What’s emerging? Superannuation for contractors: what you need to know

If you engage contractors to perform work for your business, you may be grappling with whether you need to pay superannuation for them. The answer is not always straightforward, and emerging case law and tribunal decisions continue to shape the principles and factors to assess in each scenario. 

Organisations use contractors for a range of reasons. Whatever the case may be, finding out after the fact that a superannuation guarantee (SG) obligation existed can be an unwelcome surprise from both a cost and compliance perspective. It is therefore paramount that organisations have a clear understanding of whether or not SG obligations will exist upon engagement, as early as possible. 

Even where the worker is a genuine independent contractor, the engaging organisation may still have an obligation to make SG contributions under the extended ‘employee’ definitions of the Superannuation Guarantee (Administration) Act 1992 (SGAA), which expand (or deem) certain types of non-traditional relationships to fall within the SG net.

In this article, we will look at the most recent developments impacting the extended ‘employee’ definition.

Contracts wholly or principally for labour – is the means of payment determinative? 

Under section 12(3) of the SGAA, contractors can fall within the SG net if they are a person who works under a contract that is wholly or principally for their labour. Importantly, this definition of ‘employee’ can apply even if the contractor provides an ABN, works for other clients, and may even apply where there is some supply of goods under the contract (in addition to labour). 

Case law has established that, for section 12(3) to apply, there must be a contract, the contract must be wholly or principally for the labour of a person (i.e. no right of delegation and the contract is for labour (rather than for a result)), and the person must work under that contract.

With respect to whether a contract is for a result (rather than for labour), a common consideration is the form of remuneration paid to a contractor – namely, whether a contractor is paid a fixed amount, or on an hourly basis.

In June 2024, the ATO released updated draft guidance dealing with the extended definition of ‘employee’ for SG purposes. In this draft guidance, the Commissioner of Taxation (the Commissioner) provided that ‘(c)onsideration for a specified result is often a fixed sum paid on completion of the particular job as opposed to an amount paid by reference to hours worked’.

Whilst recognising judicial commentary in JMC Pty Ltd v CoT [2023] FCAFC 76, which provided that hourly remuneration (in that case) was not incompatible with an independent contractor relationship, the Commissioner observed that these comments were ‘made in the context of the facts of JMC’ – that is to say, there was a unique factual matrix in that case that led to this conclusion, which cannot be presumed as being present in other matters.

In the recent tribunal decision of Peter Hatfield Trust v CoT [2024] AATA 3428 (Peter Hatfield Trust), the AAT concluded that the arrangement in place between the principal and a worker was a ‘results’ based contract, meaning that the contract was not for the labour of the contractor plumber (and that the individual was not an ‘employee’ for SG purposes).

In this case, the Peter Hatfield Trust had engaged Mr. Hargreaves (the Plumber) over several years as a contractor and assessed that he was not a section 12(3) ‘employee’ – in contrast, the ATO classified the Plumber as an ‘employee’ under section 12(3), with the dispute being appealed to the Tribunal for assessment. The Plumber worked under a verbal contract, had never discussed any right of delegation with Peter Hatfield Trust, was paid at a fixed hourly rate, and invoiced on the basis of time worked (rather than on job completion). 

In finding that the arrangement was ‘results’ based, the Tribunal observed that '(t)he hourly rate was simply an effective measure by which to charge for each job. All invoices set out the hours spent on each job, and he was paid for those jobs accordingly …  Mr Hargreaves was paid for time spent on each job, rather than on a fixed fee per job. No quotes were given. This structure is common in situations where the exact cost is unknown'.

While not entirely inconsistent with the ATO’s draft guidance, in particular given the Commissioner’s reference to the observations in JMC, the payment of an hourly rate has been, in our experience, often viewed as being inconsistent with a payment for a result. The approach taken in Peter Hatfield Trust – namely, the characterisation of a contract as ‘result’ based in circumstances where payment at an hourly rate was ‘an effective measure’ because ‘exact cost is unknown’, casts a commercial lens over the question at hand. Such an approach may be seen as having more general applicability, although the ATO’s caution – being that all cases turn on particular facts – should be borne in mind.

While this will likely be of particular interest to organisations when assessing SG obligations on contractors who are remunerated on an hourly basis, it is relevant to note that the Commissioner has appealed this Tribunal decision to the Federal Court. As such, we are likely to get (further) judicial commentary on if (and when) hourly rate contracts may be characterised as being ‘results’ contract for the purpose of the section 12(3) SGAA analysis – stay tuned.

Payments to ‘performers’ or ‘presenters’ which aren’t wholly or principally for the labour of a person

While the ‘wholly or principally for labour’ test is generally well known (albeit, subject to continued interpretative complexities), the meaning of employee within the SGAA includes further extensions that operate in addition to the SGAA section 12(3) test.

An often overlooked trigger-point for SG obligations is the extension to the meaning of ‘employee’ under section 12(8) which covers contractors paid to perform or present any music, play, dance, entertainment, sport, display, promotional activity, or any similar activity involving the exercise of intellectual, artistic, musical, physical, or other personal skills. This definition also includes contractors who are paid to provide services in connection with those activities. Within this definition also comes a person that is paid to perform services in connection with the making of any film, tape or disc or of any television or radio broadcast.

