ASG News - Tax / View / Clue

Deadline looming for SMSF collectables compliance

 

The ATO has reminded trustees of self managed super funds (SMSFs) that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure their SMSFs meet the requirements of the superannuation law for these assets. Assets considered collectables and personal-use assets include artwork, jewellery, antiques, vehicles, boats and wine.

From 1 July 2011, investments in collectables and personal-use assets have been subject to strict rules to ensure they are made for genuine retirement purposes and they do not provide any present day benefit. SMSFs with investments held before 1 July 2011 have until 1 July 2016 to comply with the rules.
 
The ATO says SMSF trustees have had since July 2011 to make arrangements, and it expects that they will take appropriate action to ensure the requirements are met before the deadline.
 
TIP: Appropriate actions may include reviewing current leasing agreements, making decisions about asset storage and arranging insurance cover.
 


Overseas student debts: repayment thresholds


From 1 July 2017, anyone with a Higher Education Loan Programme (HELP) or Trade Support Loans (TSL) debt who is living overseas and earning above the minimum repayment threshold will be required to make loan repayments to the Australian Government, just as they would if they were living in Australia. The HELP minimum repayment threshold for 2016–2017 is $54,869.
 
TIP: If you have a student loan debt and are planning to move overseas for longer than six months, you need to provide the ATO with your overseas contact details within seven days of leaving Australia. You should also factor in potentially having to make repayments from 1 July 2017.
 

ATO data-matching for insured “lifestyle” assets


In January 2016, the ATO advised it was working with insurance providers to identify policy owners on a wider range of asset classes, including marine vessels, aircraft, enthusiast motor vehicles, fine art and thoroughbred horses. The ATO has since formally announced the data-matching program that covers these “lifestyle” assets, and will acquire details of insurance policies for these assets where the value exceeds nominated thresholds for the 2013–2014 and 2014–2015 financial years.
 
The ATO said it will obtain policyholder identification details (including names, addresses, phone numbers and dates of birth) and insurance policy details (including policy numbers, policy start and end dates, details of assets insured and their physical locations). The data-matching program will provide the ATO with a more comprehensive view of taxpayers’ accumulated wealth, as well as assist in identifying possible tax compliance issues.
 
TIP: It is estimated that records of more than 100,000 insurance policies will be data-matched. The ATO has released a list of insurers involved with the data-matching program. Please contact our office for further information.
 

Market value of shares is not the selling price


The Administrative Appeals Tribunal (AAT) has ruled that the “market value” of a parcel of shares in a private company that a taxpayer sold in an arm’s-length transaction (together with the other two shareholders’ shares in the company) was not the proportion of the sale price he received from the sale of all the shares. Instead, the AAT agreed it was a discounted amount; the taxpayer was a “non-controlling” shareholder, so the market value was less than simply his one-third share of the sale price.
 
As a result of this AAT decision, the taxpayer passed the $6 million “maximum net asset value test”, allowing him to qualify for small business capital gains tax (CGT) concessions, where otherwise he would not have.
The Commissioner has appealed to the Federal Court against this AAT decision.
 
TIP: This decision demonstrates that the actual selling price of an asset may not always represent its “market value”. In this decision, the AAT agreed with the taxpayer’s valuer that “all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control”.
 

Individual not a share trader


The Administrative Appeals Tribunal (AAT) has found that a taxpayer (a childcare worker) was not carrying on a business of share trading, and accordingly was not entitled to claim a loss resulting from her share transactions. In the year in question, the taxpayer turned over approximately $600,000 in share transactions (including both purchases and sales).
 
In deciding that the taxpayer was a share investor and not a share trader, the AAT considered each of the key indicators established in case law. The AAT decided that a lack of regular and systematic trade, especially in the second half of the income year, when only 10 transactions were made, went against the taxpayer’s contention that she was conducting a share trading business.
 
TIP: The AAT weighs up all the relevant factors in cases like this. There have been cases where the AAT has found that a taxpayer was carrying on a business of share trading, and has therefore allowed them to claim a deduction for their losses.
 

