SUPERANNUATION GUARANTEE CHARGE AND CONTRACTORS
Noel Davis, Barrister, Sydney
An ongoing issue in relation to the superannuation guarantee charge is whether
superannuation contributions are payable for those described as contractors.
superannuation contributions are payable for those described as contractors.
Introduction
It is apparent that there has been a substantial increase by employers in the use of contractors instead of those people being employed as employees. In some instances, superannuation guarantee charge (SGC) contributions have not been paid for the contractors. That has resulted in a steady stream of litigation over the years, since SGC was introduced, in which contractors have claimed that SGC contributions should have been paid for them.
The Australian Tax Office has also been quite active in requiring companies to pay SGC contributions for contractors where it is apparent that there was an obligation for contributions to be made.
At issue, in many instances, but not always, is whether the contractors are, at law, employees. The reason that that is not an issue in some cases is that section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGC Act) requires that SGC contributions must be made for a person who works under a contract that is wholly or principally for the labour of the person. Such a contractor is treated by s12 as an employee for the purposes of requiring that SGC contributions be made for that person.
Whether particular work arrangements required contributions to be made were the subject of four recent court decisions of the Full Federal Court in Commissioner of Taxation v Scone Race Club Ltd [2019} FCAFC 225 and Commissioner of Taxation v Racing Queensland Board [2019] FCAFC 224 (the jockeys’ cases), the Federal Court in Moffet v Dental Corporation Pty Ltd [2019] FCA 344 and the Full Federal Court in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. An application to the High Court in the jockeys’ cases for special leave to appeal was dismissed by the High Court. Those cases are discussed below.
The existing law
Since SGC was introduced, there have been a significant number of cases on whether there was an obligation to make SGC contributions for contractors in varying circumstances. Some of those decisions are considered in the three most recent cases. They are discussed in the publication The Law of Superannuation in Australia (LexisNexis) and it is not, therefore, proposed to analyse them in any detail in this article.
A leading case is the decision of the High Court in Hollis v Vabu Pty Ltd [2001] HCA 44. In that case, the court had to determine whether a courier bike rider was an employee or a contractor. Whilst the couriers were required to supply their own bicycles, bore the expenses of running them and supplied many of their own accessories, they were, nevertheless, subject to a good deal of control by the courier company. They had little control over the manner of performing their work. They were required to be at work by 9am and were assigned work in accordance with a roster and were not permitted to refuse work. Because of the company uniforms they were required to wear, they were identified to the public as a part of the courier company’s own working staff.
The High Court decided that, having regard to all the circumstances of the relationship, it was one of employer/employee.
In other cases that have come before the courts, it has been variously decided that the workers were contractors or employees, depending on the individual circumstances of the contracts. However, if it is decided that they were contractors, SGC contributions may still be required because of the effect of s12 of the SGC Act.
The jockeys’ cases
In the Racing Queensland case, the evidence was that, from the year 2000, the race club paid jockeys’ fees and jockey’s winning percentages of prizemoney to the jockeys. The club created the tax invoices for such payments. There were, however, no contracts between the race club and jockeys for the provision of their service, labour, participation or performance [28]. Also, the race club did not engage the jockeys. They were engaged by the horse trainers [39].
The court identified that the issue to be determined by it was whether the race club discharged the onus of establishing that the Commissioner’s assessments for payment of SGC contributions were excessive, by showing that it was not liable to pay the jockeys’ fees [53].
Section 12(8) of the SGC Act states a person who is paid to participate in the performance of a sport involving the exercise of physical or personal skills is deemed to be an employee of the person liable to make the payment.
The evidence showed the jockeys as providing services to the race club, in the nature of taxable supplies for which the club issued tax invoices to the jockeys [71] and [72]. The club was liable to make payments to the jockeys for those supplies and liability was not imposed on trainers or owners to pay jockeys’ fees [75]. In those circumstances, the argument by the race club that it was not liable to pay SGC contributions for the jockeys because it was not liable to pay the jockeys’ fees could not be sustained and the jockeys were employees of the club, within the meaning of s 12(8) of the SGC Act, with the consequence that SGC contributions were payable by the club.
A different conclusion was reached by the Full court in the Scone Race Club case because of different facts. A racing rule that applies to race clubs in New South Wales is that they are required to pay, on behalf of the horse owners, fees payable to jockeys. The rule also states that the clubs are not personally liable for the jockeys’ fees, other than to the extent that they are making the payments on behalf of the owners as part of the returns to owners. The conclusion of the Court was, therefore, that this rule did not impose a legal liability on the race club to pay the fees. Rather the fees were paid by the club on behalf of the owners and the owners had the liability to pay the fees [65]. Section 12(8) did not therefore, have the effect that the jockeys were deemed to be employees of the race club which was not, therefore, obliged to make SGC contributions for the jockeys.
