Correctly determining whether or not an independent contractor is entitled to superannuation is important, because a failure to make the required superannuation contributions could result in you being required to pay the Superannuation Guarantee Charge and, potentially, penalties.
Under the Superannuation Guarantee (Administration) Act 1992 (Cth) a contractor is entitled to superannuation contributions if they work under a contract that is “wholly or principally for the labour of the person”.
Based on decisions of the Courts and Australian Taxation Office, an independent contractor must satisfy all four of the following criteria to be entitled to superannuation under the Act:
1. The contractor must be an individual
There needs to be a contract between the individual performing the services and the principal who is receiving the services. If the contract is between the principal and an incorporated contractor, the contractor is not entitled to superannuation.
2. The contractor must be remunerated (either wholly or principally) for their labour or skills
Generally, at least half the value of the arrangement with the contractor must be for the provision of labour (and not goods). Otherwise, the labour is likely to be considered ancillary to provision of goods under the arrangements.
3. The contractor must be required to perform the work themselves (no power of delegation)
Most written contracts do not allow delegation or subcontracting. However, if an arrangement does not prohibit delegation or subcontracting then this may suggest that delegation is possible and the contractor is not required to do the work his or her self.
4. The contractor must not be paid to achieve a result
Typically, an independent contractor will be paid to perform a specific task, as opposed to an employee who is paid for their time. However, a contractor paid an hourly rate is being paid for their time and labour, and not to achieve a result. If it is clear that a person is being paid an amount to achieve a specific result, regardless of the time they spend achieving the result, then it is more likely that the individual is not entitled to superannuation.
Of course, these tests allow considerable room for argument depending upon the precise structure of an organisation’s independent contractor arrangements. Accordingly, it is always best to seek legal advice before entering into a contractor arrangement with an individual to ensure that your organisation’s processes and contracts are in order.