Can entities adopt shorter payment terms?
Entities can choose to adopt shorter timeframes. Where shorter payment terms are agreed between an NCE and supplier, entities should be mindful that the shorter payment term is relevant when calculating penalty interest.
Do existing contracts need to be renegotiated or amended to include the new 20 day payment terms?
The policy is not retrospective and there is no need to renegotiate or amend contracts entered into prior to 1 July 2019 to reflect the change. However, consistent with the previous 30 day payment policy, entities may choose to pay a correctly rendered invoice earlier and we would encourage this in the context of consistency with the new 20 day terms.
Does the policy apply to procurements currently out to market?
If an approach to market was issued prior to 1 July 2019 with a draft form of contract containing the 30 day payment terms, the terms do not need to be updated, even if the contract is entered into after 1 July 2019. However, the shorter maximum payment term can be adopted and we would encourage this in the context of consistency with the new 20 day terms.
What is meant by “written contracts”?
A written contract under the policy is an arrangement, as defined by section 23(2) of the PGPA Act, for the procurement of goods and/or services under which relevant money is payable or may become payable. This includes standing offers, panels and purchase orders. This policy still applies even if a written contract or approach to market fails to include clauses that reflect this policy or if no written contract exists between the NCE and the supplier.
Is interest payable on invoices for goods or services that have not been delivered or do not meet the requirements of the written contract?
Interest is not payable when, in accordance with the written contract:
- goods and/or services have not been delivered satisfactorily; and/or
- a correctly rendered invoice has not been submitted.
Does the policy apply to overseas procurements or contracts?
No, the policy does not apply when procuring and consuming goods and services overseas.
Does the policy apply to contracts using foreign currency?
The policy does not contain specific instruction in relation to payments made in foreign currency. Entities should consider the limitations at Part 2 of the RMG when determining if the policy should be applied. When determining the value of a contract for the purpose of applying the policy, if the total value of the contract would be at A$1 million or less when converted to AUD, the policy would generally apply.
How is penalty interest calculated?
Finance has developed an online calculator to assist entities determine penalty interest. The general interest charge rate, available from the Australian Taxation Office, is the rate on the day that payment is due. Entities are to use this single rate when calculating penalty interest and are not required to recalculate the general interest charge rate if it changes during the penalty interest period. When calculating penalty interest, entities should be mindful that the agreed maximum payment terms outlined in the contract may be less than 20 days. If agreed maximum payment terms are less than 20 days, the shorter payment term is relevant when calculating penalty interest. If the maximum payment terms fall on a non-business day, payment is not due until the next business day.
What do I need to consider when paying penalty interest?
Government policy is for entities to pay invoices on time. As such, entities should not anticipate facing late payment charges when arranging approval for a procurement contract. Entities are required to comply with relevant legislation and internal policies and processes when approving and making penalty interest payments. This includes obtaining relevant approvals for the payment of penalty interest.
Is there a timeframe within which interest is to be paid?
The policy does not specify a timeframe within which interest payments are to be made. Entities should pay interest promptly, preferably at the same time as the late payment.
Can administered funding be used to pay late interest payments?
Administered appropriation may only be used for the program or outcome that it is appropriated for and may not be used to pay late interest payments to suppliers.
Is interest payable on the whole amount or just the outstanding amount?
Penalty interest is only calculated on amounts not yet paid by the entity. If an entity has paid a proportion of the amount to the supplier, simple interest is not accrued on the amount already paid. Interest may not be payable in circumstances where:
- the supplier has not issued a correctly rendered invoice; or
- the goods or services have not been delivered to the satisfaction of the entity, in line with the requirements of the contract.
Are interest payments reportable on AusTender?
Penalty interest payments are not procurements. As such, entities are not to report on AusTender penalty interest payments made to business as a result of late payment of invoices.
Does the policy still apply if the contract is varied to an amount equal to or above A$1 million (GST inclusive)?
Entities will have an obligation to pay interest for late payments in accordance with agreed contract clauses. That obligation is not automatically removed when a contract variation increases the value of a contract to an amount equal to or above A$1 million (GST inclusive). In many cases, it may not be desirable or feasible to seek to remove or amend these clauses if later variations cause the contract to exceed the A$1 million (GST inclusive) threshold.
Should GST be included when calculating penalty interest?
GST tax law does not stipulate an approach to payment of interest being calculated based on the inclusive or exclusive GST amount. Finance suggests that as a general rule, entities calculate the interest amount payable based on the total invoiced amount.
Should GST be applied to the penalty interest?
GST is not to be applied to penalty interest payments. Penalty interest payments are an input taxed supply under section 40-5 of A New Tax System (Goods and Services Tax) Act 1999. Therefore, it is not subject to GST and there is no entitlement to an input tax credit for the things that are acquired to make the financial supply.
Does RMG 417 apply where the supplier is a Commonwealth entity or state body?
No, RMG 417 does not apply where the supplier is a Commonwealth entity or state body. The policy is intended to encourage payments to all ‘businesses’, regardless of size, in a timely manner. Entities should pay Commonwealth entities and state bodies in accordance with agreed payment terms and in a timely manner.
Are there reporting requirements under this policy?
Yes, the Department of Employment, Skills, Small and Family Business will survey businesses annually and publish the survey results on their website. This was a voluntary survey in the past but it is mandatory under the updated policy.
Are there model clauses available to support this policy?
The policy contains an example draft contractual clause at Part 3. There is also a model clause available on Clause Bank. The Commonwealth Contracting Suite Commonwealth Contract Terms, Commonwealth Purchase Order Terms and Commonwealth Deed of Standing Offer Terms will be updated to reflect the change and will be available from 1 July 2019.