Superannuation for contractors

Posted: 24 June 2015

June 2015

Management Rights News – Superannuation for contractors

Recently we had a case whereby two contract workers approached the ATO stating that they believed they should be paid superannuation by our client.  Consequently the ATO instructed a superannuation audit.

Whilst the outcome was a favourable one, not the least because the two contractors withdrew their statements on the eve of the deadline to respond, the business owner dutifully completed the 27 page document canvassing all 43 questions.

Employee versus Independent Contractor

As you would surmise, by the size of the ATO’s line of questioning, there are many facets looked at when determining the true relationship of the payer and worker.  No one point on its own will determine the outcome of the business owners’ superannuation obligation but rather it’s the totality of the relationship that is tested.

Here are some of the more common factors that business owners across the board must consider when determining their obligations under the Act.

Is the contractor genuinely carrying on their own business or are they simply working for you in your business?  Let’s look at some of the relevant factors.

Is there a contract – Whilst a legally drafted contract signed by both parties is best practice, the courts and therefore the ATO do recognise that contracts might be verbal.  Verbal agreements though, are subject to dispute, so for the avoidance of doubt, a signed written contract is the recommended option.

Level of Control – Contractors generally maintain a high level of discretion as to how the work is to be performed and sets their own hours.  A worker operating under the direction and control of the payer is likely to be an employee.

Results – A worker who contracts to produce a result or a product rather than being paid an hourly rate is more likely to be considered a contractor.  Being paid an hourly rate is akin to being employed.

Delegation not Substitution – A worker that truly has the power to delegate the work to either an employee of theirs or to other sub-contractors without the business owners say so or permission is more likely to be a contractor.  Furthermore, the payment should be to the original contracted worker, who then in-turn on-pay’s the worker, who actually carried out the work.

Example:- a contract cleaner Brett, arranges with the consent of the business owner for another cleaner, Liz to take his spot for the day.  The business owner then pays Liz for her services.  This arrangement is not truly delegation, but rather substitution.     

Risk – A contractor bears the commercial risk and responsibility for poor workmanship or injury sustained in the performance of the work and usually has their own insurance to cover risks.  By contrast, under an employer/employee relationship, the party deemed to be an employer is the one that generally bears all the commercial risk.

Assets – A contractor provides their own equipment and assets and incurs their own expenses to complete the work, whereas an employee generally performs the work on the payers’ premises using equipment provided by the payer.

The ATO website contains useful decision tools that provides guidance on this issue.

Please view the links below.



For more detailed advice, please do not hesitate to contact us to make an appointment.

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