create economic shocks at the regional and national level, with the impact of COVID-19 alone forecast to take at least half a percentage point from Australia's GDP in the March 2020 quarter.15 Exhibit 4 15 Dr Steven Kennedy (2020) Opening Statement - March 2020 Estimates Payment Times Reporting Scheme RIS industry.gov.au 11

Consequently, small businesses are more likely to rely on non-bank sources of financing, which come at higher costs (see Exhibit 5). Exhibit 5 There is an economic imperative for government action to improve payment times for small businesses in the near term Acting now to trigger payment time improvements for small businesses is important because small businesses have faced a lengthy period of constrained credit and lower investment growth. Australian small businesses have faced increasing difficulty accessing bank financing, and a greater cost to access it, over the past decade. The cost of lending to small businesses has increased relative to large business lending costs (see Exhibit 6), as the differential between the weighted-average interest rate on credit outstanding between small and large business changed from 0.82 to 2.11 from 2008 - 2020.16 This is partially because access to riskier, unsecured loans (which small businesses are more likely to rely upon) has become more expensive. 16 RBA Statistical tables - F5 Lending Rates Payment Times Reporting Scheme RIS industry.gov.au 12

Exhibit 6 Credit has also been getting more expensive for small businesses relative to large businesses since the GFC Credit rates for small and large businesses Weighted-average interest rate on credit outstanding Small business Differential Interest rate (%) Large business 12 10 10.15 9.08 8 6 5.20 4 3.09 x2.6 2 0.82 2.11 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Date After 2008, the increasing reluctance of banks to issue small business credit was evident from the increasing differential in the cost to access finance for a small and large businesses, rising from an initial 0.8% to the current 2.11% differential. Source: RBA Lending rates Small businesses have also increasingly had to use real estate, such as their home, as collateral.17 A reliance on real estate hampers small business financing in multiple ways:  It increases the risks for small businesses and requires them to mix in their personal assets to improve their financial position;  It provides a natural limit on lending once a business has pledged all their real estate as collateral, which can impinge growing firms; and  It is not appropriate for smaller loans for day-to-day activities. Reliance on real estate for collateral also means small business lending is sensitive to changes in house pricing and ownership rates - which have been variable in recent times.18 The Council of Financial Regulators have highlighted this as a potential issue in Australia's credit market, noting the risk that the heavy reliance on personal finances and real estate could potentially inhibit small business financing.19 Long payment times and lack of access to capital are also associated with lower investment by small businesses. Stimulating small business investment is important because investment by small business has stagnated, particularly by comparison to larger firms (see Exhibit 7). Since 2010, small business investment has dropped by 36 per cent, whilst large business investment has increased by 32 per cent. 17 Connolly, E. & Bank, J. (2018) Access to Small Business Finance, RBA Bulletin - September 2018 https://www.rba.gov.au/publications/bulletin/2018/sep/access-to-small-business-finance.html 18 Ownership rates have been down a third over the past 25 years for those aged 25-34, which is the key entrepreneurial period of life (Productivity Commission 2018) 19 March Quarterly Statement by the Council of Financial Regulators - https://www.cfr.gov.au/news/2019/mr- 19-01.html Payment Times Reporting Scheme RIS industry.gov.au 13

Exhibit 7 Innovative small and medium businesses, who are particularly important to job creation and growth, are most affected by longer payment times and constrained access to finance. According to ABS data, innovation active micro and smaller firms are twice as likely to claim payment times as hindering business survival than non-innovation active firms. Small businesses in Australia are also twice as likely as large business to claim access to finance as a barrier to business growth.20 Table 1: Proportion of businesses whose reason for seeking finance was to ensure survival of business, by innovation type Firm size Innovation-active Non-innovation active Total Micro (0-4 employees) 30.0% 33.6% 31.5% Small (5-19 employees) 32.1% 25.3% 29.9% Medium (20-199 employees) 12.3% 8.9% 11.7% Large (200+ employees) 3.6% 4.9% 3.9% Source: ABS 8167.0 Characteristics of Australian Businesses, 2017-18 - Finance and business competition 20 ABS 8167.0 Selected Business Characteristics Payment Times Reporting Scheme RIS industry.gov.au 14

Reducing payment times to small businesses would relieve constraints on small businesses' growth Long payment times from large to small businesses are a significant issue in Australia with an estimated $77 billion of payments paid later than 30 days each year. Reducing payment times would relieve pressure on small businesses' cashflow, revenue and financing. This in turn would give credit- constrained small businesses' greater access to capital, which they could use to pay down debt, or to hire, invest and grow. This is particularly important in the case of innovative, fast-growth smaller businesses who are most impacted by longer payment times and difficulty accessing finance. Without Government intervention, payment times from large to small businesses are unlikely to materially improve Government intervention is needed to improve or incentivise shorter payment times for small businesses because of the significant and negative impact long payment times have on small businesses. Marked improvement in payment times without government action is unlikely because small businesses lack the market power to negotiate better payment terms and times, large businesses have little incentive for improvement, and voluntary efforts to date have had limited take-up by large businesses. Market power asymmetries make it unlikely that payment times will improve without intervention A key issue in relying on a market driven approach to improving payment times is the fundamental asymmetries in market power between small and large businesses. Small businesses have limited bargaining power relative to larger firms, which means small firms typically accept the terms of large customers, rather than setting them. In an ASBFEO survey of small businesses, 34 per cent of small firm respondents stated they were never able to influence faster payment times set by larger customers. A further 29 per cent reported they could rarely influence them. A second issue with relying on a market driven approach is that large businesses have a financial disincentive to reduce payment times. When a business customer takes longer to pay a supplier, it improves the working capital position of the business customer at the expense of the supplier. This is because the amount owed to the supplier is held by the customer in its accounts payables thereby increasing the working capital available to a business to use. It is a financially rational strategy for a customer to avoid paying sooner than required. In a situation where there is an asymmetry in the bargaining power of the supplier and customer, as with small and large businesses, there is neither the financial incentive nor financial pressure for the large customer to pay more promptly. Voluntary efforts have made some progress, but their impact is limited by low take-up A string of voluntary efforts to improve payments times by large businesses have been trialled for over two years in Australia. These efforts have been genuine, and they have led to some real improvements in payment practices. However, their overall impact has been limited because the vast majority of large businesses have failed to participate in them. Payment Times Reporting Scheme RIS industry.gov.au 15

