The Australian Taxation Office (ATO) is actively targeting employers who aren’t paying employees and certain contractors their full compulsory superannuation guarantee entitlements. If caught not complying, the employer (or its directors if it is a company) could be at risk of receiving a 12-month prison sentence for failing to comply with the relevant laws.

Which type of contractors are caught by the superannuation guarantee rules?

Generally, employers are not required to pay superannuation to contractors who are bona fide contractors. However, it is important to realise that simply calling someone a contractor, or ensuring that they are able to provide an ABN, is not enough to determine that someone is, in fact, a contractor.

A contractor who provides an ABN may still be caught under the superannuation provisions if he/she works under a contract that is wholly or principally for labour. In that case, the “contractor” is considered an employee for superannuation purposes, and the employer is required to make superannuation contributions on their behalf. Notwithstanding, an individual who performs work through an entity (company or trust) will not be considered an employee for superannuation purposes.

The ATO continues to review and audit contract arrangements closely. Where they determine that a ‘contractor’ is actually an employee, they will expect the corresponding superannuation obligations to be satisfied. Where these are not being met, organisations can expect interest and penalties to apply, and will most likely be subjected to additional scrutiny down the track.

How do you decipher a contractor versus an employee?

Determination under common law requires that a range of key factors and indicators be considered and assessed in order to determine the true nature of an arrangement. These are outlined by the ATO in Taxation Ruling TR 2005/16 (‘TR 2005/16’). The ATO views that whether a person is an employee, is a question of fact, which can only be answered through the consideration of the employment contract’s terms and circumstances.

Key Indicators

CONTROLThe organisation controls the work the individual performs, hours, location of activity and how the work should be undertaken.Contractors are in control of what work they perform, their hours, location of activity and how they undertake the work.
INTEGRATIONThe individual works as part of their employer’s business.Contractors often operate on their own account.
EXCLUSIVITYEmployees typically work exclusively for their employer.Contractors often perform services for a number of different organisations.
RESULTS’ CONTRACTA contract of employment has been drawn up.A contract has been drawn up to achieve a specified result.
POWER TO DELEGATEEmployment relationships typically require the engaged party to perform the work themselves.The ability of the engaged person to delegate or subcontract their work is a significant factor for consideration.
COMMERCIAL RISKEmployees have little to no formal responsibility to rectify poor work with their employer being held responsible.Contractors are typically be held responsible for their own work with an obligation to amend it should the results be substandard.
PROVISION OF TOOLS AND EQUIPMENTEmployees perform their work using tools and supplies provided to them by their employer and are reimbursed for work related expenses.Contractors utilise their own tools and supplies and are responsible for their expenses.
OTHER INDICIAEmployers have a right to suspend or dismiss. Employees are also entitled to additional benefits including annual, sick and long service leave.