Do I need to pay superannuation for contractors?

Do I need to pay superannuation for contractors? This is a common question we are asked and one that it is important both for the businesses hiring contractors and for contractors themselves. The answer is…it’s complicated.

Most businesses understand that employees and contractors are treated differently, but there is confusion as to the extent. While superannuation is an entitlement typically associated with employees, there are circumstances where it should be paid to contractors too. Several factors and circumstances are taken into account in each case to determine whether the obligation falls on the employer or the contractor.

 

Is your contractor actually an employee?

 

The first issue to consider is whether your contractor is actually a contractor, or whether they are an employee.

You can read our article on Contractors vs Employees for further information. The ATO has produced a contractors decision tool which can also help you clarify the working arrangement.

If you work out that you are in fact in an employer/employee relationship then you are obligated to pay the superannuation guarantee contribution (as well as other obligations) on their behalf.

For the purposes of superannuation, the Superannuation Guarantee (Administration) Act 1992 (SGAA) expands the definition of “employee” so that a wider class of workers (ie. contractors) are also entitled to superannuation contributions.

If you are certain your worker is a contractor, you’ll need to determine if you have a superannuation obligation to them.

 

Contractors who are treated as employees for superannuation purposes

 

Even if a worker is determined to be a contractor, the SGAA determines certain contractors to be employees for superannuation guarantee purposes.

The SGAA’s test states that an “employee for the purposes of superannuation” is a person who “works under a contract that is wholly or principally for the labour of the person”. In this instance “wholly or principally” refers to at least 50% of the invoice value.

The ATO has provided further guidance around this matter in that the contract actually needs to have ALL of the following characteristics to be considered “wholly and principally”:

1. The individual is remunerated (either wholly or principally) for their personal labour and skills.
2. The individual must perform the work personally (they must not delegate).
3. The individual is not paid to achieve a result. They are paid for their personal labour and skills (which may include physical labour, mental effort or artistic effort).

 

Contracting with companies, trusts and partnerships

 

The ATO states that if a contractor is a company, trust or partnership, the engagement of that entity is not for “the labour of an individual” and therefore superannuation is not payable.

 

Important takeaways for employers

 

Prior to entering into a contract or agreement with a worker, it is important to consider the following:

1. Whether you are engaging an employee or a ‘contractor’.
2. If the person is a ‘contractor’, are they covered by the expanded definition of an ‘employee’ under the SGAA?
3. Do you have the appropriate documentation? The relationship between the worker and the organisation should be documented in accordance with the terms and conditions appropriate for an employee or contractor (e.g. an Employment Contract or Independent Contractor Agreement).

 

Further help:

The Marsh & Partners bookkeeping team have many years of experience and a strong understanding of the ATO legislation on superannuation obligations.

If you would like further advice about your superannuation obligations (whether they are for employees or contractors), or need help setting up superannuation payments for non-employees in your accounting system, please contact us.

As well as basic bookkeeping, BAS preparation and reporting, our bookkeepers are payroll experts and offer expertise in:

• Payroll set up
• Payroll calculations and payments
• Payroll Tax advice and calculations
• Payment summaries
• Superannuation
• WorkCover
• Superannuation for contractors
• Taxable Payments Reports for contractors

Find out more about our Bookkeeping Services.

Feel free to contact us for further advice. You can reach us on 07 3023 4800 or at mail@marshpartners.com.au.

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