Voluntary and mandatory measures trialled by governments and the private sector to improve payment times include:  The introduction of the BCA's Australian Supplier Payment Code  The introduction of a National Payment Times Reporting Register by ASBFEO  Federal and state government mandating maximum payment times for certain government agencies to small businesses, and mandatory reporting of payment times. While these measures have improved payment practices and payment transparency, their impact has been limited by the low participation by large businesses due to their voluntary nature, or their policies focus on government agency payment time. This means despite these efforts, average payment times and the frequency of late payments to Australian small businesses have not improved in the last five years. Analysis21 of Xero data over the past five years indicates that the average payment time in Australia has marginally increased, from 25.1 days in FY2014 to 25.5 days in FY2018. The BCA's Australian Supplier Payment Code has been in place for almost three years and has attracted over 120 signatories. However, currently there are only around 80 large business signatories out of the 120 signatories, and out of approximately 3,40022 large firms in Australia.23 Evidence from the UK, which has implemented an equivalent code for more than a decade, is that even with more time, the rate of new signatories unlikely to exceed 5 percent per annum, and the majority of large businesses will not sign. The UK's Prompt Payment Code's received its first signatory in 2009. After a decade of government-backed support, only around of 10 per cent of businesses in the recently implemented UK Payment Practices and Performance Reporting scheme identified that they were a code signatory.24 This is despite greater public scrutiny and members of the UK Government publicly backing the code, previously calling businesses to sign-up or be name- and-shamed as non-signatories. The ASBFEO National Payment Transparency Register also demonstrates voluntary reporting is likely not a viable to drive widespread improvement in practice. The National Payment Transparency Register was established in December 2017. It encourages businesses to report their payment performance voluntarily and for this information to be published. However, only 29 large firms had signed-up to the ASBFEO register by mid-2019. Firms that have registered were already good performers, with all but four of the signatories paying within 30 days. This highlights a second issue with voluntary measures, which is that they are more likely to be taken up by good actors. This means the firms with the poorest practices do not improve. Commonwealth and state governments have also mandated better payment times for small businesses by government agencies and started reporting on payment times. These measures have had impact in improving payment times according to government reporting. However, they have had no discernible impact on large business practices as they are not covered by the scheme. Further, large businesses experience no competitive pressure to improve from public sector changes in practices. 21 Results are the average receivable days on trade credit for 83,380 firms for years FY14-FY18, after removing for extreme values. Data used is from Xero SBI 22 Based on the total number of businesses identified by the ABS as being required to report under this scheme. 23 At time of writing, there were 124 signatories in total. ~80 appear on the ATO Corporate Tax transparency report, or were otherwise able to be identified as a large business, which shows approximately the largest 2,200 firms in Australia and is taken as an approximation of the expected group of large businesses 24 Measured by whether a business indicated they were signatory to a code in their first report to the UK Payment Practices and Performance Reporting requirements Payment Times Reporting Scheme RIS industry.gov.au 16

For these reasons, evidence from Australia and overseas shows that without government intervention, there is unlikely to be a significant improvement in the number of large businesses paying small businesses faster and on time. There are two policy options to reduce the length of payments from large to small businesses The RIS considers two broad options to address the issue of payment times in Australia. The first is to continue with a business-as-usual approach, and the second is to introduce a payment times reporting scheme for large businesses. The RIS only considers two broad policy options because introducing the payment times reporting scheme was an election commitment of the Government. The commitment was made following a number of extensive reviews of the issue of payment times to small business in Australia, which canvassed a variety of solutions to improve payment times. All of these reviews concluded introducing a reporting scheme was the preferred policy response, compared with not acting, or having the government intervene to pass legislation regulating core business decisions, such as payment terms and times without first trialling a less severe option. The status quo or business as usual (BAU) option relies on voluntary measures that do not require government intervention, such as continuing to rely on the voluntary BCA Supplier Code and other sector specific codes, and the ASBFEO National Payment Transparency Register. There is no voluntary option beyond the BAU scenario because a number of voluntary options are already in place, including a national voluntary code of practice, sector level codes of practice, and a national voluntary reporting scheme. There are no more additional, meaningful voluntary actions that could be taken to try and improve payment times in Australia. Moreover, evidence from the UK suggests that even over ten years, the rate of take-up of the key voluntary initiative, an industry supplier code, remained stable despite multiple attempts to accelerate it. It did not result in more than 10 per cent of large businesses signing-up to the scheme in a decade. Each option is assessed based on its ability to address the aim of improving payment times from large to small businesses in Australia. Each policy option is based on the assumptions that the policy will aim to reduce payment times from large to small businesses to a common benchmark of 30 days, measured from the date of the invoice. Policy option 1: Business-as-usual In this option, it is assumed that current voluntary measures stay in place, and the Government does not introduce any additional policies to address payment times in Australia. The key voluntary policy in this scenario is the BCA's Australian Supplier Payment Code, which began in 2017 and has since had approximately 80 signatories that are expected to be qualifying entities under this policy.21 Other existing government policies such as the ASBFEO National Payment Transparency Register, industry-specific regulations and other industry codes of conduct are assumed to stay in place, but not play a significant role in affecting payment times. During stakeholder consultations on the issue of payment times, some large businesses stated this is their preferred option. However, many other stakeholders stated that current measures have not materially changed payment times, and other policy options should therefore be considered. Payment Times Reporting Scheme RIS industry.gov.au 17

Policy option 2: Mandatory payment times reporting scheme for large businesses using a Small Business Identification Tool, with reporting at the entity level for individual entities and groups In this option, the government would require qualifying entities (large businesses with more than $100 million annual turnover) to report on their payment performance to small businesses. Small businesses are defined as businesses with a turnover of up to $10 million per annum. Qualifying reporting entities would report every six months on their payment performance via a central portal administered by the Payment Times Regulator proposed to be an SES officer within the Department), with penalties for entities mis/non-reporting. Examples of fields could include the average time taken to pay small business suppliers and the proportion of invoices paid within 20 days, 30 days and between 31 and 60 days. The government would then publish reported results on a regular basis online. The information would be publicly accessible. Large businesses advised in the consultation that identifying small business suppliers would create a substantial regulatory burden, because large businesses do not currently collect or record data on the size of suppliers. Therefore, to ease the regulatory burden associated with the scheme, it is assumed the Payment Times Regulator would establish a Small Business Identification Tool (SBI). The SBI would be a free, online service allowing reporting entities to check if their suppliers were a small business for the purposes of the scheme, and therefore they were required to report on their payment terms and practices to them. The SBI would allow a large business to upload a file listing the ABNs of the reporting entities' suppliers. It would then match the list to a private data register of all businesses, and return a result for each ABN advising either that the business was required to be reported on (if the business were small), or was not required to be reported on (if the business were large or medium). The SBI will apply a negative look-up screen against the register, meaning that it will simply determine that a business is large or medium. It will not identify individual small businesses, nor collect, store or use data about them. The reporting entity would use the results to filter their internal data to calculate payment times reporting results for only their small business suppliers. The obligation to report would apply to incorporated entities with a total annual income of more than $100 million in the most recent income year, and a controlling corporation or member of a controlling corporation's group. All entities within a controlling group would be required to provide an individual report on their payment times performance, irrespective of whether the entity was individually above the $100 million per annum income threshold. The rationale for requiring all entities associated with a corporate group to report individually is that it provides the maximum transparency on a group's practices, and the drivers of payment times results across the group. Based on taxation data, we assume there are approximately 3,400 individual and group entities that would meet the reporting threshold in their own right because they are above the income threshold, of which approximately 1,400 are individual entities not associated with a group and approximately 2,000 are groups. We also assume there are a further 5,700 entities associated with those groups that would also be obligated to report. This means that under this option, Payment Times Reporting Scheme RIS industry.gov.au 18