Importantly, for a payer to incur an SG obligation under section 12(8), all that is required is that a payer is liable to make payment to the other party (i.e. the contractor). That is, while a contract will often exist between a payer and the payee, it is not a necessary aspect of the test presented by section 12(8). The relevance of this was recently highlighted in the matter of Australian Turf Club Ltd v FC of T [2024] AATA 2728 (Australian Turf Club).

In this matter, the AAT accepted the Commissioner’s position, being that jockeys who raced at racetracks operated by the Australian Turf Club (ATC) met the extended ‘employee’ definition under section 12(8) of the SGAA, resulting in a superannuation obligation for the ATC (rather than owners or trainers of the horses) in respect of riding fees and prize money paid directly to the jockeys.

Of relevance is that while it was unclear whether ATC had entered into a contract with jockeys, it was clear that on the evidence available, ATC was liable to make payment to jockeys. Having accepted the Commissioner’s contention that the payment to jockeys was ‘to perform or to participate in a sport’, the result was that the jockeys were employees of the ATC pursuant to section 12(8) and ATC’s appeal was dismissed. 

Two further observations may be made, in relation to the Tribunal’s findings.

Firstly, while the question of whether the SGAA could result in two employers being liable for the same ‘work’ was not considered in detail, the Tribunal made comment in the context of there being two potential ‘employers’ in the case (i.e. ATC and the owners of the horses). In this regard, the Tribunal opined that only one person (i.e. one employer) could be liable (to SG) for the same performance – an observation which may go some way towards settling concerns as to duplications in SG entitlements (and in this case, one could infer it prevented owners incurring SG liabilities concurrently). The Tribunal nonetheless acknowledged that circumstances of there being multiple employers connected to one activity is not contemplated by the SGAA – heightening the importance of ensuring clarity in contractual arrangements. 

Secondly, the Tribunal observed that there was nothing preventing a person from being a ‘deemed’ employee under more than one of the extended definitions contained in section 12 of the SGAA. However, where this is the case, the question would then be 'what is the most appropriate application of section 12 in the circumstances'.

Understanding your superannuation obligations for contractors is crucial. Despite existing guidance from the ATO, new case law and tribunal decisions continue to emerge, at times challenging some of the baseline principles outlined within ATO public guidance – and in other instances, testing circumstances not dealt with in public guidance. We highlight four key takeaways from this article.

First, where an organisation engages with contractors primarily for labour, it is critical that the contractual rights and obligations between the parties are well understood and, ideally, documented. One of the key challenges in Peter Hatfield Trust was that the engagement between the parties was not documented. For example, in that case, the parties disputed whether there was a right to delegate and if so, whether that right was fettered. Express clarity of this term may have made for an easier resolution of the matter (given the decision of JMC Pty Ltd v CoT [2023] FCAFC 76). On that note, organisations which engage contractors to achieve particular results, but which remunerate those contractors on an hourly basis, may wish to monitor the Peter Hatfield Trust appeal.

If unwritten contracts (or written contracts with limited details) present a similar risk for your organisation, a review of contractual terms should be prioritised to ensure clarity of terms (including, for example, delegation and whether this is fettered or unfettered).

Secondly, and in respect of the Australian Turf Club decision, whilst it may initially be viewed that this is a matter of limited application only to organisations in the sporting/entertainment industry, we have observed that this provision is becoming increasingly relevant in modern business – specifically, when section 12(8) was first introduced, the scale of performance and presentation within the modern digital world was unlikely to have been contemplated. With the rise of digital advertising and the prominence of online business – and the seeking of artists, sportspersons etc. of influence to support business objectives of varying forms, the solicitation of performers and presenters within businesses is likely to be more relevant today.

If your business engages with, and/or is liable to make payments to, contractors who perform or present, such as in the context of a social media campaign or video production (whether for an internal or external audience), it may have SG implications. A common confusion among businesses is the suggestion that these types of engagements can be viewed as ‘low’ risk from a section 12(3) perspective (for example, where the contract is structured to be for a result) – however, the engagement may still be covered by the section 12(8) employee definition. Where procurement processes do not cater for assessment of section 12(8), there may be a risk of inadvertent non-compliance (for example, where the contractor’s engagement activities fall within the remit of those provisions). 

Thirdly, following on from the second point, the Australian Turf Club decision highlights the need to focus (for the purpose of section 12(8)) on whether a person (or organisation) is liable to make payment to a person whose performance bears sufficient connection to the prescribed activities. This challenges governance frameworks by requiring SG compliance assessments to go beyond persons ‘engaged’ by the business to perform services or activities. As the Tribunal pointed out, this test does not require the existence of a contract.

Lastly, businesses which see their arrangements as being analogous to those considered in the Australian Turf Club may be inclined to assume the findings of that decision have direct application to their own circumstances. While this may be the case, the Tribunal emphasised that the ATC had failed to prove section 12(8) did not apply – at least part of which was attributed throughout the Tribunal’s reasoning to a lack of evidence. In this way, a person or entity contemplating its SG obligations in light of this case should do so, with regard to its own facts and evidence.

Should you have any questions regarding SG obligations for contractors within your workforce, or want to further discuss your organisation’s SG obligations, please contact a member of our PwC team of specialists.