Australia: Superannuation Guarantee: A new Compliance Nightmare

Last Updated: 29 July 2011

The rules relating to Superannuation Guarantee are tightening on a number of fronts. As well as the cases before the courts in recent months – most examining what it means to be an "employee" – the Government announced in the recent Commonwealth Budget that it intends to change the rules in relation to the Superannuation Guarantee ("SG") in order to crack down on phoenix activity.

Contractor or Employee?

Many businesses employ skilled operators to do a particular job for a short period. If the contract to perform this work is with an individual rather than a company, how can the business be sure that it will not be open to a claim for Superannuation Guarantee amounts at a later date? This makes it essential for employers to know whether the person they have just hired is an "employee" for Superannuation Guarantee purposes (and therefore subject to the additional 9% in compulsory superannuation) or whether they are in fact a "contractor".

Two recent cases explored this issue. In the Full Federal Court decision of Roy Morgan Research Pty Ltd v Federal Commissioner of Taxation [2010] FCAFC 52, the court held that market research interviewers doing interviews on behalf of Roy Morgan were employees for the purpose of the SG legislation. The main factors in coming to this conclusion were that the interviewers were integral to the Roy Morgan business itself and were not engaged in business on their own account. In addition, they were required to wear Roy Morgan ID cards, suggesting that they were part of the Roy Morgan enterprise.

In On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366, the Federal Court looked beyond the traditional "control" test to determine whether someone is an employee. Historically, this test was based along the following lines:

  • Employees are workers engaged under a contract of employment (a "contract of service")
  • Independent contractors are those workers who run their own business and have a contract to provide services (a "contract for service").

In other words, contractors are paid for a particular job and have control over how they complete the job.

In this case, a "multi-factorial" approach which considered the "totality of the relationship" was held to be appropriate. Some the interesting considerations of the court included:

  • The extent to which the paying party could and did exercise control of the contractors was a determinative factor in this case
  • The goodwill that attached to the work performed
  • The fact that payment for work had a connection to time was not determinative.

The Budget Announcements

In the recent Budget, the Government announced that from 1 July 2011 the director penalty regime extends to Superannuation Guarantee amounts, making directors personally liable for a company's failure to pay employee superannuation. As a result, company directors' personal assets are at risk when a mistake is found in the classification of contractors. In the Budget papers, this is headed "countering fraudulent activities by company directors".

It will be a huge challenge for the Government to appropriately target phoenix operators under this legislation. While strong action on this type of behaviour is necessary, the critical issues that will emerge will relate to the detail.

It is not uncommon for genuine business operators – many of whom have been operating legitimately for years – to inadvertently miss or fall behind in their Superannuation Guarantee obligations. Is it appropriate to have directors personal assets at stake when this occurs? Will the new legislation make the directors of public companies personally liable for the SG obligations of the company? What about nonexecutive directors? Is it appropriate to have directors personal assets at stake merely because the company has misclassified an employee as a contractor?

These targeting issues will need to be fully addressed in the final legislation.

The Budget papers note that this measure is only expected to net about $10m in revenue in 2011-12 but this will increase to $60m and then $95m in the succeeding two years. How can we be sure that these figures represent proceeds garnered from phoenix operators only and not from directors of ordinary businesses that have fallen behind in superannuation payments for their employees?


The "multi-factorial" approach applied by the Federal Court highlights the fact that Crowe Horwath clients using independent contractors need to adopt a rigorous audit process to ensure that independent contractors do not fall within the extended definition of employee under the Superannuation Guarantee legislation. This conclusion is given added impetus from 1 July 2011 as the Budget papers potentially bring company director's personal assets into play where a mistake is found in the classification of contractors.

For further information generally please contact your local Crowe Horwath Head of Tax advisor: Sydney - Steve DiLeo +612 9619 1637; Melbourne – Norman Elliott +613 9258 6866; Perth - Peter Fallon +618 9488 1102; Brisbane – Tony Marks +617 3233 3593

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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