approximately 9,100 entities would be obliged to report (that is, the 3,400 individual entities and groups above the threshold, and a further 5,700 entities associated with a group above the threshold).25 Introducing a payment times reporting scheme would create transparency around payment practices of large entities in Australia, recognising both good and bad payers. It would also create an informed view on what payment time norms exist in Australia and encourage improvement amongst reporting entities. Comparing the net benefits of the two policy options There are a range of benefits and costs associated with improving payment times under each policy option. This section sets out the calculation of the net benefit for the quantifiable effects for each policy, and discusses qualitative benefits, costs and risks associated with each policy. The net benefit for each policy in this section is calculated based on two effects that were quantifiable. The first is the cost and benefit associated with improved payment times in the economy arising from each policy. This is measured by first calculating the benefit that could be obtained if all large firms improved to paying in 30 days to small suppliers, and then multiplying that by portion of the benefit expected to be realised by the policy. The second cost is the administrative cost associated with the policy itself, such as compliance and actions required by the businesses to achieve the expected improvement. This involves costs such as time spent reporting, time or other costs required to verify suppliers as small businesses, and improvement costs for the large business. The net benefit of each policy option is estimated as the expected benefit from improved payment times, minus the policy's administrative costs to business. This is presented as a net present value of the effects over a 10 year period, and also as an equivalent annualised value. In addition to the quantifiable effects associated with a policy, section 6 also considers the additional, unquantifiable benefits and costs associated with each option. Transferring capital from large to small businesses has a net economic benefit Government intervention to improve payment times from large to small businesses to 30 days would trigger a net benefit to the Australian economy. Improving payment times to 30 days would result in a transfer of working capital from large to small businesses of approximately $7 billion (see Exhibit 8). This is because when a large business delays a payment to a small business, it increases the receivables of the small business and reduces the payables of the large business. This is equivalent to an increase in the working capital available to the small business and a decrease in the working capital available the large business. 25 Preliminary investigation estimates from ABS based on 2018-19 BAS reporting. Users comparing data from this release with other ABS data should do so with care, as some other ABS data may exclude non-employing businesses or particular industries or sectors. Payment Times Reporting Scheme RIS industry.gov.au 19

If payments from the approximately 3,400 large businesses were made in 30 days, the impact would be equivalent to a transfer in working capital from large to small business of approximately $7 billion (see Exhibit 8). This is the annualised value of payments from large to small businesses made in over 30 days. Small businesses would respond to this by either reducing their net debt and lowering their net financing costs or increasing investment in fixed capital and increasing their output (if they are capital constrained). Large businesses would respond by either increasing their net debt or reducing their investment if they are capital constrained. Exhibit 8 The net effect is likely to be positive on the economy because the financing costs of small businesses are higher than those of large businesses and the share of small businesses that are capital constrained is higher than large businesses. This transfer of working capital is likely to lead to a number of other unquantifiable benefits and costs. These are outlined in detail in a later section and include impacts on business hiring, investment, insolvency as well as second order effects such as impacts on the profitability of finance providers. The first component of the Net Present Value (NPV) for each policy is the benefit from the improvement of payment times to the economy. This is determined to be the effects of a transfer of capital from large to small business that is created as payment times improve (see box below). Payment Times Reporting Scheme RIS industry.gov.au 20

Box 1: Calculating the effective transfer of capital from large to small business The main driver of the net benefit for each policy is the expected effects of a transfer of working capital from large to small businesses that is produced at the point in time where a large business shortens their payment terms. We can illustrate how this effectively creates a transfer of capital by taking the example of a small business that has a single large business supplier, who pays the small business for a product delivered monthly (i.e. every 30 days) on a trade credit payment term of 60 days. If the large business switches their payment terms from 60 days to 30 days, then at the next pay day, the small business would be expecting two payments coinciding: one payment for a product delivered 60 days prior under the original term, and a second payment for a product delivered 30 days prior under the new payment term. The cash flows thereafter would be the same as if the large business had not changed their payment terms, i.e. occurring at regular 30 day intervals. Hence, the difference is solely the additional payment made immediately after the change in terms, which is effectively increases the cash flow of the small business and creates an overall working capital transfer from the large business to the small business. This example can be extended and calculated at the economy level. Assuming that any large business that improves their payment terms, prompted by the policy option proposed, does so in the first year the policy is effective, then a figure can be calculated for the expected transfer from large to small businesses for the economy when the policy is introduced. Based on data from the Xero Small Business Insights dataset, for the period 2017-18, 36% of all trade credit payments were made in excess of 30 days, and at an average of 63 days.26 A reduction of these times to 30 day payment terms would create an approximate 12 day reduction in payment times across the economy, for relevant trade flows between large and small businesses. In Exhibit 8, this was calculated to be an approximate $7 billion effective transfer from large to small businesses.27 This one-off improvement to working capital also delivers persistent benefits to small business over time. When a business receives a one-off cash flow benefit of $X at time t=0, that can deliver an ongoing benefit of a*$X*(interest rate) in every subsequent year if a share of the cash flow is used by the business to reduce debt (where cost of debt is materially higher for small rather than larger businesses). Similarly, some portion of the cash flow b*$X can be invested in new capital (if the business is capital constrained) which could earn a return (b*$X*rate of return on invested capital) which would also be ongoing. That is why a one-off cash flow benefit delivers persistent benefits to the small business. 26 The Xero Small Business Insights data analysed does not distinguish the source of an invoice, so direct payments from large to small businesses cannot be observed, and consumer invoices, which are usually paid more quickly, cannot be separated. The latter fact suggests that the proportion of invoices paid within 30 days is likely over-estimated, and the true figure for B2B invoices is higher, and the figure for large business to small business is expected to be even higher 27 To check this figure, a similar method was used for the available UK Payment Practices and Performance st reporting data. Analysis undertaken in June 2019, using the average time to pay for the 1 report, showed that 61% of businesses paid in excess of 30 days, and these businesses on average made payments in 48 days. An improvement of 61% of payments by 18 days equates to 11 days of improvement, close to the figure estimated from Australia data. The differences in distribution are likely attributable to Xero Small Business Insights data being at the invoice level, while UK data being an average at firm level. Payment Times Reporting Scheme RIS industry.gov.au 21

While the transfer itself does not generate a net effect for the economy, as it only moves capital from one group to another, there is expected to be a resultant net benefit based on the asymmetry of credit constraints that face small and large businesses. As discussed earlier in the RIS, small businesses face higher financing costs, and therefore benefit more from avoided financing costs than the additional financing costs incurred by large businesses. The greater benefit to small businesses minus the lesser cost to large businesses creates an ongoing net benefit for the economy, driven by this differential in the cost of accessing credit. The modelling underpinning the RIS assumes small businesses have a higher cost of capital cost of around 8%, compared to large businesses cost of around 3 per cent. The average cost of capital for small businesses has been calculated by taking the average interest rate paid by small businesses based on the basket of different financing sources that they access and the typical interest rate for those sources (see Exhibit 5). The $7 billion transfer is expected to generate:  A benefit to small businesses of $522 million per year and $4,319 million over 10 years  A cost to large businesses of $209 million per year and $1,728 million over 10 years  An overall net benefit of $313 million a year and $2,591 million over 10 years. This is the benefit that is realised from an improvement to paying in 30 days for all payments from large to small businesses in Australia, equivalent to an improvement of approximately 12 days. To evaluate the benefit of each policy, it is assumed that the level of the benefit to the economy realised is proportional to the level of improvement achieved by the policy. As neither policy mandates that large businesses improve their payment times, we assume that that not all businesses do improve and adjust the net benefit down accordingly. Policies were evaluated based on a business improvement rate between 0 per cent and 100 per cent, which indicates the percentage of the maximum improvement scenario that the policy would achieve. That considered, the percentage of large firms that would be subject to the policy, and the percentage of firms that were likely to improve. For example, an improvement rate of 50 per cent would lead to $157 million in net benefit to the economy per year, and $1,246 million over 10 years. Low and high improvement scenarios were used for each policy given actual improvement rates are hard to estimate with precision. Additional non-quantified benefits In practice, the actual benefit to the economy may be higher than the modelled number. This is because when small businesses are paid faster their cashflow position improves and they face less uncertainty in management and planning decisions. As Exhibit 1 summarises, this can trigger a second round of beneficial impacts, such as increased investment and increased hiring by the small business. Improving the cashflow position of a small business also reduces negative events, such as bankruptcies. Small businesses that are paid faster are also likely to pay their own suppliers faster, extending the effect of the improvement through economy. However, to be conservative, these benefits are described as non-quantifiable benefits rather than quantified in the net benefit modelling. The reason for this is that core operational decisions, such as hiring, investment and the decision to wind-up a company, are influenced by multiple factors. It is not possible to attribute a direct causal relationship between a change in payment times and a specific decision by a firm to change hiring and investment practices. Payment Times Reporting Scheme RIS industry.gov.au 22

