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When you engage independent contractors to work in your business, you need to be aware of whether they are contractors or are actually employees. This will affect your obligations to pay superannuation.

The Australian Taxation Office (ATO) has taken steps to crack down on investigations of businesses who engage contractors. They are investigating whether contractors engaged independently are being paid appropriate superannuation payments if they are entitled to them. The ATO no longer allows businesses to claim ignorance of the entitlements as a defence. Therefore, businesses need to be acutely aware of when they must pay superannuation to contractors under an employment relationship. This article explains how to determine whether you owe a contractor a superannuation guarantee.

Testing if Someone is a Contractor or Employee

The first rule is that you must pay superannuation for anyone who is an employee. Therefore, you must first decide if a person you hire is an employee or a contractor. Hiring someone as a contractor who should be an employee is known as sham contracting and carries heavy penalties. Problems with sham contracting commonly arise when an employment relationship ends, and a contractor thinks that they are owed entitlements or when a worker believes they are an employee and wants to receive entitlements.

Importantly, if you pay a contractor primarily for their personal labour then they are most likely employees for the superannuation guarantee purposes. This is true even if the contractor operates under their own business with their own Australian Business Number (ABN).

The ATO provides two online tests to help determine if someone is an employee or contractor. They provide guidance as to both taxation and superannuation entitlements:

  1. test for taxation purposes; and
  2. test to understand superannuation requirements.

As there are some grey areas, you may get a different response in each test. Therefore, these tests provide guidance but are not definitive.

What Happens if You Do Not Pay Superannuation?

Businesses must pay the minimum superannuation contribution requirements each quarter into the nominated superannuation fund. Therefore, a business needs to ensure that they keep accurate and up to date records of all employees and contractors. These records are especially important as they may support the decision as to whether or not the particular workers are employees or contractors for superannuation purposes and, subsequently, whether you as the business owe any superannuation contributions.

The ATO has broad powers to review your engagements to determine if you should have made superannuation payments. You can face significant penalties if your business does not make superannuation payments correctly and on time, including having to pay administration fees and interest with a superannuation guarantee charge (SGC). If you still do not pay this charge, the ATO can take stronger action, including issuing a penalty notice directing you to pay back the unpaid super. Finally, if you continue to not pay, you could be fined $10,500 or even face up to 12 months imprisonment. As this can be a significant and troublesome burden, it is best to understand your obligations from the start.

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Paying Superannuation to a Contractor

The Fair Work Ombudsman (FWO) uses a set of guidelines to determine if someone is an employee or a contractor. However, the ATO goes by the Superannuation Guarantee (Administration) Act. This nets a wider pool of workers who may be entitled to superannuation. For example, the Act states:

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.

This suggests that a contractor who invoices a business for labour and parts, where parts are a bigger proportion of the invoice, will likely not be eligible for superannuation payments. However, a contractor who invoices a business for creative works with labour being a whole proportion of the invoice will most likely be eligible for the superannuation payments.

However, you do not need to pay superannuation contractors who invoice you through a Proprietary Limited Company (Pty Ltd).

For example, if Jessica provides design services to your business and the work under the contract is wholly for the labour, but Jessica is an employee of another proprietary limited company, ‘Designs-R-Us’, you do not need to pay her superannuation.

It is also important to note that you cannot contract out of your responsibility to pay a contractor superannuation. You cannot draft a contract with terms that remove this entitlement.

Key Takeaways

Your business must pay superannuation to everyone you engage who is entitled to it. In most cases, these will be employees. However, in some cases, you may still need to pay superannuation to contractors, such as when they provide substantial labour under a contract. The ATO has extensive powers to enforce superannuation laws. It is vital that you are clear on your obligations.

If you need clear advice about your superannuation obligations, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How do I tell if someone Is a contractor or an employee?

The ATO provides two online tests to help determine if someone is an employee or contractor. They provide guidance as to both taxation and superannuation entitlements.

Can I agree with my Contractor not to pay superannuation? 

You cannot contract out of your responsibility to pay a contractor superannuation. You cannot draft a contract with terms that remove this entitlement.

Who enforces superannuation laws?

The ATO has extensive powers to enforce superannuation laws. You can face significant penalties if your business does not make superannuation payments correctly.

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