The Commissioner of Taxation (Commissioner) is targeting employers and principals who fail to adequately discharge their PAYG and superannuation guarantee obligations.
Whether a worker is an employee or a contractor is an issue that is often argued before courts and tribunals in Australia. The distinction is critical as getting it wrong can result in a liability to pay the superannuation guarantee charge (SGC) and other penalties.
Adding to the complexity is the extended definition of 'employee' in section 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGA Act), which deems certain individuals to be employees for superannuation guarantee purposes, even though they would otherwise be outside the scope of the SGA Act. In particular, section 12(3) of the SGA Act deems a person that 'works under a contract that is wholly or principally for the labour of the person' to be an employee for superannuation law purposes.
ATO ID 2011/87
The Commissioner determined in ATO ID 2011/87 that a medical practitioner was not an employee within the common law meaning or the extended definition of 'employee' under section 12(3) of the SGA Act.
Briefly, the medical practitioner was engaged by a clinic to provide services to its clients. The fees paid by the clients were paid to the clinic and upon the practitioner invoicing the clinic; the practitioner received a set percentage of the fees. No amount was withheld and the medical practitioner did not receive any employment benefits. The clinic provided treatment rooms, equipment and receptionist services and retained the remaining fees as consideration for providing the facilities. Importantly, the medical practitioner could not delegate.
The Commissioner determined that the agreement was results based and the clinic had no right of control over the manner in which the medical practitioner treated clients. Therefore, the medical practitioner was not an employee for the purposes of superannuation law, despite not having the right to delegate.
While this case appears relatively straight forward, the distinction between an independent contractor and a deemed employee under superannuation law is notoriously difficult to navigate. In the recent case of On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation1 Bromberg J noted that:
'...the absence of a simple and clear definition which explains the distinction between an employee and an independent contractor is problematic. It is troubling that in the circumstances of the bicycle couriers dealt with in Hollis, the parties involved needed to travel to the High Court to obtain a clear exposition of the legal status of the couriers... Workers and those who employ or engage them require more clarity from the law...'
Bromberg J went on to note that whether an independent contractor is in fact an employee is not a scientific test, but akin to an elephant: 'an animal too difficult to define but easy to recognise when you see it.'
Superannuation guarantee obligations
If employers do not make minimum superannuation guarantee contributions to a complying superannuation fund on behalf of their employees, the SGA Act imposes a charge on an employer's superannuation guarantee shortfall for each quarter.2 The SGC is comprised of
- 9% of each employee's total salary or wages (instead of just their ordinary time earnings) (the shortfall amount);
- interest on the shortfall amount; plus
- an administration fee for each employee ($80 per year per contractor).
The SGC is not deductible and the Commissioner has no discretion to remit all or part of the SGC. Importantly, the SGC must be paid to the Commissioner, it is not sufficient to pay the SGC directly to the employee's superannuation fund. Further, employers cannot contract out of their superannuation guarantee obligations.
While independent contractors are generally excluded from the operation of the SGA Act, they may be caught by the deeming provisions.
A principal must assess its contractors on a case by case basis to determine whether they fall within the definition of an 'employee' for the purposes of the SGA Act.
This issue arises frequently in relation to individuals who work under a contract that is wholly or principally for their labour.3 'Labour', in this context, is commonly understood to include intellectual and artistic effort as well as physical labour.
It is not sufficient that a contractor has an ABN to avoid the application of the SGA Act as the contractor may still be considered an employee for the purposes of the superannuation law. 'The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.' 4
Distinguishing between employees and independent contractors can be a difficult task. Courts have drawn the distinction by employing a 'multi-factor' test that examines the relationship between the principal and the contractor. However, this is not an exact science, but a balancing act that involves weighing the various factors and coming to a conclusion.
Superannuation Guarantee Ruling SGR 2005/1 (SGR 2005/1) sets out the Commissioner's view on when a contractor will fall within the extended definition of an employee, being where the contractor:
- is remunerated wholly or principally for their personal labour and skills;
- must perform the contractual work personally (there is no right of delegation); and
- is not paid to achieve a result.