This is demonstrated by the current economic climate, in which small businesses in multiple sectors have been impacted by a set of disruptive events, such as the impact of the COVID-19 virus and bushfires. In this environment, improving the speed with which small businesses are paid will undoubtedly provide them with cashflow relief and greater certainty in their ability to plan and manage disruptions to the business. However, decisions on hiring and investment are still more likely to be influenced by the impact of larger shocks related to disruptions to consumer demand and to supply chains. The benefits calculation also excludes the value of benefits to the community from improved payment times to small businesses, and by extension, improved small business performance. Small businesses are a significant employer, with 44 per cent of working Australians employed by a small business.28 They are also an important provider of goods and services to communities, and a source of social contact and connection. These benefits are not quantified as they difficult to value and model, despite the benefit they provide to communities. Additional non-quantified costs There may also be additional non-administrative costs that are not quantified in the modelling. This includes the cost of deterring large businesses from investing. These are not modelled quantitatively because of the numerous factors that affect large businesses' operational decisions but are discussed in the cost section below for each policy option. Evidence from the literature review and consultations with large businesses suggest the impact of these costs on large businesses' financial position and operational decisions was likely to be lower compared with the positive impact on small businesses. This is because large businesses have a much stronger and deeper balance sheet compared to small businesses, and more options for accessing low cost financing. Consequently, the impact of the transfer of working capital is less noticeable versus a small business, and therefore less likely to affect operational decisions such as investment and hiring decisions. There is a possibility that there would be a minimal cost to financial lending institutions if small businesses were able to access capital at a lower cost, or were less likely to access it because their financial position improved with faster payment times. However, this impact is likely to be limited. This is because small businesses are capital constrained, and often rely on non-conventional sources of capital to fund their business (such as personal savings or borrowings from friends and family). If small businesses financial position improved due to faster payment times, these non-conventional capital sources are likely to cease first, limiting the impact on financial lending institutions. Similarly, while there may be a reduction in small businesses borrowing on credit cards as this is a very expensive form of capital and is not likely to have a material impact on the revenue financial institutions earn from credit card facilities overall. More broadly, there are a variety of factors that determine demand for lending and the supply of loans. These are likely to be more significant than the impact of payment times on small business demand for these products. To the extent that improving the financial position of small businesses improves the performance of small businesses, it could have a positive impact on demand for lending, as a small business may be more likely to be able to repay a loan, seek a loan or successfully pass a credit approval check. These costs are discussed further in the risk section of the RIS, and in the following qualitative assessment of each policy. 28 ABS 8155.0 - Australian Industry, 2017-18. Payment Times Reporting Scheme RIS industry.gov.au 23

These costs are more difficult to quantify accurately, especially on a macroeconomic scale, and therefore have been excluded from the NPV calculation in favour of a simpler model. Calculating the administrative cost The second component of the NPV is the administrative cost associated with each policy. These are the various processes required under each policy to realise the improvement rates, such as familiarisation with the new policy, collating and undertaking reporting on a regular basis or improvement costs. For each policy, this was calculated based on which of the specific process costs were incurred in the two policy scenarios, with the net benefit calculation adjusted by the proportion that would improve. For example, if there was an expected 50 per cent improvement rate from a reporting scheme, the administrative cost would reflect the cost of all qualifying entities reporting, and benefit of improvement from half of these large businesses. These costs were estimated following consultation with large businesses and likely reporting entities. Their amount, rationale and calculation are discussed in Appendix A. Calculating the net benefit To calculate the net benefit, the administrative cost is subtracted from the benefit associated with the improvement in payment times achieved by the policy to deliver the policy's net present value. Policy option 1: Business-as-usual Cost-benefit result Benefits The BAU scenario modelled the impact of continuing to rely on the industry-led BCA's Australian Supplier Payment Code, which has been recently introduced and should expect a steady take-up. Of the more than 120 code signatories, 80 would likely be captured under the scheme. The Prompt Payment Code (PPC) in the United Kingdom (UK) is the most prominent example of an industry payment code. It is administered by the Chartered Institute of Credit Management (CICM) and the Department of Business, Energy and Industrial Strategy (BEIS). Introduced in 2008, 10 per cent of reporting entities under the government's legislated UK Payment Practices and Performance Reporting framework indicated they are a code signatory. Taking the existing sign-up rate of 80 from the BCA Code's start in May 2017 suggests approximately 30 firms joining per year in Australia. The optimistic view is that this sign-up rate continues, leading to 30 per year and 300 after 10 years - accounting for 9 per cent of potential reporting entities. However, this is likely too optimistic, as evidenced by the UK PPC sign-up rate where take-up was high over the first two years before becoming comparatively much slower in the years following. Based on these results, a 10 per cent sign-up rate based on the UK experience appears an optimistic estimate, but would be equivalent to around 300 large business signatories in the next 10 years. The lower range estimate is using the UK PPC signatories removing those that were not likely prompted by Government intervention. This is half of the large businesses, giving an estimate of 5 per cent. Costs The primary quantifiable effects are businesses incurring administrative costs. Currently under the BCA's Australian Supplier Payment Code, and confirmed through feedback from signatories through Payment Times Reporting Scheme RIS industry.gov.au 24

consultation, the primary cost is the effort in businesses verifying which of their suppliers qualify as small businesses. Another issue considered with this policy option is the likely compliance rates, where lower compliance rates would subtract from the likely benefits that that the scheme yields. As reporting for large businesses or BCA signatories is not publicly available, it is difficult to ascertain the existing compliance rate for the BCA signatories. The experience in the UK has shown compliance rates with a voluntary, self-regulation code can be a material issue. The Prompt Payment Code requires signatories to pay at least 95 per cent of invoices within 60 days, unless in exceptional circumstances. However, as reporting in the UK began in late 2017, the first report of those identifying as signatories to a code showed that less than half of these businesses paid at least 95 per cent of their payments in 60 days. This does not necessarily imply that these businesses are non-compliant, as businesses could have exceptional trade agreements or are showing improvement towards this requirement. However, since reporting started, the removal of signatories has demonstrated that a compliance rate could be a material issue. While it is hard to determine, in the modelling we have estimated a range of between 70 per cent and 90 per cent compliance. Based on these quantifiable effects, we estimate there to be a net economic benefit of between $11 and $28 million per year (averaged over ten years) or put another way, a benefit of between $77 and $198 million (net present value) over ten years. The sensitivity of the benefit to the improvement rate of large businesses is shown in Table 2 below. Table 2: Sensitivity of the benefit to the improvement rate of large businesses Improvement rate of large 1 year benefit 10 year benefit NPV businesses ($million) ($million) 10% $3 $22 20% $6 $44 30% $9 $66 40% $13 $88 50% $16 $110 60% $19 $132 70% $22 $154 80% $25 $176 90% $28 $198 100% $31 $220 Source: AlphaBeta modelling. Note this table assumes a 10% compliance rate with the code. In the pessimistic scenario cited in the net benefit finding above, the compliance rate is assumed to be 5% and the improvement rate 70%, hence the quoted figure for 70% improvement rate is slightly higher in the table versus the pessimistic scenario. Unquantifiable effects Benefits Payment Times Reporting Scheme RIS industry.gov.au 25

