Superannuation update – are your contractors entitled to superannuation?

By Anthony Bradica and Todd Bromwich

The Full Federal Court recently handed down its decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek) on the deemed employee test in section 12(3) of the Superannuation Guarantee Administration Act (SGA Act).

In broad terms, section 12(3) extends the requirement of an employer (or principal) to pay superannuation to a person who works under a contract that is wholly or principally for their labour. This may cover many workers who would otherwise be contractors at law and not entitled to superannuation.

Jamsek v ZG Operations Australia

In early 2022, the High Court held that two drivers who worked for ZG Operations were independent contractors. As the drivers were not considered employees of ZG, there was a question whether ZG was required to pay superannuation to them under the ‘deemed employee’ test in section 12(3) of the SGA Act.

The High Court did not address the merits of section 12(3) and whether the drivers were entitled to superannuation as deemed employees under this provision. The matter was remitted back to the Full Federal Court to consider this issue, with the Commissioner of Taxation being joined as a party to the proceeding.

The Full Federal Court recently handed down its decision, finding that the requirements of section 12(3) were not met and that the drivers were not entitled to superannuation as deemed employees.

Importance of this decision

The case is important for a number of reasons.

This was the first time that an appellate court has considered the breadth of the deemed employee test since the decision in Dental Corporation Pty Ltd v Moffett [2020] FCAFC 118. That case has been viewed as expanding the breadth of the deemed employee test and is notable as a case where the superannuation entitlements of a contracting professional were upheld.

Secondly, while the High Court in Jamsek did not deal with the application of section 12(3), it did make some interesting observations that hinted at a possible further extension of the scope of this provision. This caused some consternation among many employers and tax practitioners, as an extension of the scope of section 12(3) would have an enormous financial impact on many businesses. The Full Federal Court’s decision has now watered down those concerns.

Interestingly, following the High Court decision in this matter, the ATO advised that it was reviewing its guidance in SGR 2005/1 Superannuation Guarantee: who is an employee? Significant updates to the ATO guidance to reflect the Full Federal Court’s recent decision on the scope of section 12(3) of the SGA Act may not be necessary, as noted below.

Key takeaways

The upshot of the decision of the Full Court is that a number of the comments made by the ATO regarding section 12(3) in SGR 2005/1 still hold and have been endorsed as reflecting the current state of the law.

The Full Court reiterated the three elements of section 12(3) of the SGA Act:

  1. There should be a contract.
  2. Which is wholly or principally ‘for’ the labour of a person.
  3. That the person must ‘work’ under that contract.

In addressing the three elements, the Full Court then went on to confirm the requirements of those three elements and assess those elements by reference to the particular facts of the case.

Requirement of s.12(3)
Principles explaining the requirement
Application of the requirements to the case
There must be a contract and a person must work under that contract
  • There must be an identified natural person – an individual – who is a party to the contract in their personal capacity.
  • Only a natural person can ‘work under a contract’.
In Jamsek, the drivers were not parties to the contract with ZG in their personal capacity. Instead, ZG contracted with their partnership and, even though the partnership was comprised of individuals, those individuals signed the service contract in their capacity as partners in the partnership and not in their personal capacity.

This outcome is consistent with comments by the ATO in SGR 2005/1.

The contract must be wholly or principally for labour
  • As in Moffett, the Full Court said that the contract must be ‘for’ labour. That test is to be assessed from the perspective of the person engaging the service provider. What did ZG secure or obtain from the contract?
  • If there is a power of delegation – even if the consent of the ‘employer’ is required – then the contractor is free to do the work themselves or substitute another person to do the work. In that case, the contract is not ‘for’ the labour of the contractor.
  • A contract to produce a result is also not a contract for labour. If, however, remuneration is paid based on hours worked or a daily rate, this points against a ‘results’ based contract.
  • To the extent that the contract involves a mix of labour as well as the provision of something else – like goods or equipment – then a quantitative assessment of the relative contributions of the labour component and the equipment component needs to be made to assess whether the contract is principally for labour or not.
The contracts between ZG and the drivers’ partnership were for the delivery of goods. The delivery required the partnership to transport goods for ZG using trucks supplied by the partnership.

The fact that the drivers were paid on an hourly or daily rate indicated that the contract was for their labour, rather than being a results based contract. However, the Full Court said that the contract was not wholly or principally for labour because:

  • The right of the partnership (and therefore the drivers) to delegate the delivery tasks to substitute drivers, albeit with the consent of ZG, meant that the contract was not for the labour of the contractors.
  • The obligations under the service contract required the partnership to supply its own trucks and so there was a significant non-labour component in the contract. Although the drivers didn’t adduce any evidence of the relative components of the contract, the Full Federal Court felt that the benefit obtained by ZG under the contract was a delivery service that included a labour component which was not the ‘principal benefit’ of the contract.

What this means for your business

The key message for businesses and their advisors is that the manner in which section 12(3) of the SGA Act has been interpreted in the past, usually by reference to guidance in SGR 2005/1, remains valid. The principles stated in the Jamsek case do not extend or narrow the law, but have clarified some of the uncertainty.

Unfortunately, many employers have not applied the law correctly in the past and, in many cases, the Jamsek decision will not protect those employers and principals from claims for unpaid superannuation. This can lead to substantial non-deductible costs for employers, which only increase with time.

While the ATO has ended its superannuation guarantee amnesty, employers who are concerned about having correctly met their superannuation obligations should review their arrangements and, if there is a risk of unpaid superannuation, consider making a disclosure to the ATO to mitigate significant penalties.

Failing to proactively disclose non-compliance to the ATO can pose a significant risk to your business. Additionally, an adverse audit finding matters can negatively affect your compliance record, which can influence the ATO’s approach to you in future. Penalties can be up to 200% of any superannuation guarantee charge imposed by the ATO, although these can be substantially reduced if a voluntary disclosure is made before an ATO investigation commences.


Anthony Bradica

Anthony specialises in taxation planning and structuring for corporate clients, including advising on capital raisings and M&A.

Todd Bromwich

Todd is a taxation lawyer with experience in charity law, general commercial matters, trust law and estate planning.

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