The Turnbull government will slash payment times for small businesses on lucrative public contracts by up to a third in a bid to drive investment in public infrastructure and make Australian businesses more competitive.
The changes will effect more than 6800 businesses that have struggled with month-long waiting times for payment on government tenders, a market that has become worth billions of dollars and a key driver of recent economic growth.
From Wednesday, the government will be required to pay invoices for contracts worth up to $1 million within 20 days, after the Australian Small Business and Family Enterprise Ombudsman recommended sweeping reform.
In 2016, a report from Dun & Bradstreet found "late payment times remain unacceptably high" across the economy and ASX-listed companies were among the country's latest payers.
Contractors for businesses with 500 employees or more were being paid 18 days late on average after the end of the 30-day invoice period.
In March, the Business Council of Australia launched a voluntary supplier code that committed signatory organisations to pay eligible Australian small business suppliers within 30 days of receiving invoices in a bid to put an end to endemic levels of late payment.
The move was seen as an effort to head-off legislation that could punish incendiary companies after ombudsman Kate Carnell found up to 50 per cent of all small businesses had more than $20,000 owing to them and were being used as a form of "cheap finance".
The ombudsman said the federal government should set an example and be required to publish its payment performance in an effort to increase transparency and accountability.
On Wednesday, Prime Minister Malcolm Turnbull will announce the establishment of the payment system "that recognises small business should not be used as a bank".
Federal Small Business Minister Michael McCormack said cash flow was crucial to the prosperity of small businesses.
"Adverse payment terms between businesses can have a negative impact on competitiveness, increase the cost of doing business and place significant stress on owners," he said.
The federal government has stopped short of instituting all of the ombudsman's recommendations, including requiring government departments to make sure its head contractors adopt its standards through its supply chain.
Such a move could have prevented the government's exposure to Plutus Payroll, the company at the centre of the $165 million tax scandal revealed in May, the largest tax-fraud in Australian history.
A Department of Finance spokeswoman said so far more than 30 government entities had indicated they had used labour hire companies that might have used Plutus Payroll Services to pay contractors.
In response to the ombudsman's recommendation, the government said it did "not support the introduction of additional regulatory burden of verification requirements to bid for government tenders".
The reforms come on top of tax cuts that will be progressively introduced for small businesses with a turnover of up to $50 million a year from 30 per cent to 25 per cent by 2027.