Businesses that have joined the BCA's Australian Supplier Payment Code are likely do so because it helps the business's reputation. While we have included the costs of improving for businesses, the gains from an improved reputation are qualitative and difficult to determine. Rationally, as the code is voluntary any business that is joining this code does so believing that it benefits outweigh the costs. Based on this we could assume that the overall benefits to the businesses who join are greater than the costs incurred. The voluntary payment codes include provisions that are broader than an improvement to payment times, and therefore could lead to other improvements in payment practices. The BCA's Australian Supplier Code promotes principles of transparency, dispute resolution processes, adoption of technological solutions and working with suppliers to reach fair outcomes - none of which are targeted by other policies that are focused on delivering payment time improvement rates. The BCA's Australian Supplier Payment Code also has the benefit of providing an industry set norm of paying small suppliers within 30 days. This helps set a norm on what payment times in Australia should be. Setting a norm is important to encourage improvement. The benchmark of 30 days was acceptable to most stakeholders consulted in this process. Costs A concern with voluntary codes is that only good actors will become signatories. In the modelled scenario, it is assumed that each signatory will improve by the average amount. However, signatories to voluntary codes often present a selection bias, and businesses that are closer to the requirements of the code, or are more open to improving their payment times, are the businesses that are more likely to become signatories. Despite this, it is difficult to determine the extent to which is true with the BCA's Australian Supplier Payment Code. Regulatory Burden Estimate (RBE) As the code is voluntary, no regulatory burden is considered. Policy option 2: Mandatory payment times reporting scheme for large businesses using a Small Business Identification Tool, with mandatory reporting at entity level Cost-benefit result Benefits The primary quantifiable benefit associated with reporting is an improvement in the payment times of large businesses to small businesses. As explained in box 1 above, this results in a net economic benefit due to the difference in the cost to access capital for small businesses. The modelling assumes a 100 per cent take-up rate of reporting by relevant large businesses as compliance with the reporting is mandatory. It assumes the improvement rate would be higher than a voluntary code scheme, with a range of 30 per cent in a pessimistic scenario, and 60 per cent in an optimistic scenario. A range is used as there is little evidence to quantify what an improvement rate for large businesses will likely be over time as there are few precedents for this type of intervention. The only comparable policy that has been implemented has been the UK reporting scheme, where only a portion have reported for more than a year and overall trends are still unclear. Recent analysis shows that 45 per cent of UK firms that have reported for more than a year showed improvement, although this is only marginally higher than the proportion that simultaneously worsened. This means the true proportion of firms that improved from the reporting is unknown. Payment Times Reporting Scheme RIS industry.gov.au 26

Payment Times Reporting Scheme RIS industry.gov.au 27

We have taken 60 per cent as an optimistic, upper bound estimate for improvement in Australia given the Australian scheme is focussed on small businesses, unlike the UK scheme which applies to all suppliers. To allow for the fact that overall improvement may be lower than the number of firms that improve as some worsen, a pessimistic scenario is taken as an improvement of 30 per cent over the ten year period. We estimate the improvement rates in Australia would be higher than those in the UK for a number of reasons. The first is the narrower definition of large businesses in the proposed scheme, which will make it clearer which businesses qualify as reporting entities. This policy is also focused on small business suppliers only, unlike the UK scheme which focuses on all suppliers. A more focused scheme is likely to drive higher improvement by setting a clearer norm, and revealing if firms meet the set standard. As it costs a large business less to improve times for small businesses only, it is also more likely more large businesses will change. The Australian legislation also proposes the use of penalties for non and mis-reporting, which the UK has not yet introduced in its initial stages. Additionally, the reporting scheme in the UK follows numerous prior government-led payment policies, such as the more prominent, government-backed Prompt Payment Code, the right to claim interest on payment times in excess of 60 days and legislation on the maximum standard contract terms, which may have led some businesses who were willing to improve to do so prior to the commencement of the reporting scheme. Costs A regulatory cost is created in requiring businesses to report. This has been estimated based on consultation with large businesses on prospective costs of reporting, and adjusted to allow for all entities in a group to have to prepare a report, even if they did not individually meet the reporting threshold. We assume large businesses incur reporting costs, as reporting is a regulatory requirement. We assume large businesses incur a small verification cost to identify small business suppliers using the Small Business Identification Tool. We do not assess improvement costs as it is a voluntary choice for the business to improve. The costs cited are an average based on industry consultation and modelling from previous, comparable schemes. In practice, individual costs will vary across businesses depending on factors such as the number of small business suppliers, whether they already report internally on payment times, and the extent of standardisation in payment practices and financial and reporting systems within the group or entity. Based on these quantifiable effects, we expect there to be a net economic benefit of between $64 and $158 million per year (averaged over 10 years) or put another way, between $447 and $1,107 million (net present value) over 10 years. The sensitivity of the net benefit to the improvement rate of large businesses is shown in Table 3 below. Table 3: Sensitivity of the benefit to the improvement rate of large businesses Improvement rate of large 1 year benefit 10 year benefit NPV businesses ($million) ($million) 10% $8 $54 20% $29 $274 30% $70 $495 40% $102 $715 50% $133 $935 Payment Times Reporting Scheme RIS industry.gov.au 28

60% $164 $1,155 70% $196 $1,375 80% $227 $1,595 90% $258 $1,815 100% $290 $2,035 Source: AlphaBeta modelling Unquantifiable effects Benefits The introduction of a reporting scheme will provide a comprehensive measurement of large business payment times in Australia for the first time. This will enable measurement of the extent of the problem and allow evaluation of any other policies used to address payment times. This will also bolster the ability to check the compliance of signatories to the Prompt Payment Code. As explained in the section on calculating net benefits above, there are likely to be a number of non-quantifiable benefits arising from any consequent improvement in payment times associated with the reporting scheme's introduction. Costs It is possible that the scheme will require reporting on supply chain financing practices. Depending on the fields, this may require a large business to request data from a third party supplier. This cost has not been included as it is currently uncertain if third party data requests will be needed, and if they are, what proportion of reporting entities would be impacted. There is a potential concern that reporting, or any policy option that focuses on small business suppliers significantly, could discourage reporting entities in engaging with small suppliers. While it is feasible that under this policy option that a reporting entity would do this to avoid regulatory burden, no evidence so far has suggested this would happen and is difficult to quantify in its effect. During consultations on options to identify small businesses, including a small business survey, small businesses stated they were generally not concerned about being identified as a small business, as most customers were already aware of their size. Another issue raised in consultation is the susceptibility of improvement and changes in behaviour to the metrics that are used for reporting. An example brought up from the UK has been the concern that reporting the proportion a business pays on time could lead to businesses extending their initial payment terms, meaning more of their payments would be "on time". Similarly, a reporting measure such as the proportion paid in 30 days could allow businesses that are already paying quickly to increase their payment times to 30 days without any change in the measure. Regulatory Burden Estimate (annual) Table 2: Regulatory burden estimate RBE Business costs Community costs Individual costs Total costs $ 22.5m $0 $0 $ 22.5m The regulatory burden estimate (RBE) is calculated as the average annual equivalent cost over the first 10 years of the policy. For a breakdown of this estimate see Appendix A. Payment Times Reporting Scheme RIS industry.gov.au 29

