Employers must make superannuation contributions to complying superannuation funds on behalf of their employees. Persons deemed to be ‘employees’ under superannuation law may be broader than you might think.
Senior associate, Brendan Leighton, explains recent changes to the compulsory superannuation guarantee and the circumstances in which a person will be deemed to be an ‘employee’, and entitled to receive compulsory superannuation contributions.
Who is entitled to superannuation contributions?
It is compulsory for employers to make superannuation contributions to complying superannuation funds on behalf of their employees. Employers are able to claim a tax deduction for contributions paid to employees.
Superannuation law recognises two categories of employees: ‘common law employees’ and ‘deemed employees.’
From 1 July 2014, the compulsory superannuation guarantee will be increased to 9.5%. Further increases of 0.5% will apply annually until 2019-2020, when the superannuation guarantee rate will be set at 12%.
Common law employees
At common law, there is no one factor that is determinative of an employment relationship. Indicators of a common law relationship of employment include where:
- control can be exercised in regard to the manner in which the work is carried out and hours of work
- the worker is operating from within the employer’s business as opposed to operating their own business
- the substance of the contract is not to achieve a specific result
- the work cannot be delegated or subcontracted to another party
- the worker bears little or no risk in carrying out the work
- the worker does not provide their own equipment or pay for its own business expenses
- the worker is required to wear a uniform
- the employer has the right to suspend or dismiss the worker, and
- the worker is provided benefits such as annual, sick and long service leave payments.
Under superannuation law, a person may be deemed to be an ‘employee’ even though they may not be deemed to be an ‘employee’ at common law. For example, directors and in certain circumstances, independent contractors may be deemed to be employees who are entitled to be paid superannuation contributions.
Under superannuation legislation, directors are automatically deemed to be employees and are entitled to receive superannuation contributions if they are entitled to paid directors’ fees.
In addition, persons working under a contract wholly or principally for their labour may be deemed to be an employee, notwithstanding that it was intended that they be engaged as an independent contractor. The ATO interprets that a person engaged under a labour contract will be deemed to be an employee if they are:
- remunerated wholly or principally for their personal labour and skills
- performing the work personally, and
- paid by reference to hours worked rather than for the amount of work performed.
Even if the person is an employee, an employer is not required to make superannuation contributions on behalf of the following persons:
- an employee who is aged 70 or over
- non-resident employees paid for work done outside Australia
- resident employees employed by non-resident employers for work done outside Australia
- employees receiving salary or wages of less than $450 in a month
- part-time employees (employed to work not more than 30 hours per week and are under 18 years of age), and
- a person employed for not more than 30 hours per week to carry out work of a domestic or private nature.
Changes to compulsory superannuation guarantee
Effective from 1 July 2013, the compulsory superannuation guarantee increased to 9.25%. At the time of the election, the new Coalition Government indicated that it intended to honor the former Labor Government’s proposed increase to the superannuation guarantee by 0.25% in 2014-15. Further increases of 0.5% are proposed to apply annually up until 2019-2020, when the superannuation guarantee rate will be set at 12%.
It is important to get superannuation contributions right as failure to correctly pay contributions can attract penalties.