Engaging Contractors? Beware of Your Superannuation Obligations

Darius Hii, Director at Chat Legal, explores the superannuation obligations you need to be aware of when engaging contractors. He discusses potential exemptions by looking at a recent tribunal decision of MWWD and Commissioner of Taxation [2020] AATA 4169.

The engagement of independent contractors offers medical and dental practice owner’s legitimate commercial benefits by incentivising practitioners to treat patients in the most efficient and optimal manner.

Such arrangements may also impact on the tax obligations between practice owner and practitioners in potentially exempting:

1. payments made by the practice owner to the practitioner as forming part of wages for payroll tax purposes;
2. the practice owner from having to withhold pay-as-you-go payments; and
3. the practice owner from having to make superannuation payments.

In some circumstances, these exemptions to tax obligations have been considered a key driver for practice owners in engaging practitioners.

Recent cases and tribunal decisions, however, have provided a reminder that simply labelling an arrangement as an independent contractor will not automatically exempt business owners from the above tax obligations.

This article will outline when superannuation is payable to an independent contractor given the recent tribunal decision of MWWD and Commissioner of Taxation [2020] AATA 4169. Although not relating to medical or dental practices, this decision provides a good foundation on the issues that are considered.

Future articles will consider cases relating to whether practitioners were considered as employees or independent contractors; and the implication for the practice owner.

When is superannuation payable to a contractor?

Employers are required to pay superannuation to employees under Superannuation Guarantee (Administration) Act 1992 (Act)

Section 12 of the Act defines an employee to have their ordinary meaning, as well as expanding the meaning of the term to include situations where ‘a person works under a contract that is wholly or principally for the labour of the person’.[1]

The tribunal decision of MWWD and Commissioner of Taxation [2020] AATA 4169 considered whether superannuation contributions were required to be made from a business owner to Mr Smith (pseudonym), an independent contractor.

Fundamentally, the tribunal was required to analyse the relationship between the business and Mr Smith and determine:

1. Whether Mr Smith was an employee in the ordinary sense (notwithstanding the ‘contractor’ title)?
2. Otherwise, whether Mr Smith was an employee based on the expanded meaning of the term under section 12(3) of the Act?

In analysing the relationship, the tribunal considered the subjective intentions of the parties, the written legal agreement and the actual substance of the arrangements.

It is important to appreciate that the written contract should not be considered the ‘be all and end all’ of the arrangement. Specifically, it was noted that:[2]

‘the terms of the contract were certainly an aspect of the relationship that should be considered, but those terms were not necessarily definitive…His Honour emphasised the challenge was to characterise the relationship, not construe the contract albeit he acknowledge there might be some cases where the tax of the contract might carry more weight’.

What constitutes an employer-employee relationship

In determining whether an employee relationship exists, a ‘multi-factorial’ approach must be taken in reviewing the arrangement.[3] Namely, the following factors are considered:

1. The level of control a contractor is able to exercise – the less control a contractor has, the more likely the relationship reflects one of employment.
2. The level of integration of the contractor in the business – the more integrated the contractor is in relation to business operations, the more likely the relationship reflects one of employment
3. Whether the contractor is able to perform work for other businesses – if a contractor is only allowed to offer their services exclusively to a single business, it is more likely the relationship reflects one of employment
4. Whether the contractor provides their own tools and equipment – if a contractor does not provide their own tools and equipment in the performance of their work, it is more likely the relationship reflects one of employment.
5. How the contractor is remunerated – generally, being paid on an hourly or ‘time’ basis reflects an employment relationship.
6. The level of risk a contractor takes on and any insurance arrangements – the less risk the contractor can be held liable for the performance of their work, the more likely the relationship reflects one of employment.
7. The tax arrangements of the contractor – contractors who complete business activity statements and their own separate business tax returns are more likely to be reflective of an independent contractor arrangement.

Importantly, all factors must be considered holistically in determining whether the relationship reflects one of employment or independent contractor.

It will often be the case that arrangements exhibit traits of both relationships, and it will come down to weighing the various factors between each other.

In the case of MWWD and Commissioner of Taxation [2020] AATA 4169:

• Evidence suggested that both parties intended for an independent relationship to exist, with the business explaining the efficiency offered by contractors[4] and Mr Smith emphasising the ability to make good money and enjoy more freedom.[5]
• The contract between the business and Mr Smith was review and clauses providing the business with the ability to control the Mr Smith as well as deal with intellectual property suggested an employment relationship.[6]
• To the contrary, the contract also provided that Mr Smith was required to obtain his own insurance and indemnify the business, which suggests an independent contractor relationship.[7]
• The substance of the relationship was also considered with evidence suggesting that the level of control exerted by the business over Mr Smith was minimal, other than requiring the business logo to be shown on Mr Smith’s private vehicle.[8]
• Further, Mr Smith was able to undertake private work away from the business (except for restraints against working with a competitor)[9] and was also required to provide their own tools and equipment in performing the work (albeit with the business supplying at least some of the consumables used by the contractor).[10]
• Despite the flexibility to undertake private work, evidence was held that outlined the difficulty for Mr Smith to undertake such work due to the logo of the business adorned on his vehicle as well as the need to undertake such private work around the work performed for the business. That said, it was shown that Mr Smith did take steps to conduct his affairs in a way that treated himself as an independent business (even going as far as registering a business name and printing business cards).[11]
• Mr Smith was also paid for completing discrete takes that were defined in the contract. Such a payment arrangement reflects an independent contractor relationship due to the nature of Mr Smith being paid on provision of a scope of work.[12]
• Finally, evidence showed that Mr Smith had corrected work that he had not successfully completed without billing for such corrections. This again, reflected an independent contractor relationship due to the contractor carrying the risk of incomplete work.[13]