Risks associated with the policy options There are three broad categories of risk associated with the question of whether to regulate payment time performance and practice: 1. The risk of adverse consequences from inaction on payment times and practices 2. The risk of adverse consequences arising from the implementation of a policy intervention 3. The risk that an intervention is ineffective at driving improvement in payment times and practices 1. The risk of adverse consequences from inaction on payment times and practices As the RIS outlines, there is significant evidence that payment times from large to small business can be long, and when they are, they have a negative impact on multiple aspects of small business performance. There is also significant evidence from Australia and overseas that large business payment times are unlikely to improve materially or quickly if voluntary action alone is relied upon. The risk of long payment times materially impacting small businesses is growing due to the declining economic situation in 2020, driven the impact of natural disasters and the COVID-19 pandemic on business operations. This is because reductions in demand for businesses, or disruption to operations, will reduce small business earning capacity and increase financial stress. Small businesses are likely to be more at risk in this situation versus large businesses because their starting financial position is more tenuous. Therefore, this risk is deemed to be moderate to high, particularly given current economic conditions. 2. The risk of adverse consequences arising from the implementation of a policy intervention A second area of risk is a risk that implementing a policy response to payment times has an unintended adverse consequence. The primary risks raised in this category during stakeholder consultations were the risk of disincentivising large businesses from engaging small business suppliers, and the risk of small business suppliers feeling uncomfortable at being identified as a small business via the Small Business Identification Tool. Both of these risks were therefore extensively explored during stakeholder consultations on the reporting framework's design. Based on this work, they are considered to be low risk. Large businesses uniformly said during consultations that the reporting scheme - or a voluntary push to improve payment times - would not disincentivise the use of small business suppliers. This is because decisions on how to procure from suppliers are influenced by many factors, such as the quality, cost, convenience and uniqueness of the goods and services supplied. Large businesses felt that these considerations would substantially outweigh whether a supplier was required to be reported on under the scheme. In a survey of 300 small businesses as part of the research program underpinning the scheme, 97 per cent of respondents they were unconcerned at being identified as a small supplier. This was typically because their size was already known to customers, and / or because they took pride in being a small business. Only 2 per cent of small businesses surveyed thought that customers were unaware now of their size. Further, 95 per cent of respondents were not opposed to being identified as a Payment Times Reporting Scheme RIS industry.gov.au 30

small business for the purposes of enabling reporting under the payment times reporting scheme.29 It is proposed that the Small Business Identification Tool will allow these small business to opt out if they do not wish to be identified as a small business for the purposes of payment times reporting. 3. The risk that an intervention is ineffective at driving improvement in payment times and practices The final risk is that reporting framework is ineffective at driving improvement in payment times, and therefore the benefits are not realised. This risk is hard to quantify because of the lack of precedent for an equivalent reporting scheme and therefore evidence on likely improvement rates. For that reason, a pessimistic and optimistic improvement scenario were used in the modelling, with one scenario below the improvement rate observed in the UK for a similar scheme, and one scenario above it. The design of the Australian framework was informed by the UK experience and may be more effective at incentivising improvement. For example, the Australian framework focuses on the treatment of small businesses, rather than all suppliers, which places greater focus on the specific norm the policy is seeking improvement in, and therefore may result in greater pressure for improvement. It is also less costly for large businesses to improve payment times for small businesses only, and therefore easier to improve. Finally, the Australian framework includes stronger powers to compel, audit and assure reporting compared with the UK scheme, which is likely to the share of participating businesses, and the quality of the data reported. This risk is therefore assessed as being of low - moderate risk. Consultations undertaken on this issue Consultations to date Following the announcement of the policy objective on 21 November 2018 by the Prime Minister, the Department commenced extensive consultations throughout 2019 and early 2020. The objective of the initial consultation phase in February 2019 was to better understand issues related to payment times, and to test potential policy options, including a payment times reporting scheme. The consultation period sought feedback from a broad base of stakeholders and identified three key stakeholders most impacted by the potential policy in small business, large business and government entities. In total approximately 80 organisations were consulted, spread across large businesses, small businesses and policymakers. Following the initial consultation period, a second consultation phase was run from September 2019 - November 2019 which sought feedback on the more detailed design of the scheme. In particular, it considered how the framework should deal with the identification of small businesses in a way that maximised the accuracy of identification and minimised the regulatory burden on businesses. It also examined whether reporting should be at the group or entity level, or if businesses should have the ability to choose their preferred reporting method. In both consultation phases, multiple channels were used to reach stakeholders. This included expert working groups, workshops, an online forum for small businesses, one-on-one meetings, a small business survey and multiple discussion papers that interested stakeholders could respond 29 Small Business Survey conducted as part of Payment Times Reporting Framework design, n = 301 Payment Times Reporting Scheme RIS industry.gov.au 31

to via an online form or written submission. The additional organisations consulted in the second round of engagement brings the total organisations consulted to around 400. In February 2020, the exposure draft of the legislation was released to provide stakeholders with the opportunity to view the proposed approach and comment on the provisions. Working groups In the first round of consultation, two expert working groups were established to advise on the issue, one comprising industry representatives and a second working group with for government representatives. The objective of the working groups was to provide an expert view on both the issue of payment times and the design of a potential reporting scheme. The first working group meetings were held at the start of the consultation, with the intention of defining the key questions and talking points that would be brought forward into the public workshop and the online discussion paper. A second working group was then convened at the conclusion of the public workshops and after early discussion paper submissions to consider the results. The industry working group included representatives from both large and small businesses and industry organisations. The Government workshop included members from the Australian Taxation Office, the Department of Finance, the Australian Securities and Investment Commission and the Australian Small Business and Family Enterprise Ombudsman. In the second round of consultation from October - November 2019, an expert working group was also formed. Public workshops A series of public workshops were held in February 2019 for participants to understand stakeholder perspectives on payment times and the need for, and nature of, policy interventions. These workshops were held in Canberra (18 February), Perth (19 February), Sydney (20 February), Melbourne (21 February) and online (21 February). Approximately 60 representatives from small business, large business and government entities attended these workshops. The aim of the public workshops was to engage a range of stakeholders, connect large and small businesses together and discuss the key choices involved in designing policy to address payment. To achieve this, the workshops were structured as a 2 hour event, where the first hour was a presentation of the context of the problem and the policy design option, allowing for questions and discussion, and then followed by an hour where attendees were able to vote on a series of policy design choices and then discuss the results as a group. A second round of public workshops were conducted in November/December 2019. Workshops were held in Perth (15 November), Sydney (26 November) as well as a targeted workshop organised in conjunction with Chartered Accountants Australian New Zealand (4 December). These workshops explored in greater detail options to identify small business suppliers, how complex corporate groups and entities should report under the scheme, as well as compliance and enforcement options under consideration. Discussion papers A discussion paper, "Payment Times Reporting Framework - Discussion Paper", was released on 13 February 2019, inviting stakeholders to provide response either to a series of discussion questions or through a formal response. Submissions were received from 22 small business, large business and government stakeholders. Payment Times Reporting Scheme RIS industry.gov.au 32

