Death and taxes are supposedly the two certainties in life. But there is more in common than just certainty when it comes to superannuation. Disbelief, denial, anger – these are just some of the emotions we see when we deliver the inevitably bad news that the long-standing contracting practices adopted by a business when engaging independent contractors have triggered superannuation obligations.
Since his superannuation amnesty ended two years ago, the Commissioner of Taxation (Commissioner) has taken active steps to inform independent contractors of their potential entitlements to superannuation and taken action against businesses who may not have paid superannuation for independent contractors. With no statute of limitations applying to superannuation guarantee payments, there could be liabilities dating as far back as 1992. Spine-chilling, we know.
The Federal Court’s recent judgement in JMC Pty Limited v Commissioner of Taxation  FCA 750 (JMC) highlights the common misapprehensions many businesses work under when engaging independent contractors.
What happened in JMC?
In JMC, the business (Applicant) engaged Mr Harrison, a qualified sound engineer, to deliver lectures to the Applicant’s students and mark student examinations or assignments.
Mr Harrison was paid an hourly rate, submitted invoices, timesheets and weekly lesson plans, was not required to provide any of his own equipment, and ceded to the Applicant any intellectual property rights in any material arising from his teaching services. Further, the Applicant had a degree of oversight and control over Mr Harrison including when, how and where he was to provide the teaching services. Mr Harrison could not unilaterally exercise his contractual right to sub-contract or assign the teaching services, and such a right was subject to the Applicant’s unfettered discretion to refuse to consent to any sub-contract or assignment.
The Applicant did not make any superannuation contributions in respect of Mr Harrison.
The issue at hand was whether Mr Harrison was an employee having regard to both the ordinary or common law meaning of “employee” and the extended meaning of “employee” in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the SGA Act). The Federal Court of Australia held that Mr Harrison fell within both meanings of “employee”.
Importantly, also, it appears that the Commissioner assessed the Applicant more than 5 years after the first superannuation liabilities would have been triggered.
What is the ordinary or common law meaning of “employee”?
The ordinary meaning of “employee” for the purposes of section 12(1) of the SGA Act is the meaning of that term at common law. Our Employment team has written an excellent article about two recent High Court judgements on whether independent contractors are employees. Although these judgements are yet to make their way into judgements in the tax field, they will no doubt be relevant.
Subject to the primacy of the contract as established in those judgements, traditionally, the Courts have established various indicia to assist with this assessment including, but not limited to:
- terms of the contract;
- nature of the contracting parties;
- the existence of a right of control by an employer over an employee;
- the right to delegate the work;
- manner of remuneration;
- provision of equipment;
- ability to perform work for others; and
- assumption of risk.
What is the extended meaning of “employee”?
However, even if a person is found to be a contractor under the general law, the trap many businesses fall into is not considering the extended meaning of “employee”. This is almost universally the issue we see as businesses go to extraordinary length to ensure a person is not an employee for various other purposes, but forget tax and, in particular, superannuation when seeking advice.
If a person works under a contract that is “wholly or principally for the labour of the person”, that person will be regarded as an “employee” for the purposes of the SGA Act. In other words, a business will have an obligation in relation to superannuation in respect of those persons, even if such a person is intended to be, or is in fact for other purposes, a contractor.
The following three elements must be satisfied for a person to be an “employee” within the extended meaning:
- there must be a contract;
- the contract must be wholly or principally “for” the labour of the person; and
- the person must work under the contract.
Importantly, a contract is not wholly or principally for the labour of the individual if the contract is a contract for the provision or production of a result and that individual is paid for that result.
The Commissioner accepted these conclusions in Superannuation Guarantee Ruling SGR 2005/1, and indicated that a contractor will be “wholly or principally for the labour of the person” where:
- the individual is remunerated (either wholly or principally) for their personal labour and skills;
- the individual must perform the contractual work personally (there is no right of delegation); and
- the individual is not paid to achieve a result.
The Courts have concluded that in order for a contract to be a contract “wholly or principally for the labour of the person”, it is necessary that the contract requires the person to whom the payment was made to perform the work personally and that, if the contract leaves it open for the person to engage someone else to perform the work, it is not wholly or principally for the labour of the person (see Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 and World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327).
In JMC, Wigney J highlights that the existence of the limited right to sub-contract or assign the work may suggest that the contracts are not “wholly” for the labour of an individual; however, it does not preclude a finding that the contracts are “principally” for the labour of an individual.
Further, in JMC, the Court held that the contracts under which Mr Harrison was engaged were contracts pursuant to which Mr Harrison was paid an hourly rate for the time he spent providing services (ie. delivering lectures and marking assessments), which were not contracts for the production of a result or product.
What should businesses do now?
Inaction in any form is not an option – this is a ticking time-bomb because the Commissioner is actively pursuing this, either as gentle nudges to individuals who claim to be contractors or auditing businesses. If the Commissioner comes knocking before a business has voluntarily approached the Commissioner, the applicable penalties are more significant, up to two times the sum of the superannuation not paid and the interest at 10% on that shortfall and a small administrative fee.
Businesses should go back and have a look at their contractors to determine whether any superannuation is due, particularly under the extended definition of “employee”. If there is, voluntary disclosure to the Commissioner is recommended as a way of mitigating penalties.
So how far back do you go? This is a question that seems unclear, with different views in the market. The statutory position is clear – there is no time limit. The Commissioner takes the practical approach of looking at available records – if there are no records, the Commissioner generally does not inquire further. But remember, just because a business destroys its records once the statutory time periods are satisfied does not mean individuals do the same thing – if an individual can produce records going back further than those of the business, the Commissioner could well rely on those records. A common view we have heard is that it is only necessary to go back 5 years – however, the facts in JMC suggest that this is not an accurate statement of the Commissioner’s practices as the assessment in that case appears to have been issued more than 5 years after the superannuation liabilities were first triggered.
Importantly, if a business has superannuation obligations in respect of a contractor, this does not automatically make that business liable to payroll tax in respect of payments made to that contractor. There are a whole other set of rules and thresholds to step through to determine whether a business has payroll tax liabilities in respect of its contractors, and these rules vary between the states.
Finally, do you know the super guarantee changes starting from 1 July 2022?
From 1 July 2022, there are two key changes to super guarantee:
- The super guarantee rate will increase from 10% to 10.5%. Employers will need to use the new rate to calculate super on payments made to employees on or after 1 July 2022, even if some or all of the pay period is for work done before 1 July 2022.
- The $450 per month eligibility threshold for when super guarantee is paid is being removed, and so, employees can be eligible for super guarantee, regardless of how much they earn.