It has been almost a year since the super guarantee (SG) amnesty ended on 7 September 2020. The amnesty provided a window of opportunity for employers to disclose and pay previously unpaid SG charge (SGC), including nominal interest, for historical quarters within the period 1 July 1992 to 31 March 2018 without incurring a Part 7 penalty.
The Part 7 penalty imposed on the late payment of superannuation is equal to double the SGC payable by an employer for the quarter (i.e. 200% of the SGC).
Now that the amnesty period has ended, employers will again be exposed to Part 7 penalty for any SG amounts unpaid or underpaid by the due date for the respective quarter. A Part 7 penalty also applies to unpaid or underpaid SG amounts for any of the historical quarters previously covered by the amnesty that were not disclosed to the ATO by the employer before the 7 September 2020 deadline. A SG shortfall could arise due to many reasons including employment related payments that are counted as ordinary times earnings for which SG contribution is required (e.g. overtime where the ordinary hours of work are not stated in an award or agreement, or not separated from other hours), incorrectly treating a worker as a contractor (rather than a putative employee). Unfortunately, this error is typically only brought to light when an employer is being audited (following a worker notifying the ATO) and is found to have incorrectly treated the putative employee (for SG purposes) as a contractor.
Two recent cases Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 and MWWD and Commissioner of Taxation (Taxation) [2020] AATA 4169 considered the extended definition of ‘employee’ for SG purposes and were discussed in an article in the November 2020 edition of The Assessment. As a reminder the extended definition of ‘employee’ is defined as a person engaged under a contract wholly or principally for labour and only needs to be considered if a worker is not an employee at common law.
The latest decision, Olias Pty Ltd as trustee for the Storer Family Trust and Commissioner of Taxation [2021] AATA 1524 (28 May 2021) (‘Olias’), is an example of a case where a worker was found to be a common law employee. Despite being described as a ‘contractor’ the Tribunal determined the relationship was one of employment meaning an entitlement to superannuation existed.
Whether a person is a common law employee is based on a range of indicia that have been developed by the judicial system over the years. The starting point is to consider the facts relevant to each indicia so as to allow a view to be formed taking into account the totality of the relationship.
This article explores the common law indicia in the context of Olias.
Olias – a brief overview
- The Taxpayer carried on a business as a music school, principally teaching piano and keyboards to children via a set curriculum;
- During the period 1 July 2014 to 30 September 2017, the Taxpayer engaged the services of Mr Rowell as an independent contractor with his own ABN to provide private guitar and singing lessons to students;
- The Commissioner undertook an audit of the Taxpayer’s SG obligations in relation to Mr Rowell and having considered the information provided to it in its ‘SG Status of the Worker Questionnaire’ (completed on behalf of the Taxpayer and Mr Rowell), formed the position that Mr Rowell was an employee under common law and issued SG charges assessments;
- The Taxpayer objected, but the objection was disallowed by the ATO. The taxpayer then sought a review of the objection decision;
- The Tribunal found that Mr Rowell was an employee of the Taxpayer within the ordinary meaning of ‘employee’ for SG purposes.
The tests to determine if a worker is a common law employee
In reaching the decision, the Tribunal considered the whole of the relationship having regard to the following common law indicia:
- Terms of engagement – The contract was largely based on verbal agreements and the conduct of the parties. By way of conduct, the Taxpayer would pay Mr Rowell a half hourly rate in accordance with the number of lessons taught. Mr Rowell was expected to provide the lessons when scheduled, to the students provided to him, at the Taxpayer’s premises whilst wearing a uniform shirt. There was no negotiation of rates of pay. There were no guidelines or written procedures that set out the full terms of the working relationship. The Tribunal found that the contractual arrangement seemed akin to that of a casual employment relationship.
- Exclusivity– Mr Rowell was not restricted during the Relevant Period to only being able to provide his services to the Taxpayer. If Mr Rowell had wanted to, he could have provided private music lessons on his own or through another provider, and this was demonstrated by his advertisement on Gumtree. The Tribunal considered that this indicator weighed towards a contractual relationship.
- Remuneration, tax and regulatory arrangements– Mr Rowell was not aware of his rate of pay when he commenced his engagement with the Taxpayer. The rate being paid to Mr Rowell was not reflective of what he was likely to have received had he provided private music lessons independently of the Taxpayer. Mr Rowell was unable to renegotiate his rate of pay. The Tribunal’s view was that it is unlikely that an independent contractor would not negotiate their rate of pay. The Tribunal considered that this indicia weighed, although not decisively, towards a relationship of employment
- Control – The Taxpayer never supervised Mr Rowell in the actual conduct of the private guitar or singing lessons during the Relevant Period. Nonetheless, the Tribunal considered that the Taxpayer had a degree of control over Mr Rowell as the Taxpayer determined the time, duration and location of the lessons, the fees paid for the lessons, and the uniform to be worn by Mr Rowell. The Tribunal considered this indicia weighed towards a relationship of employment
- Integration – It was the Taxpayer, not Mr Rowell that sourced the students, set the timetables, set and collected the fees from the students, and entered into a separate contractual relationship with the students. Mr Rowell was seen by the students and their parents to have been one of the Taxpayer’s teachers. There was no evidence advanced before the Tribunal that indicated that Mr Rowell was in anyway providing his services on his own behalf rather than on behalf of the Taxpayer. It was clear from the evidence that Mr Rowell was serving the Taxpayer in their business, rather than carrying on his own business of providing music lessons.
- Delegation – Despite Mr Rowell being able to delegate his work with the Taxpayer’s approval, the Tribunal considered that the reality of the relationship between the Taxpayer and Mr Rowell was that it was Mr Rowell who was required to deliver the lessons himself. This indicia favoured the existence of an employment relationship.
- Risk– Mr Rowell did not guarantee his work, nor was he responsible for the rectification of any mistakes he may have made. The risk for Mr Rowell appeared to be limited to if students did not re-enrol, he would not have that particular lesson scheduled for the next term. The commercial risk lay more fairly with the Taxpayer. The Tribunal considered that this indicia was more consistent with the existence of an employment relationship.
- Tools & Equipment – The evidence was that the Taxpayer either personally or by requiring the student to acquire their own resources provided everything that Mr Rowell needed to teach his lessons, thus this indicia pointed to a relationship of employment.
The Tribunal considered that the indicia of goodwill and results did not assist in determining the relationship between Mr Rowell and the Taxpayer.
Key lessons
Just because a worker is engaged on a contractual basis and operates under their own ABN does not mean that the worker is an independent contractor.
The distinction between an employee and a bona fide independent contractor is based fundamentally in the difference between a person who serves an employer in the employer’s business, and a person who carries on a trade or business of their own.
This requires looking at the relationship between the parties as a whole having regard to the above indicia.
Whilst some of the evidence suggested that Mr Rowell had a degree of independence in how he conducted the services he was engaged to provide, at a practical level the Taxpayer exercised control over Mr Rowell by setting the time, duration, location of lessons, fees paid for lessons and requiring a uniform to be worn.
Olias is another reminder of the importance of correctly characterising the relationship between a principal and a person engaged so as to mitigate the potential risk of additional SG obligations including liability to a Part 7 penalty as well as being denied a tax deduction for the payment of the SGC.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.
