What’s emerging: Full Federal Court decision provides clarity on the application of Superannuation Guarantee to contractors
4 April 2023
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On 24 March 2023, the Full Federal Court (FFC) released its judgement in the matter of Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek FFC). In its decision, the FFC concluded that the truck drivers, Mr Jamsek and Mr Whitby, were not “employees'' of the principal (ZG) under the extended definition of that term in s12(3) (herein referred to as the Extended Test) of the Superannuation Guarantee (Administration) Act 1992 (1992) (SGAA).
The Extended Test provides that: “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract”.
There has been some conjecture in relation to the scope of the Extended Test following the FFC’s decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet) in 2020. In particular, in that case, long-standing Australian Taxation Office (ATO) doctrine from Superannuation Guarantee Ruling - SGR 2005/1 - Superannuation guarantee: who is an employee? (SGR 2005/1) was not referred to by the Court in making its decision; importantly, it appeared that the Court was not influenced by the worker’s service entity structure being party to the contract, in deeming that superannuation was applicable for the worker. In contrast, SGR 2005/1 generally prescribes that contractors operating via business structures do not fall within the remit of the Extended Test.
Further, in the High Court decision in ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek HCA), with respect to the s12(3) matter which was referred down to the FFC, in relation to the look-through aspect, the majority judgement noted (at 76) that the argument was “not insubstantial (and) cannot be dismissed out of hand (and) acceptance of these arguments would have substantial consequences for the revenue”. These comments by Australia’s highest judicial authority further exacerbated the conjecture in relation to the continuing validity of SGR 2005/1 principles.
It may be of relief to many that the Full Federal Court, in essence, agreed with the submissions of the Commissioner of Taxation (the Commissioner, who was joined to the proceedings) such that key principles of SGR 2005/1 were broadly upheld, and while the Moffet principles were applied, those principles were clarified (and thereby narrowed) in their application. We provide details of the key takeaways of this case below.
Jamsek FFC matter - Background
Mr Jamsek and Mr Whitby were initially engaged by ZG as employees driving company trucks. In or around 1985-1986, the company noted that they could no longer sustain employment of truck drivers, however could under a contracting model. As a result of this, Mr. Jamsek and Mr. Whitby created partnerships with their wives - the partnerships entered into written contracts for cartage services with the company, and agreed to purchase and maintain trucks from the company. The partnerships invoiced for their cartage work and were paid by the company for that work.
Following the High Court contractor decisions last year, as referenced above, the Jamsek case was remitted down to the FFC in relation to the Extended Test, given the High Court’s conclusion was that the truck drivers were not common law employees. This also allowed for the Commissioner to join the proceedings.
The key arguments put forward by the drivers’ Counsel were:
- All the Extended Test requires is that a person works “under” a contract, not that the person was himself or herself a party to the contract. Therefore, despite the Jamsek and Whitby partnership being party to the contracts with ZG, it was the individuals who worked under those contracts.
- Even though one of the purposes of the contract was the provision of trucks, the contract was nonetheless “principally” for the labour of the drivers.
Overall, the FFC accepted the submission of ZG and the Commissioner, being that the Extended Test required the contracting party to be the drivers in their individual capacity (rather than the respective partnerships), and further, the drivers themselves were not engaged ‘wholly or principally for labour’ due to the requirement for the partnerships to supply trucks as part of the contracted services. As such, Mr. Jamsek and Mr. Whitby were not entitled to SG under the Extended Test.
Key observations
We have outlined our key observations below:
The Extended Test’s composite elements
Consistent with the decision in Moffet, the Full Federal Court concluded that the Extended Test has three elements that each needs to be assessed. These are:
- “that there should be a “contract”;
- which is wholly or principally “for” the labour of a person; and
- that the person must “work” under that contract”.
The judgement explored each of these elements in detail.
The “contract” must be with a natural person
The FFC held that the Extended Test only has application where the worker is an identified person who is party to the contract in their individual capacity. The worker must work under the contract, and the party on the other side must make payment to the worker in respect of their labour under the contract.
This reaffirms long standing views held by the ATO that a contract exclusively between a principal and an incorporated entity cannot result in a SG obligation for a principal in relation to the entity’s workers. In their judgement, the majority (Perram and Anderson JJ) outlined that this accords to the original legislative intent of the SGAA, being to provide for adequate living standards in retirement for natural persons, individuals workers and employees.
However, it was outlined that for contracts which name multiple parties (noting that, in Moffet, there were three parties including the worker that were party to the Services Agreement), one needs to look at the two parties who have a bilateral exchange of promises. In Moffet, it was concluded that, despite the service entity also being a party to the contract, it was the individual (Dr. Moffet) who had promised labour and was in turn promised payment. In our view, this necessity to understand a bilateral exchange of promises is also likely to be relevant for oral contracts where there is an incorporated entity, with the contracted services provided by a given worker under the arrangement with the principal.
