Superannuation Obligations for Contractors

Stavroula Papadatos | 16 October 2013

What are the requirements and are you at risk?

There have been recent court decisions looking at the issue as to whether an individual is an employee or an independent contractor for superannuation purposes.

The flow on effects of a decision that a person is an employee, rather than an independent contractor, can be very costly to the employer so it is important that you understand your obligations.

As stated in the Australian Taxation Office (ATO) compliance program “Compliance in Focus 2013-14”, in addition to their focus areas they will continue their compliance efforts in the following areas:

Workers incorrectly treated as contractors rather than employees
Payment of superannuation guarantee

The ATO will investigate employers that intentionally try to avoid their tax and superannuation obligations by improperly treating workers as contractors rather than employees and where non-compliance is detected they will apply penalties.

The ATO will monitor employers to ensure they are paying correct amounts of superannuation into their employee’s superannuation funds and where appropriate will use the new director penalty regime to make directors personally liable for their company’s outstanding superannuation guarantee charge liabilities.

Employee vs Independent Contractor

It is often difficult to characterise a worker between an employee and an independent contractor and one of the misconceptions is that if a worker is engaged through their own company, there is no ‘employee’ relationship.

In a case earlier this year in relation to insurance sales representatives, the full Federal Court held that workers engaged through personal companies were still employees. The Court warned against convenient contract arrangements which are in fact hiding an employment relationship.

What happens if the employer gets it wrong?

When a contractor is re-classified as an employee for superannuation guarantee purposes, the employer is liable for a superannuation guarantee charge which equates to:

For all unpaid superannuation contributions (potentially as far back as July 1992) calculated on total salary and wages, not just ordinary time earnings
Nominal interest at 10% on those unpaid contributions from the beginning of the period the contributions relate to
Administrative penalties per person per period

The Commissioner has no discretion to reduce the superannuation guarantee charge.

In addition, the Commissioner can impose general interest charge and penalties for failing to make the payments and other offences (which can be up to 200% of the superannuation charge amount), which are not deductible.

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