When you engage independent contractors to work with your business, it is important to be aware of their status under superannuation law. The Superannuation Guarantee (Administration) Act (‘SGA Act’) requires the compulsory payment of superannuation to employees. However, the definition of an employee under the SGA Act is very broad and may capture an independent contractor in some circumstances. Given the Australian Taxation Office (ATO) has recently taken steps to investigate and crack down on businesses that engage independent contractors, it is important that you are aware of when superannuation payments are due to the independent contractors they engage. This article will outline what a superannuation guarantee is and your obligations as an employer.
What is the Superannuation Guarantee?
The SGA Act provides workers with a superannuation guarantee. The guarantee is the minimum amount of superannuation that employers must pay into their employee’s super account. The superannuation guarantee currently sits at 11% of a worker’s ordinary time earnings for the financial year ending 30 June 2024. However, further increases to the superannuation guarantee in increments of 0.5% are scheduled each year until 2025, when the rate will reach 12%.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Who is Entitled to the Superannuation Guarantee?
Common Law Employees
While independent contractors are usually responsible for making their own superannuation contributions, there are some exceptions that you need to consider when engaging a contractor. The first situation is where, on balance and in consideration of all the facts and circumstances, the independent contractor would be considered a ‘common law employee’ of you. Factors the ATO, the courts and tribunals consider include (but are not limited to):
- the degree of control you have over the contractor’s work;
- whether the arrangement is results-based;
- whether you require the contractor to wear a uniform;
- how integrated the contractor is in your business; and
- whether the contractor can delegate their work.
The SGA Act
If the contractor is not considered a common law employee, the SGA Act confirms that “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.” The concept of ‘wholly or principally’ for a person’s labour exists in circumstances where:
- you provide payment for the contractor’s personal labour and skills, including physical, mental or artistic labour;
- the contractor performs their work personally and cannot delegate the work; and
- you make payments for each hour of work, rather than to complete a specific project.
Therefore, independent contractors can still be considered employees because of the extended meaning of that term outlined above. Importantly, just because a contractor is an employee for superannuation purposes does not mean they will be an employee for other purposes, such as pay-as-you-go (PAYG) withholding. However, you should seek legal advice for your specific situation.
If your independent contractor is wholly or principally providing their labour, they are likely to be an employee under the SGA Act. Accordingly, you must pay them the relevant superannuation guarantee amount. This is still the case if your independent contractor operates under their own business with their own Australian Business Number.
Continue reading this article below the formAre There Exemptions to Paying Contractors Super?
Nevertheless, you do not have to pay superannuation amounts to your independent contractor if they are:
- under 18 and work less than 30 hours per week;
- a domestic or private worker, such as a nanny, carer or housekeeper, and work for less than 30 hours per week; or
- providing their services through an incorporated company in most circumstances.
Additionally, you should not engage in an avoidance scheme, such as telling a contractor to incorporate a company purely to avoid paying superannuation.
What Happens if Employers Do Not Pay Super to Eligible Contractors?
Businesses must pay the minimum super requirements within 28 days from the end of the quarter. This must be paid into a worker’s nominated superannuation fund. Therefore, you need to ensure that you keep accurate and up-to-date records of all employees and contractors.
If you fail to pay super on time, you will become liable for the superannuation guarantee charge (SGC). The SGC is the amount an employer must pay to the ATO when they do not pay an employee’s super:
- on time;
- in full; or
- to the right fund.
This is more than the super that would have otherwise been payable to the employee and is not claimable by the employer as an income tax deduction.
The SGC is comprised of three components:
- super guarantee shortfall amounts (including any choice liability) calculated on the employee’s salary or wages (not ordinary time earnings);
- nominal interest on those amounts (currently 10% per annum); and
- an administration fee ($20 per employee per quarter).
Once you have calculated your SGC owing, you must pay it to the ATO and lodge a super guarantee charge statement. The ATO will pass the SCG amount onto the employee minus the administration fee.
Additional Penalties
In addition to the SGC amount, the ATO also has the power to:
- impose additional SGC ‘penalty’, which can be up to 200% of the SGC amount;
- impose additional penalties and interest onto the SGC amount in some circumstances; and
- issue a director penalty notice (DPN) to the directors of a company that has an unpaid SGC liability. In essence, a DPN makes the director personally liable for the unpaid SGC amounts.
As the above suggests, failure by a company to meet superannuation obligations can lead to significant costs. Therefore, it is best to understand your obligations from the start.
What About Other Taxes for Independent Contractors?
Just like superannuation, where an independent contract is considered to be your common law employee, you may have PAYG obligations in respect of that contractor. In this case, you should seek legal advice as soon as possible. This is because PAYG withholding amounts are also amounts for which the ATO can issue a DPN.
Generally, where an independent contractor is not a common law employee, you will not have obligations with respect to that worker under the PAYG withholding system. This means that the contractor will be responsible for managing their own income tax liability.
Other taxes that may be relevant to independent contractors include:
- GST: Generally, whether or not a contractor charges GST on their invoices will depend on whether or not they are registered for GST.
- Payroll tax: There are several situations where a worker is considered an ‘employee’ for payroll tax purposes, with most contractors providing services being captured by these rules. However, there are several exceptions, so advice should be sought to determine whether any apply.
Key Takeaways
Your business must pay superannuation to workers who are entitled to it in accordance with relevant law, including the Superannuation Guarantee (Administration) Act. Generally, your employees will be entitled to the superannuation guarantee. However, it can be unclear whether you must pay super to independent contractors. Legally, you must pay the superannuation guarantee to contractors who are considered employees for superannuation purposes. The ATO has extensive powers to investigate taxation issues and enforce superannuation laws. Failing to meet them may result in significant penalties for your business, as well as other repercussions such as DPNs. Therefore, it is vital that you are clear on your obligations and meet them in a timely fashion.
If you require assistance with your superannuation obligations, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
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