Making the correct distinction between an employee and a genuine independent contractor is crucial for a number of tax, superannuation and other employment-related reasons, including:
(a) PAYG Withholding – Employers are required to withhold PAYG from salary and wages paid to employees, while payments to independent contractors generally do not require withholding. Further, since the introduction of ‘single touch payroll’, employers are required to report pay events to the ATO at the time payments are made to employees.
(b) Superannuation Guarantee (‘SG’) – Employers are required to provide quarterly SG support to eligible employees, generally payable at 9.5% of an employee’s ‘ordinary time earnings’.
(c) Fringe Benefits Tax (‘FBT’) – Employers are required to report and pay FBT where they provide their employees with fringe benefits.
The Administrative Appeals Tribunal (‘Tribunal’) considered the distinction between an employee and an independent contractor, in the context of a business’ SG obligations, in two recent cases:
- Toowong Pastures Pty Ltd as Trustee for the DB Family Trust trading as KBE Contracting Australia Pty Ltd and FCT [2019] AATA 4897 (‘Toowong Pastures’ case’); and
- Probin and FCT [2019] AATA 4597 (‘Probin’s case’).
In each of these cases, the ATO assessed the businesses involved for the superannuation guarantee charge (‘SGC’), due to a failure to provide SG support for workers considered by the ATO to be employees. The businesses, on the other hand, argued that SG support was not required, as they considered the workers to be independent contractors.
When is a worker considered to be an ‘employee’ for SG purposes?
Employers are only required to provide SG support for workers who are considered to be‘employees’ (including former employees). ‘Employee’ is defined in S.12(1) of the Superannuation Guarantee (Administration) Act 1992 (‘SGAA’) to have its ordinary meaning under common law. Further, S.12(2) to (11) of the SGAA expand the ordinary meaning of ‘employee’ for the purpose of determining whether a worker is entitled to SG support, as well as to avoid doubt as to the status of certain workers. Most notably, S.12(3) of the SGAA 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”.