Do I need to pay superannuation for contractors? This is a common question and one that it is important to understand clearly, as both a business hiring contractors (also known as sole traders) and for contractors themselves.
The problem arises because people think superannuation is only for employees, but the Superannuation Guarantee Act defines "employee" in the usual sense (i.e. as a ‘common law’ employee) as well as under an extended definition which includes various other categories of payee including a person who works under a contract wholly or principally for their labour (i.e. a contractor).
Wholly or principally? Refers to at least 50% of the invoice value. So if you pay a plumber to install a shower at your office and it costs $2,000 with $1,500 of that being for materials, then the contract is not wholly or principally for his labour.
The ATO has guidance on this matter in the form of SGR 2005/1 which states that the work need not only be “wholly and principally” for labour to be captured, but actually needs to tick three boxes to be considered “wholly and principally”. Wonderfully confusing.
11. For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of the parties indicate that:
the individual is remunerated (either wholly or principally) for their personal labour and skills;
the individual must perform the contractual work personally (there is no right of delegation); and
the individual is not paid to achieve a result,
the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.
If any of the above three criteria are not met, arguably the person is not an employee under the extended definition and therefore not covered by the Superannuation Guarantee Act. An interesting case can be made under the third criteria, being the results test, such as saying the photographer was paid to deliver 4 finished images, and not simply to work for 1 day - something to ponder.
This is something to be considered carefully and with great conservatism as if there is any doubt or question over the matter the ATO have a tendency to rule in favour of the contractor getting paid their super and not the other way around. Also note the ATO have unlimited powers when it comes to going back and reviewing your books to ensure you’ve always paid contractors the super that was due.
My advice?
If you’re uncertain as to whether a particular contractor needs to have superannuation paid or not you can use this handy decision tool provided by the ATO. Use it for each contractor you pay and save the results on their file for safe-keeping. Failing that, get professional advice!
Bonus tip. For a long time there has been a $450 threshold test for paying superannuation - you pay a worker less than $450 in a month and you've got no obligation to pay them any superannuation. This threshold has been removed (i.e. reduced to $0) effective from 1 July 2022. Don't get caught out!
The above is intended as a guide and something to get you thinking and, as such, it does not constitute advice specific to your circumstances. If you have any questions, please get in touch today. We’d love to help.