Do you have to pay superannuation to contractors?

Want to know whether superannuation should be paid to contractors? If you engage contractors, the cost of getting this wrong can be extremely high.

Government legislation is complex, the facts of each individual case are taken into account when determining your obligations, the nature of your contracting arrangement can change over time and the cost of legal advice is high.

It’s therefore important to consider the key principles the ATO has to determine whether superannuation is payable to contractors so that you know which areas you need to review. This article states these principles and suggests three steps to review your own arrangements.

What the ATO focus on – ‘wholly or principally for the labour of the person’

For superannuation, the ATO look beyond an ordinary employment agreement and consider what work the contractor performs, what rights are available to the contractor and whether the contractor is paid to produce a result.

The key term the ATO considers is whether the contractor “works under a contract that is wholly or principally for the labour of the person”. If it is, superannuation may well be payable.

When the ATO says’ wholly or principally’, it means that if a contract is partly for labour and partly for something else (eg the supply of goods, materials or hire of plant or machinery), it will qualify only if it is ‘principally’ for labour. 

When is a contract wholly or principally for the labour of the person

A contract is considered wholly or principally for labour if the contract and the conduct contain these three characteristics:

• the individual is remunerated (either wholly or principally) for their personal labour and skills;

This aspect looks at whether the contractor provides their own tools or materials and the amount that is provided relative to the work performed. If more than 50% of the work relates to materials provided, it’s unlikely to be a contract principally for personal labour and skills and superannuation won’t apply.

• the individual must perform the work personally (there is no right of delegation);

If the contractor can delegate work then the contract is not necessarily just for their own labour and skills and thus superannuation won’t apply.

The ATO may argue that the right to delegate must not have any strings attached whereas in the contract, there may be requirements for specific qualifications or experience for anyone the work is delegated to. The ATO’s position may not hold up in court based on past cases but they may argue it nonetheless.

• the individual is not paid to achieve a result.

The ATO will consider whether the contractor is paid in general for their time or more specifically for actual results. If for their time, then it indicates the relationship is more like an employer/employee relationship and superannuation may be payable.

Contracting with companies, trusts and partnerships (‘corporate entity’)

The ATO states that if a contractor is a corporate entity, the contract is not, “for the labour of an individual” and therefore superannuation will not be payable. 

However, if a corporate entity is shielding what would otherwise be a standard employer/employee relationship, the ATO can disregard the fact that a corporate entity exists and deem superannuation to be payable.

Do not take the fact that a contractor is using a company or trust as a hard and fast rule that you don’t have to pay superannuation.

Penalties for not paying superannuation when it should have been paid

As well as having to pay the unpaid superannuation, penalties include a monthly ATO administration fee per employee and interest.

Penalties can apply regardless of whether you made an inadvertent mistake or had a complex situation that may have indicated you didn’t need to pay superannuation.

Three steps to minimise your chances of getting it wrong

To ensure you minimise your chances of getting this complex area wrong and possibly suffer with large, back-dated claims and/or penalties, follow these three steps.

1. Ensure you have written agreements in place with all contractors

Agreements need to document the nature of the arrangement including the contractor’s right of delegation and whether payment is for a result or for general labour.

The agreements need to be updated if and when the working relationship with the contractor changes.

2. Use the ATO assessment tool

The ATO have an assessment tool at https://www.ato.gov.au/calculators-and-tools/employee-or-contractor/.

The tool

• entails answering some questions about the working arrangement with your contractors,
• draws on outcomes of court cases that considered various indicators to establish whether a contractor should be paid superannuation.
• provides a report that outlines whether your worker is an employee or contractor for superannuation purposes.

The ATO states that the tool is ‘designed to guide your decision’ and also state that “Provided your responses accurately reflect the working arrangement, you can rely on the result provided by the tool for tax and super purposes. It is a record of your genuine attempt to understand your obligations for your worker and would be considered if we review your working arrangement in the future.”

Given the fact that there is a long history of court cases in this area and the complexity of this area, it may be far safer to treat the assessment result as a guide rather something that can be absolutely relied upon.

3. Seek legal advice

Legal advice will help clarify your situation and ensure you have all the necessary documents and procedures in place.

There are several monthly subscription-based employment services for employers that are proving popular such as Employsure and HR Central which may be able to assist before problems arise and costly legal assistance is needed.

Summary

Many businesses are at risk of getting this wrong and suffering from disputes with contractors, back payments of super and ATO penalties. This is a complex area that you need to examine in relation to your own particular circumstances. Understanding the ATO principles, having written agreements, reviewing your own contractor relationships with the ATO assessment tool and seeking legal advice should give you a reasonable chance of ensuring you meet your obligations.

Please note this article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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© Copyright, Angus Morrison