The difference in the outcome in the two cases came about because, in the first case, the wording of the obligation didn’t say that the payments were made on behalf of the owners whereas, in the latter case, that was the way in which the rule was framed with the consequence that the fee payments were expressed as being made for the owners and the race club was not, therefore, liable to pay the fees, even though it paid them.
Moffet v Dental Corporation
This case was concerned with a dentist who had sold his practice to an aggregator of dental practices which, under a contract between the dentist and the aggregator, was required to pay him for his work as a dentist, as a contractor to the aggregator. The dentist argued that he was an employee but the Court concluded that the effect of the contract and the way in which the relationship was conducted, was that he was an independent contractor [71].
Section 12 (3) of the SGC Act states that if a person works under a contract that is wholly or principally for the labour of the person, the person is deemed to be an employee for the purposes of determining whether SGC contributions are required to be paid for that person.
The Court did not have any difficulty in determining that the contract between the parties was one that was wholly or principally for the labour of the dentist.
In an appeal against this decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118, the dentist argued that there was control over his work and he was, therefore, an employee but the Full Court decided that there was neither actual control nor the right to control the dentist in how he was to do his job as a dentist [41] and [42].
In response to a submission by the Dental Corporation that its contract with the dentist was not substantially for the dentist’s labour, the Full Court said that the contract required that the dentist perform work [82] and that the revenue generated under the contract was the consequence of the dentist’s own labour. The revenue was not derived from the contract itself because, if the dentist had not performed the labour, there would not have been any revenue under the contract [97]. The contract was, therefore, substantially for the dentist’s labour and superannuation contributions were payable for him under s 12 (3) [104].
Conclusion
Where a person is clearly an independent contractor of the other party, it is still necessary to analyse whether SGC contributions are, nevertheless, payable for the independent contractor. Contributions are payable if, for example, the contractor is being paid to participate in a sport or a performance involving the exercise of physical or personal skills or if the contract is one that is wholly or principally for the labour of the contractor.
If tools, machinery or equipment supplied by the independent contractor are utilised in performing the contract, the question becomes whether the tools, machinery or equipment are the principal elements in the performance of the contract or whether the labour of the contractor is the principal component of the contractual payment. If the contract is to provide typing services and the contractor is to provide his or her own computer, the contract will be principally for the labour of the typist as the computer is a minor component in providing the service. However, if the contract involves the use of expensive equipment supplied by the independent contractor such as in road building or earthworks, it may be that the expensive equipment is the principal component of the contractual fee.
It is apparent that there has been a substantial increase by employers in the use of contractors instead of those people being employed as employees. In some instances, superannuation guarantee charge (SGC) contributions have not been paid for the contractors. That has resulted in a steady stream of litigation over the years, since SGC was introduced, in which contractors have claimed that SGC contributions should have been paid for them.
The Australian Tax Office has also been quite active in requiring companies to pay SGC contributions for contractors where it is apparent that there was an obligation for contributions to be made.
At issue, in many instances, but not always, is whether the contractors are, at law, employees. The reason that that is not an issue in some cases is that section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGC Act) requires that SGC contributions must be made for a person who works under a contract that is wholly or principally for the labour of the person. Such a contractor is treated by s12 as an employee for the purposes of requiring that SGC contributions be made for that person.
Whether particular work arrangements required contributions to be made were the subject of four recent court decisions of the Full Federal Court in Commissioner of Taxation v Scone Race Club Ltd [2019} FCAFC 225 and Commissioner of Taxation v Racing Queensland Board [2019] FCAFC 224 (the jockeys’ cases), the Federal Court in Moffet v Dental Corporation Pty Ltd [2019] FCA 344 and the Full Federal Court in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. An application to the High Court in the jockeys’ cases for special leave to appeal was dismissed by the High Court. Those cases are discussed below.
The existing law
Since SGC was introduced, there have been a significant number of cases on whether there was an obligation to make SGC contributions for contractors in varying circumstances. Some of those decisions are considered in the three most recent cases. They are discussed in the publication The Law of Superannuation in Australia (LexisNexis) and it is not, therefore, proposed to analyse them in any detail in this article.
A leading case is the decision of the High Court in Hollis v Vabu Pty Ltd [2001] HCA 44. In that case, the court had to determine whether a courier bike rider was an employee or a contractor. Whilst the couriers were required to supply their own bicycles, bore the expenses of running them and supplied many of their own accessories, they were, nevertheless, subject to a good deal of control by the courier company. They had little control over the manner of performing their work. They were required to be at work by 9am and were assigned work in accordance with a roster and were not permitted to refuse work. Because of the company uniforms they were required to wear, they were identified to the public as a part of the courier company’s own working staff.
The High Court decided that, having regard to all the circumstances of the relationship, it was one of employer/employee.
In other cases that have come before the courts, it has been variously decided that the workers were contractors or employees, depending on the individual circumstances of the contracts. However, if it is decided that they were contractors, SGC contributions may still be required because of the effect of s12 of the SGC Act.
