Pay on time policy - additional information
Supplier pay on-time or pay interest policy - frequently asked questions
- Supplier Pay On-Time or Pay Interest Policy
- Coverage of the policy for “written contracts”
- Invoices for goods or services that have not been delivered or do not meet the requirements of the written contract
- Calculating penalty interest
- Paying penalty interest
- Exclusion of administered funding from application of the policy
- Part payments and accrued interest
- Application of the policy to existing contracts
- Reporting interest payments on AusTender
- Handling contract variations
- Should GST be included when calculating penalty interest?
- Should GST be applied to the penalty interest?
- Does Resource Management Guide (RMG) 417 apply to a procurement agreement where the supplier is a Commonwealth entity or state body?
Non-corporate Commonwealth entities are to agree to payment terms that provide payment no later than 30 days after the date of receipt by the non-corporate Commonwealth entity of a correctly rendered invoice from the supplier for contracts valued up to and including A$1 million (GST inclusive).
Where payment is not made within the maximum payment terms, the non-corporate Commonwealth entity is to pay interest to the supplier where the amount accrued is more than A$100.
The intention of the policy is that a “written contract” will also include purchase orders that incorporate contractual terms and conditions where there is no head agreement (such as a ‘deed of standing offer’ or master contract).
Purchase orders that are raised under a deed of standing offer or master contract form part of that deed of standing offer or master contract, which is the “written contract” for the purposes of this policy.
Interest will not be payable where the supplier does not submit a correctly rendered invoice that does not meet the requirements of the written contract. This includes cases where there has not been satisfactory delivery of the goods or services.
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 30 days. If the maximum payment terms fall on a non-business day, payment is not due until the next business day.
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.
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.
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.
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.
The policy applies to new procurement contracts or standing offers entered into on or after 1 July 2014. The policy does not apply to procurements commenced prior to the date of effect of this policy, for which a contract or standing offer was already in place or in the process of being negotiated.
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.
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 above the A$1 million (GST inclusive) threshold. 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.
GST tax law does not stipulate an approach to payment of interest being calculated based on the inclusive or exclusive of GST amount.
Finance suggests that as a general rule, entities calculate the interest amount payable based on the total invoiced amount.
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.
RMG 417 does not apply to agreements where the supplier is a Commonwealth entity or state body. The policy is intended to encourage payments to ‘businesses’ in a timely manner. Entities should pay Commonwealth entities and state bodies in accordance with agreed payment terms and in a timely manner.
By way of background, the previous version of the pay on time policy applied only when contracting with ‘small businesses’. RMG 417 has been broadened to capture all businesses regardless of size.
Last updated: 03 February 2017