Late Payment Interest
The Government has announced a policy of paying interest on late payments to small businesses. The Procurement 30 Day Payment Policy for Small Business (the policy) states that, for written contracts up to A$1 million (GST inclusive), agencies are to pay interest on late payments following receipt of a correctly rendered invoice. Please note that according to the policy interest is not payable unless the amount of interest is more than A$10.
This policy is in effect as of 1 December 2008 and will not apply to procurements where prior to this date, a written contract or standing offer was already in place or in the process of being negotiated.
Details of this policy can be found on the Department of Finance and Deregulation website.
In the first instance, for any inquiry regarding late payment on an invoice, suppliers should contact the appropriate officer in the relevant Australian Government agency. This person is usually the project officer or contact point for the particular service under contract.
Simple interest on late payments may be calculated using the following formula:
SI = UA x GIC x D
- Where:
-
SI
= simple interest amount
-
UA
= the unpaid amount
-
GIC
= General Interest Charge daily rate
-
D
= the number of days from the day after payment was due up to and including the day that payment is made.
Source: www.finance.gov.au
An example of a calculation follows:
Example: Calculation of simple interest
The applicable general interest charge rate is ascertained from the Australian Taxation Office (ATO) website.
Assume the relevant daily general interest charge rate is 0.03909836 per cent;
value of the unpaid amount is $100,000; and
payment occurs 5 days after the conclusion of the 30 day payment period specified in the written contract, determined from the date of receipt of a correctly rendered invoice.
| Interest |
= $100 000 x (0.03909836 / 100) x 5 |
| |
= $195.49 |
Note that the general interest charge rate is updated by the ATO quarterly and is available from the Australian Taxation Office website.
Source: www.finance.gov.au
If you issue a separate invoice to the Agency for the interest on the late payment, do not include GST on the interest. GST is not payable on interest on late payments charged when an invoice is issued separately for the late payment only.*
* The ATO's GSTR 2000/19 provides the ATO view on the GST treatment of late payment interest. Specifically:
30. Where an amount is required to be paid by a specified date, but an additional charge becomes payable if the primary amount is not paid by the due date, the additional charge is consideration for the supply of an interest in a credit arrangement and, as such, is consideration for a financial supply. This is so whether the payment is in the nature of an accruing interest charge (for example, 10% per annum), a flat percentage of the amount due (for example, 10% of the amount due) or a fixed amount (for example, $20). Example - interest charge
31. Henry supplies goods to Andrew under terms that require the amount invoiced to be paid within 30 days, after which time, interest will accrue at 14% per annum. In addition to the amount originally invoiced to Andrew, Henry demands payment of the interest. As the agreement contemplates late payment, Henry has supplied Andrew with an interest in a credit arrangement. The late payment charge is consideration for a financial supply and is not an adjustment event.
The full Ruling can be viewed on the ATO website.
For more information please contact the ATO's business tax enquiries line on 13 28 66.
In calculating the interest payable, a small business is required to determine the date that a correctly rendered invoice (an invoice that was rendered in accordance with the contract and with statutory requirements) was received by the agency. This may be determined by contacting the Government project officer or contact point. Where this date cannot be determined, a reasonable estimate should be used. The actual interest amount payable is subject to agreement with the relevant agency being invoiced.
An online calculator has been developed to assist in calculating interest charges and is available here.
For any enquiries regarding calculation of late payment interest, please contact us.
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