At the same time, Superannuation Guarantee Ruling SGR 2005/1 regarding this topic, was withdrawn. While we don’t see a significant deviation from the original guidance in this space, this clarification from the Tax Office is symptomatic of the level of focus on this topic and the gravity of the matter, as demonstrated by the number of Director Penalty Notices being issued.
Whilst the first part of the ruling deals with the meaning of ‘employee’ for common law purposes – being relevant for PAYG withholding, fringe benefits tax and superannuation guarantee purposes – the new appendix deals with the extended meaning of employee applicable for superannuation guarantee purposes only. Various highlights from the new draft appendix are outlined below.
Contracts wholly or principally for labour
The draft appendix outlines in some detail, the conditions that must be met for individuals to be considered employees under the extended definition relating to contracts wholly or principally for labour.
1. There must be a contract
The ruling confirms that the criteria can still be met where there are more than two parties to a contract.
2. The person must work under that contract
This requires the contract to name a natural person who will deliver the services personally.
3. The contract must be wholly or principally for the labour of a person
This means the worker must deliver the services themselves and cannot delegate or sub-contract delivery of the services if they are to be considered an employee under this provision. It is the right to delegate and not whether it is exercised that is important in this regard. Such services can include mental and artistic effort, as well as physical toil.
The contract must be for labour, rather than provision of a result. Payment would typically be with reference to time worked rather than a fixed sum on completion.
A rate of pay based on the number of times a certain activity is completed (for example, exams marked, deliveries made, etc.) would usually be considered a contract for labour, particularly where the rate of pay per activity is determined with reference to time, the activities are the worker’s only tasks, it is easier to calculate the remuneration on that basis and the purpose of the payment method is to increase productivity.
The contract must be principally for the provision of labour and not some other benefit, such as equipment, with ‘principally’ meaning ‘chiefly’ or ‘mainly’.
Performers
Payments are subject to superannuation guarantee where:
- They are made to an entertainer, artist, musician sportsperson, etc; and
- They are for the performance, presentation or participation in the performance or presentation - of any music, play, dance, entertainment, sport, display, promotional activity or similar activity; and
- The performance or presentation involves the exercise of intellectual, artistic, musical, physical or other personal skills.
This requires active participation in the performance or presentation, meaning that, for instance, a display of artworks does not usually cause any payments to the artists who produced the artworks to be subject to superannuation.
Payments are also subject to superannuation guarantee where:
- They are made for services provided in connection with the activities referred to above; or
- They are made for the making of any film, tape, disc, television or radio broadcast.
In contrast to the first set of provisions related to performances, these provisions do not require active participation. Further, the meaning of ‘in connection with’ is given a very wide interpretation. Therefore, payments to behind-the-scenes technicians providing services in connection with a performance, for instance, would be subject to superannuation guarantee.
General considerations
The draft appendix notes some overlap with the ‘Personal Services Income’ (PSI) measures, which are aimed at subjecting to income tax, income that is mainly a reward for an individual’s personal efforts or skills. However, provisions in the income tax legislation state that these PSI rules do not imply the individual is an employee for the purposes of any Australian laws. Therefore, whether or not an individual is subject to the PSI rules is a separate and distinct consideration from whether payments to the individual are subject to superannuation guarantee.
Importantly, in paragraph 9 of the main section of the ruling, the higher level of importance given to the terms of the relevant contract, after various recent court decisions, remains unaltered. Specifically, the ruling states that where the contract is comprehensive and is not a sham, ‘it is the legal rights and obligations in the contract alone that are relevant to determining whether the worker is an employee.’
Further, evidence of how the contract was performed are not a relevant consideration for this purpose, unless the contractual terms are not clear or comprehensive, or have been changed. This is reiterated in the draft appendix, which specifies attention is to be given to the rights under the contract and not to the actual performance of the contract.
Feedback
The Taxation Office is seeking feedback by 9 August 2024 in relation to the draft appendix. Please get in touch if you would like us to incorporate your comments into a submission.
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