Superannuation: the potential pitfalls when engaging ‘independent contractors’
16 August 2022
Earlier this year we highlighted two High Court cases which stressed the importance of understanding a business's tax and superannuation obligations when engaging contractors. This has been further emphasised with a recent Federal Court decision which found that a worker who was classified as an ‘independent contractor’ was in fact an employee for superannuation guarantee purposes.
In Summary, in JMC Pty Limited v Commissioner of Taxation  FCA 750 (“JMC”) Mr Harrison was engaged by JMC as a sound engineer to provide “teaching services” as an independent contractor which, under the terms of the contract he;
Was paid hourly for delivering his services,
Was required to submit invoices, timesheets and lesson plans,
Was not required to provide any equipment
Surrendered any intellectual property rights in any material arising from his teaching services to JMC
Did not have autonomy over how he conducted his training such as when, how and where the lessons were held
Could not unilaterally exercise his contractual right to sub-contract or assign the teaching services, and such a right was subject to the Applicant’s discretion to refuse to consent to any sub-contract or assignment
JMC did not make any superannuation contributions in respect of Mr Harrison.
The Federal Court held that Mr Harrison fell within both meanings of “employee” (i.e. ordinary or common law meaning of “employee” and the extended meaning of “employee” pursuant to subsection 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth)(SGAA)) and that for all intents and purposes Mr Harrison was employed by JMC as a lecturer and to mark student exams.
Even as a contractor under the general law where that individual works under a contract that is “wholly or principally for the labour of the person”, that individual will be regarded as an “employee” for superannuation guarantee purposes.
The Commissioner of Taxation (the Commissioner) has indicated1 that a contractor will be “wholly or principally for the labour of the person” where:
the individual is remunerated (either wholly or principally) for their personal labour and skills
the individual must perform the contractual work personally (there is no right of delegation), and
the individual is not paid to achieve a result.
This decision is the latest in a series of recent decisions involving ‘independent contractors’ who were found to be employees for super guarantee purposes.
What should businesses do now? Review.
Employers need to review their relationships with contractors (particularly under the extended definition of “employee”) and be mindful of their potential super guarantee obligations, as significant penalties, charges and interest apply for late/underpayment of super guarantee. Businesses need to go back and have a look at their contractors to determine whether any superannuation is payable.
If the Commissioner contacts a Taxpayer before a business has voluntarily approached the Commissioner, the applicable penalties are more significant, up to two times the sum of the superannuation not paid and the interest at 10% on that shortfall and an administration fee.
Importantly, if a business has superannuation obligations in respect of a contractor, this does not automatically make that business liable to payroll tax in respect of payments made to that contractor. There are a whole other set of rules and thresholds to step through to determine whether a business has payroll tax liabilities in respect of its contractors, and these rules vary between the States.
Tax Deductibility of Late Super Contributions
The following table below sets out the due dates for:
employers making super guarantee contributions for employees in a super guarantee quarter to avoid incurring a super guarantee shortfall
lodging a super guarantee statement with the Australian Taxation Office (ATO) and paying the super guarantee charge.
Super Guarantee quarter
Due date for payment of Super Guarantee contributions
Due date for lodgement of Super Guarantee charge statement and payment of Super Guarantee charge
1 July to 30 September
1 October to 31 December
1 January to 31 March
1 April to 30 June
Employers are required to pay an employee's minimum superannuation guarantee amount on time and to the right fund. Otherwise, the employer must pay the superannuation guarantee charge (SGC) and lodge an SGC statement with the ATO.
The SGAA does not provide for any extension of time for employers to make super guarantee contributions beyond their due date, and the Commissioner has no discretion to overlook a failure to make the contributions by the due date. Employers are liable to pay the super guarantee charge for non-compliance with the contributions deadline as per the above table.
Importantly, the super guarantee charge is not tax-deductible. Therefore, where the superannuation guarantee contributions are not paid to the correct superannuation fund by the due date, these contributions and any subsequent SGC is not tax deductible.
Super Guarantee Changes Effective from 1 July 2022
From 1 July 2022, there are two key changes to super guarantee:
The super guarantee rate has increased from 10% to 10.5%. Employers will need to use the new rate to calculate super on payments made to employees on or after 1 July 2022, even if some or all the pay period is for work done before 1 July 2022.
The $450 per month eligibility threshold for when super guarantee is paid is being removed, and so, employees can be eligible for super guarantee, regardless of how much they earn.