With more businesses now using contract labour, the ATO has begun focusing on contractors and their obligation to pay the 9.5% Superannuation Guarantee Levy.
Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 provides that if the contract is “wholly or principally for labour” then that person is deemed an employee and therefore has a Superannuation Guarantee (SG) levy obligation.
The common law principal to determine whether a tax payer is an employee (an individual) is tested against the following:
- The control the employer has
- The basis of the contract
- The ability to sub contract
- Who bears the risk of the project.
There has been a significant number of cases recently regarding the Superannuation Guarantee. In general, the courts have taken a more expansive view when testing whether an individual is employed ‘wholly or principally for labour’.
While the impact on individuals is clear, there is now more significant focus on interposed entities (e.g. companies); more specifically, between the contractor and the ultimate entity paying the contractor.
According to the ATO, if you make a contract with someone other than the person who will actually be providing the labour, there is no employer/employee relationship.
The following situations are examples of when the contract is not for the labour of the individual:
- If you make a contract with a company, trust or partnership or
- If the person you have the contract with is free to hire other people to perform the work even if the person ends up performing the work themselves.
A recent case still subject to appeal highlighted that where a contract is in all practicality for the services of the individual, the payment of contract fees to an interposed entity may not be sufficient to overcome the SG liability. The key issue here was the freedom of the contract entered to delegate the work. We recommend that you seek Saward Dawson’s assistance if you feel this is relevant to your situation.