The crucial factor in determining whether the deemed employee provisions apply is whether the contract is a 'contract of service' (the performance of labour) or a 'contract for services' (for the production of a result). Essentially, 'the distinction between a contract for service and a contract of service is rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.' 5
The level of control exercised by the principal over the contractor is also key factor in determining the true nature of the relationship between the parties, which was reiterated by the Commissioner in SGR 2005/1.
In determining the degree of control exercised, the Commissioner and the Courts look to the extent to which the employer has the right to control the manner in which the task is to be carried out. The Commissioner does not require strict day to day control but the legal right of control.
It is necessary to assess all the circumstances of the relationship between the parties to determine whether the contract is a genuine results-based contract. The payment structure will not be determinative as the fee under a results-based contract may be calculated on an estimate of the time and labour cost that is necessary to complete the task.
The general view has been that if the contractor is a company or trustee of a trust there is no employment relationship, either at common law or under the extended definition of an employee. This view is supported by SGR 2005/1, but has recently been called into question by the Roy Morgan Research case6 where the Full Court of the Federal Court held that the Administrative Appeals Tribunal was correct in concluding that the fact that Roy Morgan paid money to 'someone other than the individual interviewer for that interviewer's assignments does not change the fact that Roy Morgan engaged the individual.'
The Court went on to note that the Tribunal considered 'the ability of an interviewer to incorporate as a factor entitled to little weight because the entity selected to do the work (conduct interviews) was the individual interviewer, and the company featured only as the recipient of the fees that would otherwise have been paid to the interviewer. No error has been shown in the Tribunal's treatment of this factor.'
In light of the Roy Morgan Research case, this issue is now the subject of some uncertainty. Depending on the specific facts, incorporating may not be sufficient to take a contractor outside the scope of the SGA Act if they would otherwise be caught. However, in our view, it is unlikely that an incorporated contractor who has been correctly engaged, invoices the principal and is carrying out a business will be treated as a deemed employee for superannuation law purposes.
An independent contractor that is carrying on a business will generally be 'autonomous rather than subservient in its decision-making; financially self-reliant rather than economically dependent upon the business of another; and... chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.' 7
Managing contractor risk
Principals should assess the degree of risk of their contractors being treated as deemed employees for superannuation law purposes, review their agreements and substantive arrangements and consider whether their business structure is appropriate.
It is important that principals are aware that the onus is on them to establish that the relationship is a genuine principal/ independent contractor arrangement. This can be difficult where a principal engages large numbers of contractors and typically does not gather sufficient information about the contractors' business practices and clients.
If proposed legislation is passed in its current form, directors could be personally liable for the SGC if superannuation guarantee contributions are not made on behalf of contractors deemed to be employees for superannuation law purposes. This will be the case despite the fact that contractors are generally paid a higher fee on the basis that the contractor is responsible for any personal tax liabilities and insurance premiums. Further, the fact that a contractor has made deductible contributions to superannuation will not reduce the principal's liability, even if the contractor will incur an excess contributions tax liability.
Given the vexed question of categorising a worker as an employee, deemed employee or independent contractor and the serious penalties that could be levied if you get it wrong, we recommend maintaining records that document the principal/independent contractor relationship and keeping abreast of changes in this area of the law.
1 On Call Interpreters and Translators
Agency Pty Ltd v Commissioner of Taxation (No 3)  FCA
2 Section 16 of the SGA Act
3 Section 12(3) of the SGA Act
4 Bromberg J in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3)  FCA 366 citing Gray J in Re Porter; re Transport Workers Union of Australia  FCA 226 at 184
5 Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210 cited in Hollis v Vabu (2001) 207 CLR 21
6 Roy Morgan Research Pty Ltd v Commissioner of Taxation  FCAFC 52
7 Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3)  FCA 366
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.