Contractors and Superannuation Obligations

A common misconception we see all too often is where an employer enters into an arrangement with an individual whereby the individual uses a personal ABN to invoice for their time in labour and be of the belief that there is not requirement to pay superannuation on behalf of the contractor.

A common misconception we see all too often is where an employer enters into an arrangement with an individual whereby the individual uses a personal ABN to invoice for their time in labour and be of the belief that there is not requirement to pay superannuation on behalf of the contractor.

There are other issues that come with this scenario such as workers compensation, withholding tax, payroll tax and employee entitlements however the focus of this blog is superannuation. The ATO is very clear in that individual contractors paid mainly for their labour are deemed as employees for superannuation guarantee purposes and therefore the employer is obligated to pay the 9.5% superannuation guarantee on top of the labour component of the contractors income. It is important to note that we’ve often seen arrangements where the employer and contractor will agree a rate which is inclusive of the 9.5% guarantee and note in the contract that it is the responsibility of the contractor to pay their own superannuation from that. To satisfy the super obligations the employer must pay the superannuation component directly to the contractors superannuation fund each quarter.

Determining whether a contractor would be a deemed employee for superannuation purposes is generally an exercise that requires investigation and more than likely legal advice. The contract first needs to be determined at the common law level, there should be appropriate documentation drawn up and then further analysis of the definition of an employee is required under the Superannuation Guarantee (Administration) Act 1992.

Our recommendation is generally to avoid paying contractors on individual ABN’s who you will be paying predominately for their labour (and paying consistently and repetitively) and either:

• Treat them as Employees
• Have the Contractor incorporate and invoice through their own company

This article is general in nature and should not be relied upon in making an investment decision. We strongly recommend you seek financial advice prior to making any investment decisions

Share this article