It was ultimately held in the tribunal decision that an independent contractor relationship existed and superannuation was not payable by the business as Mr Smith’s relationship could not be considered as one of employment.[14]

Extended definition of employee under superannuation law

Despite Mr Smith’s relationship being considered one of independent contractor, section 12(3) of the Act expands the definition on what it means to be an employee to include ‘if a person works under a contract that is wholly or principally for the labour of the person’.

Superannuation guarantee ruling 2005/1 provides clarity on when a contract is considered to be wholly or principally for the labour of an individual engaged. Specifically, the presence of the following three factors in an arrangement will suggest that section 12(3) of the Act applies and superannuation is payable to the independent contractor:[15]

1. The individual is remunerated (either wholly or principally) for their personal labour and skills.
2. The individual must perform the contractual work personally (there is no right of delegation).
3. The individual is not paid to achieve a result.

In the case of Mr Smith, his contract provided him with the right to take on an apprentice, hire an employee or engage a sub-contractor as he saw fit. It did not matter whether he exercised such right but rather that he had such ability and more importantly, there was no reason to suggest that the business could have unreasonably prevented Mr Smith from exercising such right.[16]

It should be noted that the ruling accepts that an employment relationship cannot exist between a business and an independent contractor operating through a company or trust structure.[17] Despite this, care should still be taken as there are other potential tax issues that could apply (particularly from the independent contractor perspective).

Key takeaways

The engagement of practitioners as independent contractors does not automatically exclude practices from being required to pay superannuation to such practitioners.

The intentions, contracts and substance of the relationship must first reflect (on the balance) an independent contractor relationship. Importantly, the evidence of interactions between parties will be considered, notwithstanding what is written down on legal agreements.

Further, additional steps must be taken to ensure that the relationship does not fall within the expanded meaning of employee under the Act. This can be achieved by ensuring practitioners are offered the ability to delegate their work as well as ensuring they are paid to achieve a result. Unfortunately, due to common industry practices, practitioners are generally not offered such arrangements and practice owners may be exposed to potentially being required to pay superannuation.

Our next article will consider a case which analysed whether a dental practitioner was considered to be an employee or an independent contractor.

Please contact the author if you have any queries about this article

[1] Section 12(3) Superannuation Guarantee (Administration) Act 1992

[2] MWWD and Commissioner of Taxation [2020] AATA 4169 at [14]

[3] Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 per Wilson and Dawson JJ at 35-36

[4] MWWD and Commissioner of Taxation [2020] AATA 4169 at [19]

[5] MWWD and Commissioner of Taxation [2020] AATA 4169 at [22]

[6] MWWD and Commissioner of Taxation [2020] AATA 4169 at [32]

[7] Ibid

[8] MWWD and Commissioner of Taxation [2020] AATA 4169 at [40]

[9] MWWD and Commissioner of Taxation [2020] AATA 4169 at [45]

[10] MWWD and Commissioner of Taxation [2020] AATA 4169 at [50]

[11] MWWD and Commissioner of Taxation [2020] AATA 4169 at [46]

[12] MWWD and Commissioner of Taxation [2020] AATA 4169 at [54]

[13] MWWD and Commissioner of Taxation [2020] AATA 4169 at [55]

[14] MWWD and Commissioner of Taxation [2020] AATA 4169 at [58]

[15] Superannuation Guarantee Ruling 2005/1 at paragraph 11

[16] MWWD and Commissioner of Taxation [2020] AATA 4169 at [61]

[17] Superannuation Guarantee Ruling 2005/1 at paragraph 13

Darius Hii, LLB/BCom (Finance), CTA is an estate planning and tax lawyer, who works alongside private clients and advisors to provide comprehensive structuring advice.  The core of his work revolves around planning today for a headache free tomorrow and relates to personal and business succession planning.  This often involves preparing holistic estate plans and ensuring they are structured to complement a client’s succession planning and asset protection intentions, as well as implementing tax effective business succession and restructuring strategies.  He has developed a deep interest in trusts and taxation which complements his area of practice, and has spent time involved with payroll and land tax disputes with the Queensland Office of State Revenue.  He founded Chat Legal Pty Ltd to provide legal services to busy individuals and families outside office hours and at a location convenient to them. You can connect with Darius at darius@chatlegal.com.au or via LinkedIn . Copies of his publications and presentations are available for download at https://dariuschats.github.io/.