Superannuation issues: "Employee" or "Independent Contractor"

December 2009

The Superannuation Guarantee Administration Act 1992 requires employers to make superannuation contributions for the benefit of their "employees". If the required superannuation contribution is not made the employer will be subject to the Superannuation Guarantee Charge (SGC). However if an individual is not an "employee" under the Act or is otherwise exempted from the application of the Act then no liability for the SGC will arise. The challenge is knowing the 'ins and outs' of what classifies an individual as an "employee" versus an "independent contractor".

To assist taxpayers deciding whether a worker is an employee or an independent contractor the Australian Taxation Office has a 'Employee/contractor decision tool' page.

This ATO tool is designed to help the entity that pays the contractor decide about tax and superannuation treatment in respect of whether a party is an employee or a contractor.

Note that this ATO tool does not deal with payroll tax as payroll tax is a state based matter.

This page will also direct business owners to an ATO Superannuation Guarantee Decision Tool designed to assist employers to determine the way to treat superannuation guarantee obligations in certain circumstances. The ATO has also issued a ruling SGR 2005/1 which provides guidance.

It is important to be aware that, for superannuation guarantee purposes, there is an extended definition of "employee" which deems a contractor (where the contractor is an individual) to be an employee if:

  • the individual is paid, either wholly or principally, for their personal labour and skills;
  • the individual must perform the work personally (that is, there is no right of delegation); and
  • the individual is not paid to achieve a result.

If the above three elements apply then the contract will be considered to be wholly or principally for the labour of the individual. The individual will be then treated as an employee for superannuation guarantee purposes.

Your attention is drawn to paragraphs 64 to 78 of SGR 2005/1 which further clarifies the above.

Note that if an individual performs work through an entity such as a company or a trust then there cannot be an employer/ employee relationship for superannuation guarantee purposes either at common law or under the extended definition of employee contained in section 12 (3) of the Superannuation Guarantee (Administration) Act 1992: paragraph 13 SGR 2005/1.

Similarly, if a partnership is contracted to perform work under a contract, then an individual partner who performs the work will not be treated as a deemed "employee" for superannuation guarantee purposes: paragraph 14 SGR 2005/1l.

Further information

For advice and assistance on independent contractor agreements contact CCIQ Legal Services on 1300 405 711.

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