The superannuation guarantee charge

Where an employer fails to meet its superannuation obligations, the Australian Taxation Office (ATO) can issue an assessment for superannuation guarantee charge (SGC) under the Superannuation Guarantee Charge Act 1992 (Cth). In many cases there’s no limit on the period for which the ATO can issue a SGC assessment.[1] Super obligations can have a very long tail.

Potential impact on independent contractor model

The potential for this long tail to sting is amplified by the fact that the statutory obligation to pay super depends upon whether a service provider is an employee or independent contractor – and this distinction is very much a question of fact and degree. How an entity views the nature of its relationship with a service provider may be very different to how the ATO views it.

This long tail of SGC and the potential for it to catch an entity unaware are vitally important in the context of a sale or purchase of a legal entity (such as a trust or company) that utilises an independent contractor model, commonly used in industries such as building and construction, cleaning, education, security services, telemarketing and interpreting/translating. Both the purchaser and seller of such an entity can potentially be stung by historical SGC liabilities long into the future.

In selling such an entity, extreme caution should be exercised in making any warranties or representations as to the entity's compliance with super obligations. Any lawyer worth their salt who is advising a purchaser of an entity will insist upon a warranty for compliance with super obligations. On the other hand, the seller's lawyer will insist on limiting the scope of any warranties or representations.

The following are two examples of possible warranty clauses that may be used in a share sale agreement. They illustrate the different outcomes that can be achieved due to slight variations in the wording.

Example 1

“The Company:

(a) has made when due all contributions to each superannuation fund that the Company is obliged to make or has voluntarily committed to make; and

(b) has made all superannuation contributions required to avoid any liability for a superannuation guarantee charge under the Superannuation Guarantee Charge Act 1992 (Cth).”

Example 2

To the best of the seller’s knowledge or awareness, the Company:

(a) has made when due all contributions to each superannuation fund that the Company is obliged to make or has voluntarily committed to make; and

(b) has made all superannuation contributions required to avoid any liability for a superannuation guarantee charge under the Superannuation Guarantee Charge Act 1992 (Cth).”

The first example is simply a bald statement of fact - the company has at all times complied with its superannuation obligations. In contrast, the second example is qualified by the seller’s awareness or knowledge.

Importance of distinction: employee v independent contractor

The distinction is a very important one in the case of superannuation obligations because a seller may genuinely regard its service providers as independent contractors, although on a correct characterisation of the law such persons may actually be employees. This is because the question of whether a service provider is an employee or independent contractor is a question of substance and not form. In other words, the fact that the contract with the service provider stipulates that they are contractors is not determinative of the legal position; they may still be employees as a matter of law, including for the purpose of superannuation obligations. Complicating this, the legal test involves balancing a number of circumstances of the relationship. This means that it’s often not easy to determine whether a person is a contractor or employee; it’s a question of fact and degree.

The difficulty in undertaking such a characterisation is seen in the decision of the Federal Court in 2011 in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366. In this case the relationship between a company providing translating and interpreting services and the persons it engaged to provide the services to its clients was regarded as being that of employer and employee. On Call had previously acted on advice of the ATO since 1989 that such workers were independent contractors.

Drafting considerations if selling an entity using the independent contractor model

Drafting considerations for a warranty given on superannuation compliance in a share sale agreement for an entity that uses an independent contractor model depends upon whether you’re the seller or the purchaser of the shares in the entity.

In the case of the seller, any warranty given on the entity’s superannuation compliance should be qualified by the seller’s awareness or knowledge, particularly where the entity holds a genuine belief that its workers aren’t employees, as this would provide it with a defence against liability under the warranty if the ATO subsequently characterises the workers as employees. Additionally, a seller should seek to negotiate the inclusion of a clause limiting the time the purchaser has to make a warranty claim after completion of the sale.

In contrast, in the case of the purchaser, any warranty given on superannuation compliance shouldn’t be qualified by the seller’s awareness or knowledge; there should be no limit on the time the purchaser has to make a warranty claim and the warranty shouldn’t be limited by the purchaser’s own inquires or knowledge.

Additionally, where there’s sufficient uncertainty as to the appropriate status of the service providers, and any potential SGC liabilities would be substantial, purchasers should consider purchasing the assets of the business as opposed to the shares in the operating company.

Conclusion

It’s important that contracting parties are aware of the implications associated with making any warranties or representations as to the entity's compliance with super obligations. The potential long tail of superannuation obligations is a factor that needs to be taken into account when negotiating and drafting an agreement for the purchase of an entity whose business is heavily reliant upon contracted workers. This is the case irrespective of whether you are the purchaser or seller of the entity.