Your business may be required to make superannuation contributions for some independent contractors, even if they have an Australian Business Number (ABN). Contractors hired under a contract "principally for labour" are captured – but what does that mean? Find out what test the ATO applies and check whether your business has its super obligations covered.
Hiring independent contractors can be a flexible staffing solution for many businesses, not only to meet fluctuating workloads but also to help fill gaps with specific skills. But did you know that some workers who are genuinely independent contractors are still entitled to compulsory superannuation contributions?
If a worker is not an employee in the general sense but is hired under "a contract that is wholly or principally for the labour of the person", the worker is deemed an employee for super purposes, even if they have an ABN.
This means the hirer must make superannuation guarantee (SG) contributions of 9.5% (in relation to the part of the contract that is for labour). Hirers can't meet this obligation simply by paying the worker an additional 9.5% – they must actually make contributions to the worker's superannuation fund.
So what sort of contracts are captured? The ATO's view is that a contract is "wholly or principally for labour" when three key requirements are all met.
- First, the person must be paid "mainly" for their labour (if not entirely), and the ATO interprets this as "more than half the dollar value" of the contract being for labour. Labour includes not only physical work, but also mental and artistic effort.
- The second requirement is that the person is paid for their labour, not to achieve a result. Being paid by the hour suggests the person is paid for their labour. In contrast, when a person is paid a fixed sum for a specific output, this suggests they're paid for a result.
- Third, the person must personally perform the work and must not be able to delegate to someone else. The ATO notes that many contractors are often hired based on their personal skills, qualifications and experience, so many contractors will typically be unable to delegate their work.
What types of work can this affect?
All kinds of workers can be captured. Typical examples might include freelancers such as programmers, editors, graphic designers or administrative support workers who are paid by the hour (not for a specific result) and can't delegate the work to someone else. Similarly, labourers and other contractors performing physical work could be captured.
The rule can also extend to individuals in sophisticated business structuring arrangements. In a recent decision (Moffet v Dental Corporation Pty Ltd), the Federal Court found that a dentist who had sold his dental practice to a third party and continued to work as a dentist for that practice was an independent contractor, but had been working under a contract "wholly or principally for labour". The new dental practice owners were therefore required to make minimum SG contributions for him.
The dentist was earning a percentage commission of the fees collected from patients, but was also contractually required to pay a "shortfall" amount to the dental practice in the event the practice's annual cash flow fell below a set target – a risk not usually born by a worker in an employment-like arrangement. This case illustrates how even individuals like former business owners who agree to perform services under complex contractual arrangements can potentially be entitled to SG contributions.
Not sure about your contractors?
Don't wait for the ATO to come knocking. Contact us today for assistance in reviewing your contractor arrangements and ensure your business is protected.