The Australian Taxation Office amnesty for unpaid superannuation ended on 7 September 2020. Based on the work Alex Bevacqua, Biya Sun and Prath Balasubramaniam have done with corporate clients, human resource managers, payroll officers and legal counsel still have a fundamental misunderstanding in relation to their superannuation obligations for workers and service providers (both employees and contractors).
Under the amnesty, employers could come forward and voluntarily disclose unpaid superannuation in relation to their workers and obtain favourable treatment in relation to penalties and interest, in addition to being able to deduct the late payment (for income tax purposes).
Conversations with clients and business advisers during the amnesty period emphasised the importance of sifting through the common myths.
Not paying superannuation to a worker or contractor can lead to a 200% penalty, interest and the loss of the ability to deduct otherwise deductible superannuation contributions.
The most common myth is that superannuation contributions are not payable in respect of independent contractors and smaller service providers.
Myth buster #1
Myth: If a worker has an ABN, they are an independent contractor and are carved out of superannuation obligations.
Fact: Superannuation is payable to most independent contractors with a personal ABN who provide their services principally in the form of personal labour. Some very specific and limited exemptions apply.
Myth buster #2
Myth: If a worker has a registered business name, they are an independent contractor and are carved out of superannuation obligations.
Fact: Only genuine businesses that have the key characteristics of an independent business (not just a contractor with a trading name) are carved out of superannuation obligations.
Myth buster #3
Myth: If a worker self-assesses or self-declares as an independent contractor, they are carved out of superannuation obligations.
Fact: The worker’s self-classification is an irrelevant consideration. More importantly, it has no bearing on assessing an employer’s obligations to pay superannuation. Often employers can pay a higher contractor rate taking into account that they are not paying superannuation and get caught out having to pay superannuation at a later date.
Myth buster #4
Myth: If the worker and employer sign an Independent Contractor Agreement and they agree that the worker is not subject to superannuation, they are carved out of superannuation obligations.
Fact: This is an irrelevant consideration. An employer’s obligation to pay superannuation contributions to a worker is not determined by contract but rather by statute and they cannot contract out of these legal obligations.
Myth buster #5
Myth: If the contract provides the right to a worker to delegate, they are carved out of superannuation obligations.
Fact: Whilst the existence of the right to delegate is a consideration, usually it is important that the services being provided can actually be delegated (in practice), so it is important that there is some evidence of actual delegation.
Myth buster #6
Myth: If the employer pays the worker for a job or a result, they are carved out of superannuation obligations.
Fact: This is an influential consideration. It is important that payment for a job or a result is not calculated by reference to time.
Myth buster #7
Myth: An employer can always back pay unpaid superannuation to their worker’s superannuation accounts.
Fact: Under our superannuation laws, any unpaid superannuation becomes a debt payable to the ATO. So proper compliance can only be achieved by administering the payment to the ATO. Paying it to the superannuation fund creates a risk that the employer may have to pay it again to the ATO.
In assessing whether a business is required to pay superannuation to a category of workers, a number of factors must be taken into consideration and there are several ATO rulings.
Whilst the ATO employee-contractor checklist is helpful, we have found it does often lead to incorrect assessments being made by clients (because it depends on how well the user understands the questions and prompts).
Importantly, if a worker contracts through a company or trust, the ATO take the view that an employer is not required to pay superannuation. However, payroll tax may still apply.
Unlike with tax compliance, there is no time limit to audit superannuation compliance. That is, the ATO can go back indefinitely which means that a potential superannuation debt could accumulate to a significant sum over the years especially after you add the 200% penalty and interest and the cost of not being able to deduct the sum.
It is important that if you have a workforce for which you are not paying superannuation , and you have not recently reviewed your superannuation obligations, you seek privileged legal advice to assess your risk and understand your options.
KHQ Tax & Structuring
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The Tax & Structuring team has in-depth experience working with corporate clients, HR managers, payroll officers and legal counsel in assessing risk, quantifying exposure and advising on the best possible solution in the circumstances.
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