Recent landmark High Court decisions, in CFMMEU v Personnel Contracting Pty Ltd and ZG Operations Australia Pty Ltd v Jamsek, have catapulted ‘contractor’ and ‘employee’ issues back into the spotlight for businesses and directors.
There are significant penalties for failing to meet obligations and can cost the company up to 330% of the short-paid superannuation, excluding the impact of the interest and administrative charge. Directors can be personally liable for these charges in addition to Pay As You Go Withholding.
We outline what this means for you and your business below:
When is Superannuation Guarantee payable to contractors?
Employers are penalised if they fail to meet the minimum level of Superannuation Guarantee (SG) contributions on behalf of their employees.
The Superannuation Guarantee (Administration) Act 1992 broadly defines an employee for SG purposes. Notably, where a person works under a contract that is wholly or principally for that individual’s labour, they will fall within the expanded definition of an employee for SG purposes.
As outlined in the recent High Court decisions, the parties to the contract and the substance of the arrangements will be key to determining whether or not the company will have a SG obligation in relation to the contractor.
Merely labelling an individual a contractor does not change the character of the relationship or divest a company of their SG obligations. It is possible that superannuation must be paid for those who are not common law employees, so close attention must be paid to the status of the contractors you engage.
The ATO has indicated in a non-binding ruling that payments to contractors who operate through entities such as companies or trusts will not give rise to SG liabilities. Thus, at least for present purposes, the risk would seem to only exist with contractors who are engaged as individuals.
What are the consequences of not meeting SG requirements?
Where quarterly SG requirements are not met, the employer has an obligation to lodge Superannuation Guarantee Charge (SGC) statements with the ATO within 28 days following the end of the relevant quarter. The SGC is made up of the following amounts:
- The short-paid SG for the quarter;
- A nominal interest charge of 10% per annum; and
- An administrative charge of $20 per employee, per quarter.
Additionally, the Part 7 penalty can be imposed where an employer fails to lodge the SGC statement for the relevant quarter by the due date. This penalty can be as much as 200% of the abovementioned SGC payable.
The ATO has the discretion to reduce or remit the Part 7 penalty in cases of voluntary disclosures by entities with good compliance histories. However, absent of exceptional circumstances, the Australian Taxation Office is limited in its ability to remit penalties for historical quarters between 1 July 1992 and 31 March 2018.
Given that no component of the SGC is tax deductible, the real cost of a company’s failure to comply with its SG obligations can be as much as 330% of the short-paid superannuation, excluding the impact of the interest and administrative charge.
Personal liabilities for directors
In addition to the potentially enormous consequences of incorrectly dealing with individual contractors over an extended period of time, directors can be made personally liable for SGC amounts owed by the employing entity.
Directors can also be made personally liable for unpaid Pay As You Go (PAYG) Withholding arising from the engagement of the contractors via Director Penalty Notices.
We have recently seen an increased appetite from the ATO to investigate SG compliance. With ever-increasing data-matching procedures, we expect the ATO’s SG reviews will become more frequent. Therefore, it is vital that employers are aware of their SG obligations in relation to contractors.
What about Payroll Tax?
Arrangements with contractors involving services are generally “relevant contracts” for Queensland payroll tax purposes, unless one of the nine exemptions apply. Relevant contracts are subject to payroll tax, and the underreporting of taxable contractor payments can result in additional penalties and charges levied by the Queensland Revenue Office (formerly the OSR).
The Queensland Revenue Office have identified the treatment of contractors as a source of persistent error, and are enhancing their data-matching capabilities to undertake more rigorous investigations in this space. Recently, the Revenue Office has been commencing payroll tax reviews based on mis-matches between lodged payroll tax returns and Taxable Payments Annual Reports (TPARs) lodged with the ATO.
What do businesses need to do?
Directors should ensure payments to contractors are meeting the superannuation and payroll tax requirements. Further, businesses may wish to design specific contractor engagement policies to ensure that directors are not unnecessarily facing personal liabilities.