Thinking | 15 February 2022

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from its long-standing position regarding fee splitting arrangements in the medical field in ATO ID 2011/87, which was withdrawn on 23 August 2021 based on the decision in Moffet.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).

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.

Contact

Anthony Bradica

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

Adam Dimac

Adam is an experienced tax lawyer, advising on a range of matters, including Division 7A, CGT and corporate restructuring.

You might be also interested in...

Tax | 20 Jan 2022

Talking Tax – Issue 202

In this edition of Talking Tax, we discuss the Full Federal Court appeal of Clough v The Commissioner of Taxation over whether the cancellation of employment share schemes is income tax deductible.

Tax | 23 Dec 2021

Long awaited guidance on s100A, but read with caution!

After a 13-year wait, we finally have some new judicial guidance on section 100A of the ITAA 1936 in the Guardian AIT case.