Superannuation for Contractors: What you need to know

Businesses have an obligation to pay superannuation for their employees. But did you know that you may also have an obligation to pay superannuation for contractors?

What's the Issue?

It's well known that many of the benefits businesses must provide to their employees, such as paid annual and personal leave, don't need to be provided to independent contractors. It's common to assume that superannuation works the same way, but that's not necessarily the case.

Do I have to pay superannuation for contractors?

Under the Superannuation Guarantee (Administration) Act 1992, where a business engages a person under a contract 'wholly or principally for the labour' they provide, the business must make compulsory superannuation contributions on their behalf. This is intended to encompass not only employees but some independent contractors as well.

To determine whether you have to pay superannuation for contractors, you need to ask what you hire the contractor for. Are they hired predominantly to provide labour, or are they hired to provide a particular service? If a contractor provides a specialised service, or brings their own capital equipment to carry out a task, it's more likely that the contract is a contract to provide a particular service, rather than a contract for labour.

If the contractor is hired predominantly to provide labour, you should consider whether the worker is actually an employee rather than a contractor. There are significant consequences for wrongly classifying workers as contractors when they are in fact employees. If you are in doubt about whether your workers are contractors or employees you should seek advice.

Where an independent contractor is contracted predominantly for the labour they provide, you will need to pay them superannuation under the compulsory superannuation guarantee scheme. Additional information is available on the ATO website.

But my contractors have their own business?

Whether or not an independent contractor has established their own business (with an ABN) is irrelevant to the question of whether a hirer has to pay superannuation for contractors.

It's different if you are contracting with a company rather than an individual. In that case it is the company rather than you that is obligated to pay superannuation. (However, the courts will make an exception to this rule if the company is being used as a sham to avoid providing workers with their entitlements).

Practical Tip

If you are in doubt about whether you need to make contributions for superannuation for contractors, you should seek advice. If you fail to pay superannuation when you should have, you will be liable to pay the superannuation guarantee charge (SGC) to the ATO to cover the superannuation you were required to pay. However, unlike superannuation payments the SGC is not tax deductible, so having to pay the SGC carries a tax penalty.

Being aware of when you have to pay superannuation to your contractors allows you to factor that cost into the contract at the start of the relationship, and avoid any nasty surprises down the track.

How can Sharrock Pitman Legal help me?

We have helped many businesses with ensuring they comply with their superannuation for contractors, and it would be our pleasure to assist you. We provide fixed prices and offer substantive free benefits to all customers who run a business. Call Sharrock Pitman Legal today on 1300 205 506.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Mitchell Zadow

Mitchell is the Managing Principal of our law practice.

He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.

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