Workers classification for super guarantee (SG) purposes – key highlights for the 2023-24 tax year

The landscape for working out who super guarantee must be paid for has changed in the last year, with an increased ATO focus and several useful cases.  The key developments are summarised below

ATO SG compliance activities

The ATO has released its annual superannuation guarantee (SG) employer compliance results for the 2023-24 tax year. The statistical results show there was an increase in compliance activities compared to previous year; a total of 167,000 employers received reminder letters from the ATO to check their SG obligations (which is a jump from 134,000 in the previous year), resulting in $240 million SGC liabilities raised. Compliance activities initiated by unpaid superannuation queries also rose from 23,300 to 28,100 for the 2023-24 tax year. The ATO has also completed a significantly higher number of cases, 23,600 cases compared to 14,000 cases in the previous year, raising approximately $659 million in SGC liabilities and $300 million in Part 7 Penalties. There was a total of 8,710 director penalty notices (DNPs) issued in relation to unpaid super, which was more than double the 3,660 DPNs issued in the previous year.  With the STP process providing the ATO with a constant stream of data about employer super contributions, we expect this trend to increase.

Recent case challenges

During the 2023-24 period, there were several cases before the Administrative Appeal Tribunal (AAT) where the workers challenged their independent contracting arrangements under s.12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Section 12(3) SGAA extends the definition of an employee to include a person that is not otherwise an employee at common law where the person works under a contract that is wholly or principally for their labour. Case law has established that for s.12(3) SGAA to apply the following three elements must be present; (a) there must be a contract, (b) the contract must be wholly or principally for the labour of a person; and (c) the person must work under the contract. It is worth noting that where a worker has an unfettered right to delegate, subcontract or assign the contracted work to others, the existence of this right is a strong indicator that the contract is not “wholly or principally for the labour of the person”. A contract that is properly characterised as being for the provision of a result is also a strong indicator that the contract is one for service.

Specific cases of note are:

• Peter Hatfield Trust v FC of T [2024] AATA 3428 – in this case the worker (a qualified plumber) was engaged by the applicant as an independent contractor to provide plumbing services for a period of 10 years. The worker lodged an unpaid super enquiry with the ATO advising that the applicant had not paid superannuation on his behalf for a period of 10 years. There was no written contract to evidence the legal rights and obligations between the parties. Thus consideration of the parties’ conduct was necessary to determine the nature of the legal relationship and whether both parties had a mutual understanding that the worker was engaged as an independent contractor. The case turns on the evidence being sufficiently compelling to provide prove that the worker was engaged to produce a result, namely the provision of plumbing services to complete specified plumbing jobs. The ATO has appealed against the Tribunal’s decision.
• S&H Investments Pty Ltd v FC of T [2024] AATA 893 – In this case the worker was engaged as an independent contractor to provide the same cleaning duties that she was previously employed full-time to perform. There was no written contract. The evidence supported a conclusion that the worker was engaged wholly or principally for her labour. The evidence included the worker was remunerated for her personal labour and skills in cleaning the applicant’s office, the work that the worker performed was not connected to any quantifiable result, she was remunerated by the hour, suggesting she was not engaged to achieve a particular result, she had no right to delegate, she worked solely for the applicant, had no employees etc.

Importance of written contract & PCG 2023/2

Case law has established that where the worker and the engaging party have comprehensively committed the terms of their working relationship to a written contract, and the validity of the contract has not been challenged as a sham, varied, waived, discharged or the subject of an estoppel, it is the legal rights and obligations in the contract alone that are relevant in determining the characteristics of the working relationship. Evidence of how the contract was performed is relevant only for confirming the contractual terms of the engagement. In other words the parties conduct cannot be considered for the purpose of determining the nature of the legal relationship where there is in existence a comprehensive written contract. Having a comprehensive written contract that governs the entire independent contracting arrangement will also help eliminate any ambiguity concerning each party’s legal rights and obligations in relation to the work engaged.

A comprehensive written contract is also an important consideration in the ATO’s compliance approach of workers classification as outlined in Practical Compliance Guideline PCG 2023/2 Classifying workers as employees or independent contractors – ATO compliance approach (PCG 2023/2). PCG 2023/2 sets out four different risks zones (Vey Low, Low, Medium and High), and depending on which risk category the working arrangement falls into, the ATO may cease its investigation (where the arrangement falls within the Very low risk zone), or extend their initial review to include testing whether the worker is an employee at common law, or for SGC purposes (or both). We note there are seven criteria outlined in PCG 2023/2 and most of these can be easily addressed at the time of the engagement when the contract is executed. It is important to note that if the engaging party fails to obtain advice from an appropriate qualified professional confirming that the classification as an independent contractor for both income tax and SG purposes is correct, and communicate this to the worker accordingly, this will cause an arrangement that may otherwise be classified as Very low risk to one of the higher risk zones.

Businesses are put on notice

Given the ATO statistical results and the release of PCG 2023/2, it would not be surprising to see increase SG compliance activities in the coming year, particularly compliance activities initiated by unpaid super enquires or where the STP data lodged indicates that a SGC shortfall has occurred. With the evolving landscape of the workforce such as gig economy roles and hybrid working models it will become increasingly more challenging for businesses to determine whether a worker under an independent contracting arrangement is correctly classified, specifically in relation to section 12(3) SGAA. Accordingly, practitioners are recommended to consider their clients’ existing independent contracting arrangements and assess these against the PCG 2023/2 risk assessment framework.

To satisfy the ‘obtaining specific advice from a qualified profession’ criterion, according to PCG 2023/2, the advice must be from the following class of professionals (the engaging party’s own in-house counsel, a third party such as a solicitor, a tax professional, an administrative body, or client specific advice from the ATO). Where applicable it may also be necessary for practitioners to obtain advice from an appropriately qualified professional to confirm the intended worker classification.

Should you have any questions regarding SG obligations for contractors or want to further discuss your clients’ SG obligations, please contact a member of our Webb Martin Consulting team of tax specialists.

——-