State of Play: Superannuation Guarantee FAQs

In this edition of HSF FSR Australia Notes, we cover some live issues facing employers with respect to their superannuation guarantee (SG) obligations.

1. What is the SG amnesty and how can you take advantage?

Employers are generally required to make quarterly SG contributions in respect of their employees under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act), in order to avoid liability for the SG charge.

The SG amnesty provides a one-off amnesty for historical SG non-compliance, and allows employers to avoid administrative penalties that form part of the SG charge and claim a tax deduction for qualifying SG payments made during the amnesty period. In other words, where the employer qualifies for the amnesty, the employer is required to pay the shortfall in SG as well as the prescribed rate of interest (10% per annum), but can avoid paying the applicable administrative and Part 7 penalties (including the administrative component of the SG charge of $20 per employee per quarter) and claim tax deductions.

The amnesty period began on 24 May 2018 and ends on 7 September 2020.

An employer qualifies for the SG amnesty for a quarter if:

• during the amnesty period, the employer discloses to the ATO the information that relates to the amount of the employer’s SG underpayment for the quarter (provided that such underpayment was not previously disclosed to the ATO);
• the relevant quarter ended at least 28 days before 24 May 2018; and
• the ATO has not, before the disclosure, informed the employer that it is examining or intending to examine the employer’s SG compliance for the quarter.

The ATO has a prescribed process and form through which employers can apply for the SG amnesty. Employers must disclose to the ATO by 7 September 2020 and either pay the unpaid superannuation in full with interest, or put a future payment plan in place. Payments made by 7 September 2020 will be tax deductible.

The ATO has stated that it will take a very strict approach to enforcement and penalties where an employer could have come forward voluntarily to disclose an SG shortfall during the amnesty and failed to do so, and it may impose Part 7 penalties of up to 100% of the SG charge amount. The ATO has released Draft PS LA 2020/D1 setting out proposed guidelines on the remission of any additional SG charge after the SG amnesty ends on 7 September 2020.

As a result of the amnesty, a large number of employers are currently reviewing their SG contribution arrangements, to ensure compliance with the SG regime. A key area of scrutiny we have seen is independent contractor arrangements.

2. What are an employer’s obligations with respect to making superannuation contributions for independent contractors?

Under section 12(3) of the SGA Act, a broader definition of “employee” applies in the context of an employer’s SG obligations. Section 12(3) of the SGA Act provides:

“If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”

This means that if a contractor is paid “wholly or principally for [their] labour”, they will be considered an employee for superannuation purposes and entitled to SG contributions.

The application of the SG regime to independent contractors remains a complex area for employers to grapple with. In our experience, it is common for independent contractor arrangements to contain hallmarks of both employee and contractor relationships, making the assessment of whether SG obligations apply all the more complex.

The Full Court of the Federal Court of Australia recently considered the extended definition of “employee” in the SGA Act in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet). This case concerned whether a dentist (Dr Moffet), who had sold his practice to Dental Corporation Pty Ltd but continued to work in the practice, was an “employee” of Dental Corporation for various purposes, including under the SGA Act. The Full Court answered yes to this question.

The main focus in Moffet was the meaning of the phrase “wholly or principally for the labour of the person”. In coming to its decision, the Full Court held that the previous test applied by Bromberg J in On Call Interpreters and Translators Agency Pty Ltd v Federal Commissioner of Taxation (No 3) [2011] FCA 366 was an impermissible gloss on the language of section 12(3). Bromberg J was of the view that section 12(3) would apply only where an independent contractor provided personal services in an employment-like setting, which was not of a domestic or private nature. In determining what an employment-like setting was, Bromberg J thought it was appropriate to ask whether “in all the circumstances, the labour component of the contract in question could have been provided by the recipient of the labour employing an employee.”

In Moffet, Perram and Anderson JJ stated (at [82]-[85]):

“In our opinion, what s 12(3) requires is that: (a) there should be a ‘contract’; (b) which is wholly or principally ‘for’ the labour of a person; and (c) that the person must ‘work’ under that contract. …

So far as (b) is concerned, the word ‘for’ is purposive but even the simplest employment relationship has two purposes depending on the perspective from which it is viewed. From the employer’s perspective an employment contract is ‘for’ the provision of labour (in return for wages); from the employee’s perspective it is ‘for’ the receipt of wages (in return for labour).

Since s 12(3) poses the question of whether the contract is ‘for’ the labour of a person, this shows that Parliament was mandating an inquiry into the purpose of the contract from the perspective of the person obtaining the benefit of the labour (ie the quasi-employer). On no view could the question posed by s 12(3) be answered by asking whether the contract was wholly or principally ‘for’ wages.

What did Dental Corporation receive for entering into the Services Agreement? In particular, did it receive ‘wholly or principally’ the labour of Dr Moffet?  In answering that question it is irrelevant to ask what Dr Moffet might have received from Dental Corporation. This is not so on the approach required by On Call – there the question of whether the relationship was framed in an ‘employment-like setting’ by no means makes irrelevant a consideration of what the person providing the labour obtains from the quasi-employer.  It is no surprise, therefore, that in this appeal Dental Corporation focused, in relation to On Call, on services received by Dr Moffet from Dental Corporation such as the provision of premises, the ‘Administrative Services’ and the assistance of other health care professionals employed by it. In our view, however, none of these can be relevant to the question posed by s 12(3).”

The result of this decision is that section 12(3) of the SGA Act has a potentially much broader application, as it is no longer relevant to consider any employment-like benefits obtained by the contractor.

The SG amnesty period ends on 7 September 2020. We encourage employers to consider taking advantage of this amnesty and undertaking a review of any independent contractor arrangements, which may fall within the broad definition of “employee” in section 12(3) of the SGA Act.

3. What is the position on annual leave loading?

On 12 March 2019, the ATO updated its website in relation to whether SG contributions are payable on annual leave loading. Since 2009, the ATO has considered that annual leave loading constitutes ordinary time earnings (OTE), unless the entitlement to annual leave loading was “demonstrably referable to a notional loss of opportunity to work overtime” (see Superannuation Guarantee Ruling SGR 2009/2 ‘Superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’’).

On 12 March 2019, the ATO acknowledged ongoing uncertainty around this requirement, particularly noting that most awards and employment arrangements do not state the reason for the annual leave loading entitlement. Accordingly, the ATO confirmed that it will not scrutinise the purposes of historical annual leave loading where the employer had a reasonable position to believe the annual leave loading was for a notional loss of opportunity to work overtime and there is no evidence that suggests otherwise.

However, from 12 March 2019, the ATO expects employers to have written evidence to support any position that annual leave loading is not OTE. Where such evidence does not exist, the ATO expects that SG contributions will be paid on annual leave loading.

Accordingly, employers paying annual leave loading should determine whether they make SG contributions on such loading and if not, consider what is needed to satisfy the ATO’s evidentiary requirements.