As part of our contractor blog series, we break down the superannuation obligations you might have when working with independent contractors.

This is not a complete guide to every technical detail – just the key considerations and how the rules usually apply.

You must seek advice specific to your circumstances if you’re unsure how the rules may apply to you.

 

who regulates super?

The Australian Taxation Office [ATO] plays a crucial role in ensuring compliance with tax laws and superannuation regulations. It manages the collection of employer superannuation guarantee contributions and ensures that all contributions are made and handled appropriately.

 

determining if a contractor is independent or a deemed employee

hiring individuals

When engaging individuals, the details within the working agreement or contract are just the starting point when determining whether they are independent contractors or employees for tax and super purposes.

A review of the entire working arrangement is needed to determine if your worker is an employee or an independent contractor. The High Court’s rulings in CFMMEU v Personnel Contracting [2022] HCA 1 and ZG Operations v Jamsek [2022] HCA 2 emphasise that the determination of whether a worker is an employee is a question of fact, requiring an objective assessment of the totality of the relationship.

 

key superannuation considerations

You might have to pay super for an independent contractor if:

  • They’re paid wholly or principally for their labour [more than 50% of the contract is for their work, not materials or equipment] – even if it’s a verbal contract.
  • The contract doesn’t allow them to delegate their work to someone else.

 

If they qualify for super, you must:

  • Offer them a choice of super fund within 28 days of their start date.
  • Pay 11.5% super on their ordinary earnings [as of July 2024]

 

This is the labour component of the amount paid to the independent contractor. Simply adding an extra amount to their invoice to ‘cover super’ isn’t enough. You must pay it into their super fund each quarter.

Super payments do not include:

  • GST
  • Payments for materials and equipment
  • Overtime [if paid separately from standard hours]

 

hiring through entities

Companies, trusts, and partnerships are always ‘contractors’ and they are not deemed employees for superannuation purposes. An employee must be a person. Sole traders would be captured though.

 

employee vs. independent contractor

The critical differences between an employee and an independent contractor are:

  • An employee serves in your business and performs their work as a business representative.
  • An independent contractor provides services to your business and performs work to further their own business.

The ATO provides the following guidance outlining each indicator to help assess the relationship. No single indicator is determinative, and they should not be applied as if they are a checklist.

 

Deemed employee Independent contractor
Control Your business has the legal right to control how, where, and when a worker does their work. The worker can choose how, where, and when the work is done, subject to reasonable direction from you.
Integration The worker serves in your business and is contractually required to perform work as a representative of your business. The worker operates their own business and provides services to yours to further their own.
Mode of remuneration The worker is paid either:

  • For the time worked,
  • A price per item or activity, or
  • A commission.
 The worker is generally contracted to achieve a specific result and is paid upon its completion, often for a fixed fee.
Ability to subcontract or delegate The contract does not include a clause allowing the worker to delegate or subcontract their work to others. They must perform the work themselves and cannot pay someone else to do it for them. The contract includes a clause allowing the worker to delegate or subcontract their work to others. This clause must not be a sham and must be legally enforceable.
Provision of Tools + Equipment Your business provides all or most of the equipment, tools, and other assets required to complete the work. While the worker may provide some tools, your business either offers an allowance or reimburses them for any expenses incurred. The worker provides all or most of the equipment, tools, and other assets required to complete the work, and you do not offer an allowance or reimburse them for any expenses incurred.
Risk The worker bears little to no risk, while your business assumes the commercial risk for any costs arising from injury or defects in their work. The worker bears the commercial risk for any costs arising from injury or defects in their work.
Generation of Goodwill Your business benefits from any goodwill arising from the work of the worker. Your business retains any goodwill generated from the worker’s work.

 

example application of ATO guidance Ally’s Allied Health Services Pty Ltd

We’ve applied the ATO guidance to a set of fictitious facts below.

The worker bears little to no risk, while your business assumes the commercial risk for any costs arising from injury or defects in their work.

 

Ally’s Allied Health Services Pty Ltd [an example] Employee vs. Contractor Result
Control Your business has the legal right to control how, where, and when the worker does their work. ‘The contractor will be required to perform most services at 123 Smith Street NSW [the “Premises”].‘  Employee
Integration The worker serves your business and is contractually required to perform work as a representative of your business.

“The Contractor must prepare and deliver all written correspondence using the Principal’s provided templates. Any modifications or alterations to these templates require prior written approval from the Principal.

The Contractor must use the Principal’s letterhead and business cards for all communications and matters related to the Services performed on behalf of the Principal.”

 Employee
Mode of remuneration The worker is paid a price per item or activity, or percentage of gross income earned by the performance of their services. Employee

 
Ability to subcontract or delegate The contractor can subcontract, but only with your permission, which may render the clause a sham. Employee

 
Provision of tools + equipment Your business provides most of the equipment, tools, and other assets needed to complete the work.

“The Principal will supply all property and equipment required for the Contractor to undertake the Services, including but not limited to:
a. internet;
b. stationary;
c. filing cabinet.”

“The Contractor will supply their own laptop.”

 Employee
Risk The worker bears little to no risk, while your business assumes the commercial risk for any costs arising from injury or defects in their work. Employee
Generation of goodwill Your business benefits from any goodwill arising from the work of the worker. The Company is responsible for servicing all Clients and prospective Clients acquired through its own marketing and advertising initiatives. Employee

Compared to the ATO-provided indicators, it is apparent that the contractors in this example would be deemed ‘employees’ for superannuation purposes.

 

Co-authored by MD, John Knight.

 

you can review the other parts of our contractor blog series here:

misconceptions
Payroll Tax
Workers’ comp

 

 

we’re here to help

If you have any questions, please reach out to your usual contact at businessDEPOT. You can also give us a buzz on 1300BDEPOT or email us and our team will be happy to help.

 

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