Federal government departments and businesses will have less than three weeks to pay small and medium contracts, as part of new rules announced by Prime Minister Malcolm Turnbull.
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Facing continuing calls for a royal commission into the banking sector and growing fall out from the parliamentary citizenship fiasco, Mr Turnbull and Finance Minister Mathias Cormann said more government contracts would be paid more quickly.
In an announcement with Small Business Minister Michael McCormack on Wednesday, they said the move was in response to an inquiry by Australian Small Business and Family Enterprise Ombudsman Kate Carnell.
The inquiry report, published in April, recommended the government adopt rules requiring a 15-business-day payment time by July 2018, and that state and local government consider following suit.
Instead, government entities will be required to pay invoices for contracts worth up to $1 million within 20 calendar days, faster than the current 30-day policy.
Mr Turnbull said the move would help the 6800 small businesses working with the federal government.
"This will put money back in the pockets of small business, helping them invest, grow and employ more workers," he said.
"It demonstrates the government's continued commitment to small business, the engine room of employment in Australia.
"The government is already a proud leader in terms of payment times and practices, with the latest pay on-time survey showing Commonwealth agencies paid 97 per cent of their invoices within 30 days."
The pair said the new standard would set an example for business and state and local governments, establishing "a new payment culture within Australia" – recognising small business should not be used as lending banks.
"Federal government agencies will be required to publish their payment time performance, significantly increasing transparency and accountability," they said in a statement.
"Digital technologies are also assisting small businesses in managing their business, streamlining administrative tasks and facilitating faster payments.
"The government has been actively engaging with the industry-led Digital Business Council development of e-invoicing."
Last month, Ms Carnell said big spending government departments should require their contractors to pay supply chain businesses within 30 days, writing to seven departments and agencies including Defence, the Australian Tax Office and Human Services as part of consultation on contract terms and conditions, the use of special project bank accounts and 30-day payments.
The inquiry helped bring down payment times for small businesses and Ms Carnell said moves by the public service to favour larger prime contracts meant extra protections for smaller sub-contractors were needed.
Ms Carnell called for a change in business culture in Australia, following new rules for United States and United Kingdom government contracts, which incorporate stronger terms and conditions already for the use of taxpayers' money.
Former public service minister Eric Abetz welcomed the announcement from his Coalition colleagues.
"The landmark report by the Small Business Ombudsman finally brought much needed attention on the practice of big government and big business using small businesses as cash cows by delaying payment times," he said.
"This positive announcement today will send a clear message that payments to small businesses should be done quickly and efficiently.
"Australia has one of the worst records with the majority of payments being 26 days past due compared to countries like Japan where payments are on average made six days ahead of falling due," he said.