Small business restructures made easier


The Government has made changes to the tax law to provide tax relief for small businesses that restructure. The tax law changes provide an optional rollover for small business owners who change the legal structure of their business on the transfer of business assets from one entity to another. The effect of the rollover is that the tax cost of the transferred assets is rolled over from the transferor to the transferee.

This optional rollover is in addition to existing rollovers available where an individual, trustee or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.
The changes to the tax law will take effect on 1 July 2016.
 
TIP: You must meet strict eligibility requirements in order to access the rollover. Among other things, the rollover must be part of a genuine business restructure that does not change the ultimate economic ownership of the assets. There are also tax consequences you should be aware of.


Tax law changes to treatment of earnouts


The Government has recently amended the tax law concerning the capital gains tax (CGT) treatment of the sale and purchase of businesses involving certain earnout rights.
 
Specifically, the changes provide for a “look-through” treatment. Under the amended tax law, capital gains and losses that arise in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying assets to which the earnout arrangement relates when they are received or paid (as the case may be).
 
The changes apply from 24 April 2015.
 
TIP: These changes to the tax law do not apply for events that occurred before 24 April 2015. However, transitional protection is provided, subject to conditions, for taxpayers who have reasonably anticipated these changes to the tax law, which were originally announced by the former Government.

 

 

Reconsidering Incorporated Contractors


(Article by Daniel Butler & Rebecca James, DBA Lawyers)
 
Determining whether payments to a contractor are covered by the superannuation guarantee (‘SG’) regime can be a vexed and difficult exercise. Of particular interest is whether an incorporated contractor is automatically outside the scope of the SG regime, such that SG contributions are not required to be made on their behalf to avoid a shortfall under the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’).
 
This article will consider the legislative provisions and key Federal Court decisions, as well as providing practical guidance on the application of the SG regime to incorporated contractors. 
 

Background


Definition of an employee
For the purposes of the SGAA, an employee is defined in Sec. 12 as a common law employee and a worker that falls within the expanded definition of an employee, which includes a person that works under a contract that is wholly or principally for their labour (s 12(3) of the SGAA). 

 

 
What is a contract for labour?

In determining whether a contractor works under a contract that is wholly or principally for their labour, it is important to first consider what constitutes a contract for labour.
 
The Commissioner of Taxation (‘Commissioner’) has outlined his view on when a contract for labour will be held to exist in Superannuation Guarantee Ruling SGR 2005/1 – Superannuation guarantee: who is an employee? (‘SGR 2005/1’).
 
The Commissioner will look at three key factors as follows:

 

  • Is the contractor remunerated (either wholly or principally) for their personal labour and skills?

 
For example, does the contractor supply tools, equipment or materials and if so, what is the value of the tools or equipment provided as a proportion of the total fee or amount received. If the fee for hiring similar equipment in comparable circumstances would equate to more than 50% of the fee for the particular job, this factor would suggest that the contractor is not in fact remunerated wholly or principally for their personal labour and skills. Further, does the contractor engage employees or subcontractors that the contractor is responsible for remunerating? 
 

  • Is the contractor required to perform the work personally, such that there is no right of delegation? 

 
Importantly, if there is a right of delegation under the contractor agreement, is it a genuine right, and does the contractor exercise this right in practice? 
 
In the case of Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Proprietary Limited (1955) 94 CLR 419 at 424-425, the Court formed the view that the right of delegation under the contract was a genuine right that the contractor could exercise, despite the fact that it had not been exercised to date, and therefore (based on this factor and various other factors), the worker engaged was an independent contractor. 
 
In our experience, it is not uncommon for the Commissioner to seek to argue that the right of delegation must be an unlimited or unrestricted right of delegation, such that if the principal requires any subcontractor engaged by the contractor to have adequate education, training or experience, the right to delegate is effectively discounted or afforded less weight in determining whether the contractor is in fact an employee for SG purposes. However, this interpretation adopted by the Commissioner is not in fact supported by case law and highlights the difficulties principals can face when trying to assess whether SG contributions should be made on behalf of a worker who wishes to be engaged as an independent contractor.  
 
