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Most employers know they are not required to pay super contributions for the genuine contractors their business uses to provide a range of services.
But simply calling someone a contractor – or asking for their ABN – doesn’t release you from obligations under super law to make Super Guarantee (SG) contributions on their behalf.
So how do you decide who is or isn’t a contractor?
Who’s an employee for super purposes?
Deciding who is a contractor and who is an employee is important when it comes to making super contributions for your staff. If you get it wrong, the ATO can impose some pretty costly penalties.
To decide who is an employee or contractor for super purposes, you need to look at the whole working arrangement. This means looking at a range of factors – not just the terms of the written or verbal employment contract.
You may still need to make super contributions for a contractor who provides an ABN if he or she works under a contract (verbal or written) that is wholly or principally for their labour. In this situation, the contractor is considered an employee for super purposes and you must make super contributions on their behalf.
If someone is working for you as an apprentice, labourer or trainee they will always be an employee for tax and super purposes.
If you make a contract with an entity other than the person providing the service – such as a company, trust or partnership – you are generally not required to make super contributions on their behalf.
Factors to consider: What does the ATO look at?
The ATO considers and assesses a number of points when it determines the true nature of a working arrangement and these are outlined in Taxation Ruling TR 2005/16. Six of these factors are outlined below.
| Situation | Contractor | Employee |
|---|---|---|
| Ability to sub- contract or delegate Who does the work? | Free to pay someone else to do the work. | Can’t pay someone else to do the work. |
| Basis of payment? How does the business pay the worker? | Paid all or the majority of the amount of the quote once the work is completed (to an agreed standard). Generally supplies an invoice before payment is made. | Paid for either: Amount of time (normally hours or shifts) worked. Each item or activity commissioned to complete. |
| Equipment, tools and other assets | Brings to the job all or most of the things needed to do the work. Buys or hires tools of trade or any equipment required. | Business provides all or most of the things needed to do the work. or Employee provides all or most of the things needed, but business provides an allowance or refunds cost of purchases. |
| Commercial risks Who pays to fix mistakes? | Responsible for fixing mistakes at own expense. | Business is responsible if employee makes a mistake and pays for the cost of fixing it . |
| Control over the work? | Work can be done in any way provided it is completed to an agreed standard, or to the specific terms in contract or agreement. | Employee follows any reasonable work requests made by the business. |
| Independence Is the worker seen as part of the business or separate? | Operates own business independently. Completes tasks or services as agreed to in contract or agreement. Free to accept or refuse extra work. | Seen to be part of the business and not independent from it. |
Source: Adapted from the ATO website
Common misunderstandings about contractors
As an employer, you need to consider all the terms and conditions of a working arrangement when you decide if someone is an employee or a contractor.
You also need to remember you are not permitted to decide who you treat as an employer and who you treat as a contractor.
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Many employers assume they can consider a worker to be a contractor if the person:
- Has an ABN or you require them to have an ABN
- Only works for you for a day or two
- Wants to be considered a contractor
- Is engaged by you as a contractor
- Has signed a contract specifying they are a contractor. This doesn’t override your real employment relationship with them.
Just because everyone in your industry treats their workers as contractors, it doesn’t mean your workers are considered contractors for super purposes. As an employer, you are not permitted to decide to treat a worker as a contractor if the work arrangements suggest otherwise.
Tax and super obligations for contractors and employees
| Contractor | Employee |
|---|---|
| Responsible for own tax. Completes and lodges activity statements. Reports and pays GST on activity statements if registered. Keeps own records of income, invoices issued and business expenses. Completes own tax return. Responsible for own super unless contracted mainly for their labour. | Provides TFN and employer withholds salary and wages. Keeps records of any work-related expenses. Completes own tax return using payment summary from employers. Can choose which super fund employer pays super contributions into. |
Tax and super responsibilities of the employer
| Contractor | Employee |
|---|---|
| Pays for work based on working arrangement, generally after invoice submitted. | Pays employee regular wage or salary. Withholds tax from employee’s salary and wages and forwards it to ATO. Provides payment summary after end of financial year. Makes super contributions into super fund on behalf of employees. |
Source: Adapted from the ATO website
Penalties: Treating your employees as contractors
Although treating your employees as contractors could save you money in the short term, it’s illegal to do so and it can end up being a costly decision.
Employers that do this can face penalties and charges, such as:
- PAYG withholding penalty for failing to deduct tax from worker payments.
- Super guarantee charge (SGC), which includes missing super contributions, interest charges and administration fees.
- Additional SGC of up to 200%.
ATO Employer/Contractor tool
If you are uncertain about whether or not a worker is an employee for super purposes, the ATO has a useful Employee / Contractor Decision Tool you can use to check you have made the right decision.
You need to answer several questions about the working arrangement between you and your workers to use the decision tool. Once you finish, you receive a report outlining whether your worker is an employee or contractor for tax and super purposes, plus the tax and super obligations you need to meet.
The Employee/Contractor Decision Tool does not consider your other employment obligation such as payroll tax or WorkCover.
The tool is designed to guide your decision. If you’re still unsure, you should seek professional advice or request a private ruling from the ATO.
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