The objective of the discussion paper was to provide a public account for the choices currently present in the policy design, and to invite stakeholders, especially those that were unable to attend the public workshops to vote on the key design choices. A second discussion paper was released in October 2019, which provided an update on the design of the scheme and sought stakeholder feedback on a further set of detailed design questions. One-on-one meetings In addition to the formal consultation channels discussed, there have one-on-one discussions with a range of stakeholders, primarily large businesses and other policymakers. The objective was to provide a chance for stakeholders to further discuss issues with the department independently of the other workshops and provide more in-depth feedback on their experiences with payment times. Interviews Interviews with large businesses were used to survey the feasibility and cost of different reporting scheme options. These were used as the basis for the administrative cost estimates present in the regulatory burden measurement and cost benefit analysis. Interviews with other policymakers included those who had worked on payment times as a policy issue both in Australia and in the UK, and also administrators of similar Government regulation schemes. During the second round of consultation, a further 17 interviews were undertaken with large and small businesses and regulators to better understand their view on the key issues. Survey During the second round a consultation, a survey of 300 small businesses was undertaken to establish their attitude to being identified to customers and their preference for the means of identification if it did occur. Exposure draft of legislation An exposure draft of the legislation was released for consultation on 21 February 2020. A consultation paper outlining the content of the proposed Minister's Rules that would be made under the legislation was also released at the same time. Acceptance of submissions closed in early March 2020. More than 30 submissions were received providing feedback on the exposure draft legislation and Rules. The preferred option is the introduction of a Payment Times Reporting Scheme The preferred option to implement is the introduction of a payment times reporting scheme. Improving payment times for small business is an important policy priority, which will deliver a net economic benefit. It is particularly essential as the Australian economy enters an uncertain period with a risk of a downturn, because it will improve the cashflow position of small business and encourage more spending and investment. The introduction of a payment times reporting scheme is preferred because it will provide greater transparency around payment practices to small businesses. This in turn is likely to encourage more large businesses to pay their small business suppliers faster. Payment Times Reporting Scheme RIS industry.gov.au 33

A reporting scheme is preferred to the BAU and voluntary option because in both Australia and overseas, voluntary action has not catalysed a material improvement in payment times to small business. Payment Times Reporting Scheme RIS industry.gov.au 34

The reporting scheme will have an effective implementation, compliance and evaluation program Implementation overview The implementation of the Payment Times Reporting Scheme requires the following key actions:  The introduction and passage of enabling legislation  The establishment of the Payment Times Regulator, including their regulatory and enforcement powers,  The establishment of the key functions, platforms and supporting materials required to support the scheme. This ranges from the establishment of the reporting and publication platform and a Small Business Identification Tool, to the creation of communication and information materials.  Ongoing support from a core policy government function.  The running of an information campaign to alert businesses to the scheme, and their obligations under it Legislation to enact the scheme has been drafted, with the exposure draft released for public comment in February 2020. Once the legislation is passed, it will establish the Payment Times Regulator, their powers, and the key functions to support the scheme. The Payment Times Regulator will be responsible for obtaining and publishing information on payment times and practices from reporting entities, that is large businesses and corporate government entities with an annual turnover greater than $100 million. The Regulator will also have responsibility for monitoring and enforcing the provisions of the relevant legislation. Passage of the legislation will also allow the key functions and platforms supporting the scheme to be established. Planning for this work is already underway to ensure a smooth implementation in time for the commencement of the first reporting round. Funding for the scheme has been allocated. As part of the 2019-20 MYEFO, the Government provided funding to establish the scheme with $10 million over four years from 2019-20 (including $3.4 million in capital funding), $2.6 million in 2023-24 and $2.4 million per year ongoing from 2024-25. Enforcement and compliance scheme The Payment Times Reporting Scheme will be underpinned by a compliance and enforcement regime. The design of this approach balances minimising the cost and regulatory burden of the scheme with ensuring it has good compliance and is able to serve its purpose. One of the first key steps will be establishing the Payment Times Regulator to ensure large businesses report accurately. It is proposed that the Payment Times Regulator is a Senior Executive Service SES role, appointed by the Secretary of the Department of Industry, Science, Energy and Resources. The Regulator will be impartial and independent. They will have the power to accept and publish reports as well as monitor and enforce compliance with the proposed legislation. This Payment Times Reporting Scheme RIS industry.gov.au 35

includes the ability to provide written notice to a reporting entity to appoint an auditor, as well as monitoring and investigation powers. The Regulator will also need to engage with a range of stakeholders and promote cultural change within large businesses. The Regulator will be appropriately resourced with additional staff provided to support its functions. This option is preferred as it will reduce costs compared with establishing a new entity because the Regulator can leverage the existing infrastructure and corporate support functions of the Department. It is preferable to placing the function with an existing regulator, such as the Australian Securities and Investment Commission, as they have a significant work agenda and would have less capacity to focus on addressing the payment time issues. Locating the Regulator in the Department with policy responsibility for small business could create the perception of bias that the Regulator and its approach to compliance and enforcement favours small businesses. However, this perception of bias could be effectively managed through a number of mechanisms including:  Creating a specific identity for the Regulator, through separate branding distinct from the Department;  Establishing distinct reporting and accountability lines between the Regulator and the small business policy function;  Ensuring internal separation between staff assisting the Regulator and those working on small business policy (for example, through separate record-keeping arrangements). There are a number of examples where a regulator is successfully co-located with the related policy function. For example, the Gene Technology Regulator is supported by the Department of Health under the Gene Technology Act 2000. Penalties The Bill establishing the Payment Times Reporting Scheme imports standard penalties from the Regulatory Powers Act for a number of offences including failure to report and failure to respond to an audit notice. These penalties can apply daily. In addition, a number of multiple of gain penalties (percentage of company turnover) will be imposed for false and misleading information, failure to keep records and assist the auditor. This approach is necessary to maintain a deterrent effect given the size of the companies involved. The Bill also allows the Regulator to publish information about a reporting entity that has failed to comply with the Act. This will provide transparency to small businesses using the register, allowing them to determine the companies they will engage with. As enforcement activities are not covered by Regulatory Impact Statements, costs associated with these penalties and publishing non-compliance have not been included in the RIS. The Bill requires reporting entities to maintain records for seven years. This is required to enable compliance activities to be undertaken. This is similar to the Australian Securities and Investment Commission (ASIC) requirement for companies to keep records for seven years or Tax requirement to keep records for five years including the below:  Receipts and other evidence of all sales and purchases you made for your business  Tax invoices, wage and salary records  All documents about GST  Records of the purchase, sale and other costs of any business assets, such as land, buildings or office equipment Payment Times Reporting Scheme RIS industry.gov.au 36

