Virdis and Moffet: a reminder that superannuation guarantee obligations apply to a broad range of ‘contractor’ relationships
By Anthony Bradica and Adam Dimac
One of the great myths about superannuation is that it doesn’t apply to payments made to contractors.
Two recent landmark decisions by the High Court in Construction, Forestry, Maritime, Mining and Energy Union & Anor v. Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd & Anor v. Jamsek & Ors [2022] HCA 2 indicate a shift in the legal analysis of whether a worker is an independent contractor or employee at common law that could mean an increased focus on the deemed employee test that can extend superannuation obligations on payments made to independent contractors.
While the High Court cases indicate a changing landscape, the recent decisions of the Full Federal Court (FFC) in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet) and the Administrative Appeals Tribunal (AAT) in The Trustee for Virdis Family Trust t/a Richard Heating Pty Ltd v Commissioner of Taxation (Taxation) [2022] AATA 3 (Virdis) highlight the expansive circumstances in which a ‘contractor’ relationship will attract superannuation guarantee (SG) obligations.
Specifically, both cases highlight that the extended definition of ’employee’ in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act) will apply to a broad range of ‘contractors’.
The cases also mark the ATO departure from its long-standing position regarding fee splitting arrangements in the medical field in ATO ID 2011/87, which was withdrawn on 23 August 2021 based on the decision in Moffet. Importantly, ATO ID 2011/87 reflected the ATO’s position for almost 10 years, and has been relied on by many businesses.
Anecdotally, it seems that the cases also coincide with an increased SG compliance focus from the ATO. In this regard, the ATO’s ability to detect non-compliance is helped by the fact that (for good reasons) contractors can easily report unpaid superannuation contributions to the ATO; often the trigger for a review or audit.
The decisions in Moffet and Virdis highlight that the risks are not limited to white or blue-collar workers. Businesses in any field engaging contractors should review their arrangements to ensure they are complying with their SG obligations.
If you have things wrong, there is a big stick. While the ATO recently updated its practice statement on the remission of Part 7 Penalties, penalties are automatically imposed at 200% of the SG charge amount, and valid reasons will need to be provided for a remission.
Moreover, there are no time limits for the recovery of unpaid superannuation. For example, if a business has not met its SG obligations for a ‘contractor’ on the basis of the withdrawn position in ATO ID 2011/87, it will still be required to back-pay superannuation for all periods (plus penalties and interest in many circumstances).
The SG Act imposes no time limits on the recovery of unpaid superannuation, and neither the ATO, nor the Courts, will accept reliance on ATO ID 2011/87 as the basis for avoiding SG obligations. This is an important reminder that ATO ID 2011/87, like any ATO ID, is not the law but simply a reflection of the ATO’s interpretation of the law (and that they can be withdrawn).
Moffet ExpandDr Moffet ran a dental practice through his family trust. The dental practice was sold to Dental Corporation, with Dr Moffet agreeing to continue working in the practice under the terms of a services agreement.
The issue before the Full Federal Court was whether, because of the terms of the services agreement, Dr Moffet fell within the expanded definition of employee under section 12(3) of the SG Act on the basis that the agreement was ‘wholly or principally for the labour of the person’, in this case Dr Moffett.
The Full Federal Court held that the inquiry into whether a contract is wholly or principally for the labour of the person should be determined by enquiring what benefit did the ‘quasi-employer’ receive? Based on the facts, the court concluded that Dental Corporation received two benefits, being Dr Moffet’s:
- personal services as a dentist and practice manager; and
- promise that the practice would achieve a minimum cash flow.
On this point, the Full Federal Court stated that:
In our opinion, these two benefits which Dental Corporation received under the Services Agreement were what it was ‘for’ insofar as s 12(3) is concerned. Dr Moffet’s obligation to provide personal services as a dentist, manager and so forth may be said to be ‘for labour’; his promise – secured against his monthly drawings – that the practice would generate the minimum cash flow, may not.
Ultimately, the Full Federal Court stated that while these two benefits remained conceptually distinct, they could not be disentangled, and that, from Dental Corporation’s perspective, the services agreement was wholly or substantially ‘for’ Dr Moffet’s labour. Specifically, the Full Federal Court stated that:
To answer that question in the negative would require one to conclude that the fact that Dental Corporation also received the important benefit of the minimum cash flow promise meant that the labour component could not predominate (ie was not the whole or principal benefit that the Services Agreement was ‘for’).
Dental Corp’s application in the High Court for special leave was unsuccessful. This case highlights the SG risks that arise in the context of medical practice acquisitions, and in the allied health sector.
Virdis Expand
In Virdis, the Taxpayer (Virdis Family Trust trading as Rickard Heating Pty Ltd) conducted a business selling and installing cooling and heating systems.
It engaged a number of employees, as well as Mr Pirie. However, Mr Pirie was treated differently in that (among other things) no superannuation contributions had been made by the Taxpayer on his behalf.
While there was some dispute about the terms and basis upon which Mr Pirie was engaged, it was agreed that he was engaged to do work, and that he did that work as result of his engagement.
Some of the key terms on which My Pirie was engaged, as found by the Administrative Appeals Tribunal (AAT), are set out below:
- Mr Pirie was on a set hourly rate for prescribed work per week;
- Mr Pirie was told where he was required to work and he would then complete that work;
- Mr Pirie was responsible for expenses such as petrol, mobile phone, insurance for his van, tolls and clothes, although the arrangement regarding petrol changed towards the end of the relationship;
- materials were arranged by either party depending on the job, but they were always paid for by the Taxpayer where work for the Taxpayer was concerned;
- Mr Pirie took time off when he wanted to but when he did, he was expected to give notice of any period of absence. Mr Pirie did not arrange a replacement to do his work or delegate his work to someone else. The AAT rejected any suggestion that, based on these facts, Mr Pirie could delegate his work; and
- Mr Pirie was able to work for others while working for the Taxpayer.
Applying the test in Moffet, the AAT found that Mr Pirie fell within the expanded definition of employee under section 12(3) of the SG Act, stating that the contract in this case:
was the paradigm kind of agreement that would be caught by the expression ‘works under a contract that is . . . principally for the labour of the person’.
The AAT also stated that whether Mr Pirie was conducting his own business or not was irrelevant, as Mr Pirie contracted to give to the Taxpayer only his labour.
This case confirms the decision in Moffet, and highlights that contractors required to provide labour personally are likely to be employees for SG purposes pursuant to the expanded definition of employee under section 12(3) of the SG Act.
The decisions in Moffet and Virdis highlight that the risks regarding unpaid superannuation are not limited to white or blue-collar workers, and businesses in any field that engage contractors should review their arrangements to ensure they are complying with their SG obligations.