It is not uncommon for incorporated contractors to be engaged under an independent contractor agreement and for a key person who is required to provide the services to the principal to also be a party to the contractor agreement. In this circumstance, the key person of the company has a legal obligation to provide the specified services to the principal and the principal has corresponding legal rights in respect of non-performance by the key person.  
 
The difficulties that arise when contractor agreements are structured in this manner is discussed in greater detail below. 
 
It is also not uncommon for principals to seek to equate delegation with the reallocation of work among a pool of contractors. It is important to remember that effective delegation requires the contractor to be legally responsible for remunerating the person or entity to whom the work is delegated. It is not sufficient for a contractor to arrange for another entity to undertake the work, where the obligation to remunerate the entity continues to rest with the principal. Thus, for delegation to be effective, the contractor would accept the particular job and then resource the job by delegating the tasks required to achieve the specified outcome to a sub-contractor for example. In this scenario, the contractor is legally liable for the fees it has agreed to pay to the sub-contractor, as well as any other applicable legislative requirements, such as workcover premiums. Similarly, the principal continues to be liable to pay the agreed fees to the contractor for the completion of the agreed job.  
 

  • Is the individual paid to achieve a result? 

 
The Commissioner will consider whether the contractor is engaged and remunerated to produce a result, or if they are remunerated for their efforts. While the payment structure is not determinative (ie, whether the contractor is remunerated hourly, or at a fixed rate per assignment), it is likely to indicate whether the contract is a contract for service as opposed to a contract of service (being an employment contract). 
 
Can a company be engaged under a contract for labour? 
 
It is commonly understood to be the case that a company cannot be a common law or deemed employee for SG purposes. This view has been confirmed by the Commissioner in SGR 2005/1 at paragraph 13 as follows:
 
Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement.

However, it is important to keep in mind that SGR 2005/1 is not binding on the Commissioner and represents the Commissioner’s thinking 10 years ago, and that the law in this area has continued to advance. 
In light of this background, we now consider how the Courts have treated incorporated contractors for SG purposes. 
 

Incorporated Contractors 


Roy Morgan Research Pty Ltd v Commissioner of Taxation
 
In the case of Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 (‘Roy Morgan Research’), it was found that some interviewers were engaged under the name of a company. It was held that while incorporation was a relevant factor, it was outweighed by other factors. 

 
Ultimately, the fact that an interviewer was incorporated carried little weight because the entity selected to conduct the interviews was the individual interviewer, and the company featured only as the recipient of the fees.
 
This case highlights the issues involved in engaging a company, but requiring a key individual to perform the relevant services. Further, incorporation by itself is not sufficient to take a worker outside the scope of the SG regime where they would otherwise be caught. Thus incorporation was considered to be merely one factor to be taken into account and weighed in light of the totality of the circumstances. It is not a ‘silver bullet’ that automatically ensures a contractor is outside the scope of the SG regime.
 
ACE Insurance Ltd v Trifunovski 
In Ace Insurance Ltd v Trifunovski [2011] FCA 1204 (‘Ace Insurance’), the Federal Court considered the status of insurance agents.  
 
In this case, all of the contracts permitted the agents to operate, if they chose, through a corporation. As sub-regional representatives, Mr Peries and Mr Trifunovski did at certain times conduct their operations through their respective companies. However, despite these arrangements, the services were provided by Mr Peries or Mr Trifunovski. The Australian financial services (‘AFS’) licence required the individuals to be authorised by the relevant AFS licence holder. This was an important factor in the ultimate decision of the Federal Court. 
 
The Federal Court followed the decision in Roy Morgan research, stating that:
In substance, the corporate vehicle merely allowed the commissions to be received by the companies and for the incurring by them of expenses. As the Full Court noted in Roy Morgan Research at 464 [43] the Tribunal in that case had committed no error in giving this matter little weight when ‘the entity selected to do the work... was the individual interviewer, and the company featured only as the recipient of the fees that would otherwise have been paid to the interviewer’. 