 All records relating to tax returns, activity statements, fringe benefits tax (FBT) returns, and contributions to employee super. As reporting entities are already required to keep similar records, this has not been included in the regulatory burden estimate. Auditing and investigation powers It is proposed that the Regulator has the power to request an audit of reporting on the basis of a reasonable suspicion of misbehaviour. The Regulator will either accept the large business choice of auditor or will choose its own. The large business will be required to pay for the cost of the audit. This cost is not included in the Regulatory Burden Estimate as it is considered to be an enforcement cost. A number of standard powers have also been imported from Regulatory Powers Act covering monitoring and investigation. These powers are required to identify the accuracy of reports. This approach is necessary because of experiences with the UK scheme whereby the accuracy of reports were unable to be examined and verified. Audits will only be undertaken as a last resort where other information raises issues about the accuracy of the data provided by a large business and they are unwilling to change their approach. Power to identify reporting entities A consequential amendment to relevant taxation legislation will give the Regulator the power to use tax data to access information on reporting entities for the purpose of the scheme. This information will be used to identify entities who should be reporting. The information will be subject to the normal safeguards established by comparable schemes that have been given access to tax data for similar purposes. Taking a graduated approach to compliance and enforcement To minimise the regulatory burden associated with the scheme, there will be a transition period of 18 months where compliance and enforcement actions will not apply. The purpose of this grace period is to allow reporting entities the opportunity to establish their internal reporting function and build the capability to report efficiently and accurately, without the risk of inadvertently triggering a penalty or enforcement action. Following this 18-month period, a graduated approach will be taken to compliance and enforcement. This will start with education and awareness raising, followed by working with companies, and then application of penalties as a last resort. The Bill for the scheme provides that certain decisions made by the Regulator are reviewable. These include: a decision not to determine that an entity has ceased to be a reporting entity, a decision to not allow further time to give a payment report; and a decision to publish the identity of an entity with details of non-compliance. The scheme will seek to establish a constructive relationship between the Regulator and reporting entities. A reporting entity will have the obligation to provide a report within 3 months of the end of a reporting period. However, the Bill allows a reporting entity to seek an extension of time to report by applying in writing to the Regulator. A reporting entity will also have the right to request that the Regulator registers a revised version of a payment times report. Payment Times Reporting Scheme RIS industry.gov.au 37

Evaluation of the scheme The Payment Times Reporting Scheme will be reviewed after three years. The review will consider the efficiency, effectiveness and appropriateness of the scheme, and opportunities to improve it. In considering the efficiency and appropriateness of the scheme, the review will assess the regulatory burden imposed on large businesses and government, whether this is proportionate, and if there are opportunities to further reduce it. In considering the effectiveness of the scheme, the review will evaluate trends in payment times and practices for reporting entities covered by the scheme, and whether there is evidence that the scheme has incentivised improvement. It will also consider whether the measures in the scheme could be improved, or require additional efforts to support them. Payment Times Reporting Scheme RIS industry.gov.au 38

Appendix A - Administrative cost estimations In addition to the benefits and costs associated with a change in payment times in the economy, there is also the expected cost on qualifying entities in complying with the proposed policies, which is encapsulated by the Regulatory Burden Estimate (RBE) used in this statement. To determine the RBE of each policy, the likely requirements imposed on each qualifying entity in the proposed policy scenarios was considered and broken down into distinct processes. These processes were then the subject of consultation with large businesses that would likely qualify with reporting, to arrive at a range of potential costs each would impose on a business. In addition, these costs were compared to similar regulatory impact statements where comparable.30 Costs have been quoted as either a dollar figure or in terms of working days and the corresponding employee level, depending on what is more applicable. Costs have also been categorised as either an initial, one-off 'transition cost' that are costs imposed within the first year of complying with the policy option, or an 'ongoing cost' that is expected to continue annually. The RBE is then taken as the total, non-discounted cost over the first 10 years and then divided for an annual estimate for each policy option. As the first policy option considered is a voluntary, business-as-usual scenario, the RBE is assumed to be zero. The remaining option is explained below. Policy option 2 - Requiring entity-level reporting This option requires all entities that meet the qualifying threshold to produce a report for that entity. Where the qualifying entity is a group, the requirement to produce an entity report also applies to all related entities, irrespective of whether they are above the threshold individually. A provisional estimate for the number of entities that would be required to report under this scenario is 9,100.31 Hence, the estimated cost for this policy option is taken as the average cost of reporting for each entity, multiplied by the estimated 9,100. For some activities, such as submission and CEO verification, qualifying entities will have the option to perform them at the group or entity level. We assume that reporting entities will take the most efficient option, and report as they do for tax purposes. Therefore, for these activities we assume 3,400 firms perform them. Table 3: Estimated costs for qualifying entities to report Estimated range of costs Average cost Transition costs $13.9m - $40.5m $27.2m Ongoing costs $14.9m - $24.6m $19.7m RBE cost $22.5m This policy option has been broken down into its expected required processes, and each were then consulted on and a range was estimated for its cost. Practice will vary across different business sizes 30 Primarily, the UK Payments Practices and Performance Reporting Scheme conducted an impact assessment using a survey of businesses. Their results have been used as a reference point for some estimates presented here where directly comparable, and referred to as the UK Scheme 31 Preliminary investigation estimates from ABS based on 2018-19 BAS reporting. Users comparing data from this release with other ABS data should do so with care, as some other ABS data may exclude non-employing businesses or particular industries or sectors. Payment Times Reporting Scheme RIS industry.gov.au 39

and structures, but again the estimation below reflects the expected average cost for entity-level reporting. Reporting at entity level is assumed to involve processes of:  Familiarisation - Time taken for a business to familiarise and understand the requirements of the policy. Estimations based on feedback suggested this would likely take one employee between one day and one week to complete. This is comparable with UK estimations, which 32 33 was approximately $1,000 to complete . An estimation of between 2 and 3 days was used  IT costs - Refers to any changes required to the business's IT system. Through consultation, businesses expressed that reporting requirements that were limited to the proposed fields could be reported from one set of existing accounts, and hence completed with minor or no additional IT changes. This is again comparable with feedback received in the UK estimations. An estimate of between $0 and $1,000 was used.  Verification - Refers to the process of identifying which invoices are related to small businesses, which is done using the proposed Small Business Identification Tool. As this is a novel process that is being proposed as part of this policy option, the estimate remains general. However, it is expected to be simple in its use, and in consultation businesses have expressed a likely ease of using the proposed design. An estimate of half a day for to learn how the tool works, and another half a day per year of reporting ongoing was used.  Preparing the report - Refers to the process of preparing the report once qualifying entities are familiar with the reporting requirements, made any requisite IT changes and verified which invoices are to be reported on. This involves collating data and summarising it into the required reporting fields. It is expected that within the first year of reporting, this will require managers to organise and coordinate reporting within the entity. After this initial setup, it is assumed an employee will be able to carry out the process of preparing the report, given that the report is a basic summary of invoicing data and not requiring any qualitative assessment. An estimate of between 2 days and 4 days was used for a manager in initial transition costs, and an ongoing cost of between 2 days and 3 days is assumed for an employee to produce the report at an ongoing basis34  Verifying the report - Refers to ensuring the report is correct and entering data in the online form and submitting the report into the online portal. An estimate of between half a day and 1 day was used for a manager to verify the reporting, assuming that it is performed twice in the year. We assume that this is done at the entity level.  Approving the report - Refers to the requirement that each report has to be approved at the CEO level. The modelling assumes half-yearly reporting, and therefore that this activity is performed twice in a 12 month period. An estimate of between 1 - 2 hours was used, inclusive of two approvals.35 We assume this is done at the group level.  Submitting the report - refers to the time required to complete and submit an online form to upload the reporting. We assume this is done at the group level twice a year, and that it requires between 2 - 3 hours. 32 Results from the UK Impact Assessment are originally in £ and are quoted here in approximate AUD figures 33 The wage of an employee is estimated to be $100,000, and the wage of a senior employee to be $200,000 per year. This is then divided into a per-working day figure 34 This is treated as an average figure. 35 The daily salary at this level is estimated to be $2,400 Payment Times Reporting Scheme RIS industry.gov.au 40

[Index] [Search] [Download] [Bill] [Help]