When providing advice to self-employed people on superannuation contributions, the definition of an “employee” under the Superannuation Guarantee Administration Act (SGAA) is important to determine. Employers are required to pay SG contributions for “employees”, and this flows onto whether the person can meet the “10 per cent rule” to claim a tax deduction for personal contributions. The general rule is that a self-employed person (sole trader or partnership) is not captured under the super guarantee (SG) system but instead is able to claim a personal tax deduction for contributions to super. However, the implications are not clear-cut where the person works as a contractor. The definition of an employee for SG purposes extends beyond both the common law definition and the definition for PAYG tax purposes to include many contractors. DEFINITION OF AN EMPLOYEE If a person is defined as an employee under the SGAA, the employer is required to pay SG on the employee’s behalf. Under section 12 of the SGAA, the term “employee” is defined using the common law definition of an employee. Common law definitions are derived from court decisions. The common law definition requires determination of whether an employer/employee relationship exists instead of a principal/contractor relationship. This is based on the factual circumstances of the employment arrangement. Section 12 also extends the employee definition to specifically include certain people as employees. These include: • a person who is paid as a director of a company; • members of the Commonwealth and State parliaments (including ACT and NT legislative assemblies); • a person paid to perform in any music, play, dance, entertainment, sport, display or promotional activity or other similar activity; • entertainers in media broadcasts; • employees of states, including members of the defence or police forces; • member of a local governing body; • a person who works under a contract that is wholly or principally for labour. In addition to specific inclusions, the SGAA also specifically excludes some employees.
For example, a person who is paid to work wholly or principally in a domestic or private nature for 30 hours or less a week is specifically excluded from the employee definition. Also excluded are Australian residents who work overseas for a non-resident employer. Any work performed in Australia by a person meeting the definition of employee (by an Australian resident or non-resident) is subject to SG requirements. This may cause problems for people who are employed in Australia by a foreign company that does not have a physical presence in Australia. Enforcement of SG payments may be difficult but the obligation for SG can exclude the person from making personal tax deductions. People in these circumstances may wish to seek a Tax Ruling to determine the opportunities available to them. CONTRACTOR OR EMPLOYEE A contractor is generally paid by submitting invoices for work completed. An ABN is quoted on invoices and no PAYG is deducted.
They generally do not receive leave entitlements or other employee benefits. However, contractors may be defined as an employee and entitled to SG contributions if: • Paid wholly or principally for labour and skills. • The remuneration is based on hours of service, not achievement of a result. • The employer requires the work to be personally performed and will not allow it to be delegated to someone else. If a partnership is contracted rather than an individual, SG is not payable. The person who does the work is not considered to be an employee of the partnership and will not fall under the SG definition of employee. Factors that need to be considered to determine whether a contractor is an employee for SG are discussed in the table (see previous page). Each of these factors may be an indicator of the nature of the employment relationship but assessment will depend on the full circumstances. Other indicators that an employee relationship exists include the right to exclusive services of the person engaged and provision of leave or other employment benefits. THE 10 PER CENT RULE To be eligible to claim a tax deduction for personal super contributions the person must:
• Be aged between 18 and 65, or • Be aged between 65 and 75 and meet the work test to contribute, and • If engaged in employment activity, receive less than 10 per cent of total assessable income plus reportable fringe benefits plus reportable employer super contributions from employment that meets the definition of employee in SG. The second part of the definition applies even if the SG contributions are not actually paid on the person’s behalf. It is important for businesses hiring contractors to correctly identify whether the person meets the employee definition to ensure that SG commitments are met (if applicable) to avoid penalties. Contractors who are defined as employees may not be able to make personal deductible contributions unless they have significant other income. If they have disposable income that they wish to contribute tax-effectively into super, they may wish to consider structuring contracts to increase the amount of the contract fee that is paid into super in a form of salary sacrifice.
STRATEGY IMPLICATIONS When providing advice to contractors it is important to determine whether they are employees for SG purposes. If the answer is yes, they will need to meet the 10 per cent rule to make personal deductible contributions. Some strategy options to consider for these clients: • Consider operating the consultancy business under a corporate structure. The consultant will become an employee of his/her own company and SG is payable on salary or directors’ fees paid by the company, but this provides the opportunity to control how much is contributed to super. • Negotiate with the employer how much of the contract fee is to be paid into super. In some cases, opportunities may exist for clients aged between 55 and 60 to set up a transition-to-retirement pension as the taxable portion of income payments can help to increase non-employment income. This may help to meet the 10 per cent rule. Where clients are unsure about their employment status they should be referred to the Tax Office or tax adviser.
