When should superannuation be paid to contractors?

Many people are unaware that in many cases, they are obliged to pay superannuation for their contractors. The Superannuation Guarantee requires that if an eligible person is paid more than $450 in a month, their employer or the person who engaged them must pay super.

The ATO directs that you must make super contributions for contractors if under a verbal or written contract you pay the contractor more than half the dollar value of that contract for their labour. Note that:

  • A contractor’s personal labour and skills includes physical labour, mental effort or artistic effort;
  • The contractor must be paid for their time and effort rather than to achieve a result; and
  • The contractor must be paid to perform the contract work personally (so there is no right of delegation).

When contractors fit this description they are to be treated as employees for superannuation purposes.

Super must be paid to eligible contractors even if

  • The contractor is full-time, part-time or casual;
  • The contractor receives a super pension or annuity while still working (there is no upper age limit for employer contributions);
  • The contractor is a temporary resident, permanent resident or citizen;
  • The contractor is a company director; and/or
  • The contractor is a family member working in your business (as long as they earn $450 or more before tax in a calendar month.)

*Note that if the contractor is a family member who is under 18, or a family member doing private or domestic work, they must work for more than 30 hours a week to qualify for super.

When should superannuation not be paid?

  • If you make a contract with someone other than the person who will provide the labour (such as another individual, company, trust or partnership) you do not pay that person super.
  • If the contractor is a non-resident and you pay for work they do outside of Australia;
  • Some foreign executives who only hold certain visas or entry permits should not be paid super; and
  • Contractors temporarily working in Australia who are covered by a bilateral super agreement should not be paid super.

Superannuation contributions:

  • The current superannuation rate is 9.5% of the employee or contractor’s earning base (this is generally ordinary time earnings).
  • The superannuation guarantee charge or “SGC” is a quarterly levy or charge payable by employers if they fail to provide the prescribed level of superannuation support.
  • If insufficient contributions are made, the SGC (plus interest, administration fees and penalties) applies in respect of any shortfall.

Further help:

The ATO provides a free superannuation guarantee eligibility decision tool if you would like help determining whether your contractors are to be treated as employees for superannuation purposes. This can be found at https://www.ato.gov.au/Calculators-and-tools/Super-guarantee-eligibility/

If you would like to speak to someone further about your tax obligations with respect to employees or contractors please contact Sinclair + May.

This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation. 

Published Nov 21, 2018

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