Contracts “for” results are not “for” labour
In applying precedent, the majority (Perram and Anderson JJ) concluded that the Extended Test is not satisfied where a contract is properly characterised as being for the provision of a result, as opposed to being “wholly or principally for [the] labour” of the specific person. Again, this stands to preserve long-standing ATO doctrine from SGR 2005/1.
The majority also noted that remuneration by the hour will generally signal against a contract being for a given result. For completeness, we note that the Moffet arrangement was structured to have two remuneration components, a personally generated revenue component (based on percentage of monthly revenue) and a performance bonus based on the overall practice’s revenue (set as a percentage of the increase in annual cash flow over a threshold). There was also a minimum annual cash flow requirement for the practice, where Dr. Moffet would need to compensate the principal (Dental Corporation) for any shortfall.
In that case, whilst not elaborated upon in the judgement, the same three judge panel (as for the Jamsek FFC matter) concluded the application of superannuation, suggesting that the arrangement should not be viewed as “for” a result, even though underlying remuneration components could be argued as being (at least to some degree) based on specific output.
Contracts which have a right to delegation may not be “for” labour
Noting that the contract must be wholly or principally "for" labour, the majority (Perram and Anderson JJ) indicated that if the contract allows for employment or subcontracting, then it cannot be "for" the labour of the person. Again, this aligns to SGR 2005/1.
For completeness, Wigney J, in his judgement, voiced a point of difference to the majority judgement, being that a right of delegation, which is fettered by restriction (in this case, required ZG’s “prior and continuing approval”), may not in and of itself be “determinative” of whether the contract is “wholly or principally for labour”.
Contracts including large capital item is a barrier to being “for” labour
Where an argument is mounted that a contract (which is for labour and something else, such as equipment) is wholly or principally for labour, some method by which the value of each component can be ascertained, is necessary.
In the Jamsek FFC matter, in the absence of such analysis, the materiality of the trucks sought under these contracts, combined with the risk and costs to the partnerships of ongoing operation, maintenance and insurance, permitted a conclusion that “labour” was not the principal object of the contracts.
We also noted that the majority agreed with the Commissioner that consideration must also be given as to whether the equipment or vehicle is specialist in nature, consistent with the findings in Hollis v Vabu Pty Ltd (2001) 207 CLR 21. In Jamsek FFC, it was concluded that a truck is characterised as a specialist and a large capital item, whereas a bicycle (in Hollis) is not.
Key takeaways
From the above key principles, as evident, whilst the decision does not directly advocate the ATO’s long-standing three-pronged test from SGR 2005/1, some of the conclusions are directly aligned (for example, the majority’s comments in relation to result-contracts and delegation).
However, and in particular with respect to delegation, Wigney J’s comments may suggest that constrained rights of delegation (in the absence of other factors) will not unequivocally prevent the application of the Extended Test. Subsequent case law and/or regulator guidance is likely to offer direction in due course.
Also, and whilst not specifically relevant to the Jamsek FFC matter, it is important to note that the Moffet arrangement was not considered as being “for” a result. Whilst the concept of “for” a result was not elaborated upon in that case, it appears that the remuneration structure, despite being calculated upon a share of revenue generation, was still considered to be “for” Dr’ Moffet’s labour. Therefore, organisations should be cognisant of solely relying on remuneration structure as being representative of a contract being “for” a result; we expect that subsequent jurisprudence and/or ATO guidance will likely elaborate on what will, and will not, constitute a contract “for” results.
Arguably, the biggest takeaway from the Jamsek FFC decision is the principle that the Worker, as a natural person, must be a party to the contract in their individual capacity. Broadly, this aligns with the SGR 2005/1 principle that incorporated contractors do not fall within the ambit of the Extended Test.
However, the comments in relation to multi-party contracts, and the potential application of that logic for oral contracts, should be taken as a caution. In particular, consistent with the High Court decisions last year, this places fundamental importance on drafting clear written contracts for such arrangements, ensuring clarity of who the engaging parties are.
Finally, the decision also makes clear that contracts which involve the provision of high-cost assets and associated labour are generally unlikely to meet the threshold of being “principally” “for” labour. Where the threshold lies in relation to such arrangements (i.e. equipment plus labour) is likely to be determined on a case-by-case basis.
Overall, the Jamsek decision should provide engaging organisations with more clarity, particularly in relation to engaging incorporated contractors. Whilst we await the ATO’s comment (likely through a revision of the principles outlined in SGR 2005/1 and potentially a decision impact statement), employers should ensure that their contractor governance process aligns to the key principles in the judgement, as well as the ATO’s recently released worker classification guidance.
Should you wish to understand more about the Jamsek FFC decision, or if you are currently undergoing an examination of your contractor governance framework in light of recent developments, please reach out to your PwC Employment Taxes specialist for assistance.
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