AUTHOR

Leena Gurung
Leena Gurung
Assistant Manager
Perth
Zi Yong
Zi Yong
Analyst
Perth

Engaging Contractors? Consider Your Superannuation Guarantee and Other Tax Obligations

Businesses routinely engage with contractors for a multitude of commercial reasons such as access to niche skills, expedited hiring processes, and the ability to readily scale a workforce up and down based on prevailing market conditions. 

Contrary to popular views regarding the Superannuation Guarantee (SG) implications of engaging contractors, the recent Administrative Appeals Tribunal (AAT) decision in Trustee for the Kitchen Unit Trust and Commissioner of Taxation [2023] AATA 2831 highlights the importance for engaging parties to consider and apply the ordinary meaning of the term ‘employee’, as developed by the courts, regardless of however an arrangement is described. 

For completeness, it is noted that in many cases it will be necessary for engaging parties to also consider and apply the extended definitions of ‘employee’ and ‘employer’ under subsections 12(2) to (11) of the Superannuation Guarantee (Administration) Act 1992 (“SGAA”). 

Background

No written contract existed between the Trustee for the Kitchen Unit Trust (“Trustee”) and Mr Novak (the contractor). However, the following facts were accepted by the AAT: 

  • The Trustee was in the business of supplying and renovating kitchens and bathrooms. Mr Novak was engaged by the Trustee for duties involving the designing, quoting and selling of kitchens and bathrooms for, and to, customers of the Trustee;
  • In performing his services, Mr Novak utilised the Trustee’s cabinetry, benchtops and price list;
  • Notwithstanding the Trustee’s testimony to the contrary:employee vs contractors
    • Mr Novak could not delegate his work to somebody else to perform;
    • Mr Novak was paid a weekly amount by the Trustee for his work, reflected as “wages” in payslips provided to Mr Novak by the Trustee;
    • Mr Novak was required to work regular hours, as stipulated by the Trustee;
    • Mr Novak used stationery, and in particular, business cards that identified him with the Trustee; and
    • Mr Novak had a regular place, whether it be called an office or not, where he would do work or meet with customers, at the Trustee’s showroom.

The Decision

Applying the test enunciated by the High Court in WorkPac Pty Ltd v Rossato [2021] HCA 23 (i.e., that whether a person engaged to work for another as an employee or independent contractor depends on the extent to which it can be shown that the person acts in the business of, and is under the control and direction of, the other), the AAT decided that Mr Novak was an employee, and the Trustee was an employer, according to the ordinary meanings of the terms, which are referenced at subsection 12(1) of the SGAA. The implication of this was that the Trustee was therefore liable to make SG contributions in respect of payments made to Mr Novak, in turn rendering the Trustee liable for superannuation guarantee charge (SGC) for its failure to pay such SG amounts in full and on time.  The impact to the Trustee of the SGC position include additional interest and penalties applying (Part 7 penalties may be imposed up to 200% of the shortfall) as well as loss of opportunity to apply a tax deduction on the SGC.

Employee Vs Contractors

The following indicia for whether an employer-employee arrangement exists based on ordinary concepts can be inferred from Trustee for the Kitchen Unit Trust and Commissioner of Taxation [2023] AATA 2831 and other relevant case law:   

Key Takeaways and Tips

(i)    Engagement with contractors, should involve documentation which appropriately address the relationship between both parties, including the conditions of delivery of the underlying service (i.e. working arrangements, supply of equipment, ability to delegate etc). tax differences between employees and contractors

(ii)    This case further highlights the need for businesses to adopt a suitable contractor assessment as part of their procurement process to address any employment tax obligation risks at the onset.  

(iii)    It is important to regularly reassess contractors engaged in a business to identify changes in arrangements which may impact employment tax obligations.

(iv)    Voluntary disclosures to the relevant authorities greatly assist a business in requesting reduction of applicable penalties.

(v)    Failure to correctly report and pay SG contributions for employees on time will trigger a severe penalty (up to 200% of the shortfall);

(vi)    If a contractor is identified as an employee, there may be various tax implications that the employer must consider, however, the implications/obligations are not limited to only the following: 

  • Withold the Pay As You Go (“PAYG”) Tax appropriately when making salary and wages payment as the penalty of not withholding is equal to the amount you should have withheld or paid;
  • The employer may be exposed to Fringe Benefits Tax if various employee benefits are provided;
  • Abide by the reporting requirements for Single Touch Payroll (“STP”) promptly and providing misleading or false statement may result in excessive penalties;
  • Payroll tax may apply in the state or territory the deemed employee is working in.  However, a business would need to consider other factors such as available thresholds, grouping and any exemptions available within the particular state or territory;
  • Subject to the requirement in various states, worker’s compensation insurance is compulsory as required by law for a business for the safety of their employees.

FOR MORE INFORMATION

If you require assistance to determine your employment tax obligations of your contractors, please reach out to your  local RSM adviser.

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