The jockeys’ cases
In the Racing Queensland case, the evidence was that, from the year 2000, the race club paid jockeys’ fees and jockey’s winning percentages of prizemoney to the jockeys. The club created the tax invoices for such payments. There were, however, no contracts between the race club and jockeys for the provision of their service, labour, participation or performance [28]. Also, the race club did not engage the jockeys. They were engaged by the horse trainers [39].
The court identified that the issue to be determined by it was whether the race club discharged the onus of establishing that the Commissioner’s assessments for payment of SGC contributions were excessive, by showing that it was not liable to pay the jockeys’ fees [53].
Section 12(8) of the SGC Act states a person who is paid to participate in the performance of a sport involving the exercise of physical or personal skills is deemed to be an employee of the person liable to make the payment.
The evidence showed the jockeys as providing services to the race club, in the nature of taxable supplies for which the club issued tax invoices to the jockeys [71] and [72]. The club was liable to make payments to the jockeys for those supplies and liability was not imposed on trainers or owners to pay jockeys’ fees [75]. In those circumstances, the argument by the race club that it was not liable to pay SGC contributions for the jockeys because it was not liable to pay the jockeys’ fees could not be sustained and the jockeys were employees of the club, within the meaning of s 12(8) of the SGC Act, with the consequence that SGC contributions were payable by the club.
A different conclusion was reached by the Full court in the Scone Race Club case because of different facts. A racing rule that applies to race clubs in New South Wales is that they are required to pay, on behalf of the horse owners, fees payable to jockeys. The rule also states that the clubs are not personally liable for the jockeys’ fees, other than to the extent that they are making the payments on behalf of the owners as part of the returns to owners. The conclusion of the Court was, therefore, that this rule did not impose a legal liability on the race club to pay the fees. Rather the fees were paid by the club on behalf of the owners and the owners had the liability to pay the fees [65]. Section 12(8) did not therefore, have the effect that the jockeys were deemed to be employees of the race club which was not, therefore, obliged to make SGC contributions for the jockeys.
The difference in the outcome in the two cases came about because, in the first case, the wording of the obligation didn’t say that the payments were made on behalf of the owners whereas, in the latter case, that was the way in which the rule was framed with the consequence that the fee payments were expressed as being made for the owners and the race club was not, therefore, liable to pay the fees, even though it paid them.
Moffet v Dental Corporation
This case was concerned with a dentist who had sold his practice to an aggregator of dental practices which, under a contract between the dentist and the aggregator, was required to pay him for his work as a dentist, as a contractor to the aggregator. The dentist argued that he was an employee but the Court concluded that the effect of the contract and the way in which the relationship was conducted, was that he was an independent contractor [71].
- The basis for that conclusion was:
- The terms of the parties’ agreement.
- The absence of any degree of control exercised by the aggregator over the dentist with respect to the patients he saw or the procedures he performed on the patients.
- The absence of any degree of control by the aggregator over the hours or days the dentist worked. He chose the days and hours he worked and what holidays he took.
- The absence of any intent on the aggregator to establish an employment relationship with the dentist.
- The dentist was reimbursed for costs he incurred.
- The contract provided for performance fees to be paid to the dentist based on increases in cash flow but the dentist was required to pay for shortfalls if cash flow fell below a set target [73].
Section 12 (3) of the SGC Act states that if a person works under a contract that is wholly or principally for the labour of the person, the person is deemed to be an employee for the purposes of determining whether SGC contributions are required to be paid for that person.
The Court did not have any difficulty in determining that the contract between the parties was one that was wholly or principally for the labour of the dentist.
In an appeal against this decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118, the dentist argued that there was control over his work and he was, therefore, an employee but the Full Court decided that there was neither actual control nor the right to control the dentist in how he was to do his job as a dentist [41] and [42].
In response to a submission by the Dental Corporation that its contract with the dentist was not substantially for the dentist’s labour, the Full Court said that the contract required that the dentist perform work [82] and that the revenue generated under the contract was the consequence of the dentist’s own labour. The revenue was not derived from the contract itself because, if the dentist had not performed the labour, there would not have been any revenue under the contract [97]. The contract was, therefore, substantially for the dentist’s labour and superannuation contributions were payable for him under s 12 (3) [104].
Conclusion
Where a person is clearly an independent contractor of the other party, it is still necessary to analyse whether SGC contributions are, nevertheless, payable for the independent contractor. Contributions are payable if, for example, the contractor is being paid to participate in a sport or a performance involving the exercise of physical or personal skills or if the contract is one that is wholly or principally for the labour of the contractor.
If tools, machinery or equipment supplied by the independent contractor are utilised in performing the contract, the question becomes whether the tools, machinery or equipment are the principal elements in the performance of the contract or whether the labour of the contractor is the principal component of the contractual payment. If the contract is to provide typing services and the contractor is to provide his or her own computer, the contract will be principally for the labour of the typist as the computer is a minor component in providing the service. However, if the contract involves the use of expensive equipment supplied by the independent contractor such as in road building or earthworks, it may be that the expensive equipment is the principal component of the contractual fee.