An inquiry into late payments to creditors has been commenced by the Australian Small Business and Family Enterprise Ombudsman. A report is due by March 2017.
The inquiry aims to establish an accurate picture of the trends in payment terms that have emerged in recent years in commercial arrangements between large and small businesses as well as between governments and small enterprises. Payment terms of over 60 days can be imposed by those in a stronger bargaining position.
If a business takes 60 days to make an on-line payment it should not be in business but the reality is that bloody minded support of one’s own finances and disregard of others’ appears to be part of the culture.
The Inquiry says it “will assess the impacts these trends are having and will identify practical solutions that can be implemented quickly and effectively to help address identified problem areas”.
In the context of business operations and viability, the maintenance of cash flow is vital to the maintenance of the solvency, in particular under the legal test of solvency of being able to pay all debts as and when the fall due. Balance sheet solvency will not necessarily prevail over inadequate cash flow.
But while we have the Ombudsman examining, no doubt sympathetically, the reference given, we also have another part of government examining its own difficulties in being paid on time, the ATO.
A continual issue for the ATO is the poor overall payment record of small business.
ATO’s 2016 annual report has its usual reporting on “tax payment performance” and the various measures by which the ATO seeks to improve this, down to the detail of SMS reminders sent to habitual late payers.
However it is the small business sector that remains a concern. In the year to 30 June 2016:
- only 72.3% of small business tax liabilities were paid on time;
- small businesses accounted for 65.2% (or $12.5 billion) of total collectable debt holdings, an increase of 1.9% over the previous year; and
- the ATO agreed to around 950,000 payment plans in 2015–16, an increase of 17.2% over the previous year.
But of course, for those with outstanding tax debts who “fail to engage with us”, the ATO says it is taking “more timely action, including insolvency proceedings”, but with an even less productive outcome likely at that late stage.
One might say that the culture to which the Ombudsman refers is one which the government itself has allowed to become entrenched, with the ATO itself being limited by the laws which it has to administer, and the political decisions it has had to accept to appease taxpayers.
The culture of using the ATO as a “bank” is well ingrained, and not readily challenged, however much the law and the courts might sanction and criticize late payers.
One purpose of the removal of the ATO’s priority in insolvencies in 1993 was to remedy the lassitude that it had engendered in tax recoveries, with the ATO “under no pressure to recover [its tax debts] in a normal commercial manner”: Harmer Report, ALRC 45. It was said in parliament at the time that debts were allowed to accumulate to “ridiculous proportions”. A later assessment of the removal of the tax priority reported that any positive impact was debatable, and hard to assess from public records: see The ATO as an Insolvency Regulator?, (2007) Jul-Sept ARITA Journal 24, Murray.
Single touch payroll
The government now has an opportunity to change this, with its single touch payroll approach now in the law, the Budget Savings (Omnibus) Act 2016, commencing in 2017, and the further development of STP being devised.
Whereas the ATO has always been on the back foot in its debt recovery – it has no services or supplies to withhold from a taxpayer for non- or late payment – STP would give it the upper hand. It would allow the ATO to itself draw employees’ tax and superannuation payments from the bank account – the cash flow – of the business employer; in the same way that an employer withdraws an employee’s taxes from their personal “cash flow”.
The difficulty there is that an ingrained system cannot be changed overnight, otherwise, it is said, havoc would be wreaked on businesses reliant on that free float from the ATO.
In that context, the accounting profession might itself take some responsibility, in not addressing the major payment and accounting changes that have occurred even this century, and which are about to change much more. Thinking in this area seems stuck in the ‘payment by post with a postal order from the post office’ era.
What to do?
Law simply seeking to enforce or penalize late payment would probably have little impact, unless enforced readily and to a high degree. The 2003 Late Payments of Commercial Debts (Interest) Bill never proceeded, with its aim – “to provide for interest to be levied on the late payment of commercial debts arising in relation to contracts for the supply of goods and services” – unlikely to have succeeded, at least on its own.
The issue is one of culture, commercial morality, competition imbalance, and base human behaviour. Publicity, ‘shaming’, disclosure and behavioural messages can assist.
How other countries have dealt with what seems to be a common issue, at least in cultures similar to ours, need to be examined. The Ombudsman has usefully linked other laws and measures from both England and Europe.
It does all seem like a merry-go-round which cannot stop and from which no one can jump off without serious harm … unless pushed.
Perhaps it needs the authority of the ATO to start to re-shape the practices and culture of payment of business debts, and, with enough lead time, finally take the position that money due for employees, or superannuation, or GST is not and never has been the company’s and it is best if the company in effect never sees it. Single touch payroll offers a good start
At least then, a large part of the slow payment problem would improve; possibly with some long term flow through change of the sad culture infecting many of our large business operators.