Thus the Federal Court held that a similar conclusion applies in this case as the incorporated contractor merely featured as a payment mechanism for the receipt of fees and payment of expenses. The Federal Court took the view that the relationship between the engaging entity and the company was not in substance a principal/independent contractor relationship.
 
As a result of the Federal Court decisions in Roy Morgan Research and Ace Insurance, it is crucial to consider which entity in practice is actually being engaged to perform the relevant services. It is not sufficient to simply engage an incorporated entity under a contractual arrangement – it is still necessary to consider each factor in determining whether the contractor (or key person) falls within the scope of the SG regime, as the Courts will consider the substance of the relationship between the relevant parties in discerning the relationship. The principal and contractor ‘cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck’ (Re Porter; re Transport Workers Union of Australia (1989) 34 IR 179 at 184).
 
There is a risk that where a contractor operates via a company, but the dealings are in substance between the principal and a key person rather than the company, and the following factors are present:
 

  • the individual operates in all material respects as an individual, such that any fee received is in substance a payment principally for their labour;

  • the company undertakes little other business activities or minimal other clients apart from providing services to the principal; and 

  • the company does not have any substantial business operations, equipment or any goodwill, it may result in a Court being willing to ignore the corporate structure.

 
In contrast, where an incorporated contractor has numerous employees, substantial equipment, business systems and goodwill, it is unlikely that payments to such a contractor will be deemed to be a payment to an individual engaged by the contractor.
 
It is commonly understood that a payment to a contractor that operates via a company is not covered by the SG regime. 
 
However, as the analysis above suggests, this is not a safe position to rely on without a more detailed examination of the overall circumstances to see if, in substance, the arrangement is primarily for an individual’s labour.
 
As the cases outlined above demonstrate, this area of the law is complex and difficult to apply in practice. As Bromberg J noted in On Call Interpreters and Translators Agency Pty Ltd v Federal Commissioner of Taxation [2011] FCA 366:
 
the absence of a simple and clear definition which explains the distinction between an employee and an independent contractor is problematic… Workers and those who employ or engage them require more clarity from the law. That is particularly so when important legislation such as the Fair Work Act (and its predecessors dating back to 1904) have steadfastly avoided defining what is an employee, yet demand (on pain of civil penalty) that there be no misrepresentation as to the nature of the work relationship: see s 357 of the Fair Work Act.
 

What are the risks of getting it wrong? 


We now examine what happens if the parties get it wrong. It is not uncommon for parties to intend to enter into a contractor arrangement, and for the ATO or the Courts to find that irrespective of each party’s intention, the relationship is in fact an employment relationship. We outline the consequences that may follow below.
 
As the law currently stands, when a principal fails to make SG contributions on behalf of a contractor that is a common law or deemed employee for SG purposes, the principal is liable for the superannuation guarantee charge (‘SGC’), which is calculated as follows:
 

  • a shortfall amount determined by multiplying the employee’s total salary or wages (rather than just their ordinary time earnings (‘OTE’)) against the charge percentage (currently set at 9.5% for the 2016 income year);

 

  • an administration fee of $20 per quarter per employee; and 

 

  • interest at 10% on the shortfall amount from the beginning of the quarter in which the contribution was required to be made (ie, 1 January) until the later of the lodgement of a SG statement outlining the shortfall amount or the 28th day of the second month after the end of the relevant quarter (ie, 28 May for the quarter ending 28 March).

 
Principals may also be liable for: 

  • a penalty of up to 200% of the SGC amount under Part 7 of the SGAA (however, the Government has introduced draft legislation that proposes to remove this penalty. 

 

  • a penalty of up to 100% under the Taxation Administration Act 1953 (Cth);

 

  • a choice of fund penalty up to $500 per quarter per contractor; and 

 

  • an amount equal to the SGC personally if the Commissioner issues a director penalty notice. There is a defence to personal liability that applies specifically to contractors, where the principal believed the contractor was a genuine independent contractor for SG purposes and this belief was reasonable in the circumstances. However, this defence has not been tested to date, so it is unclear how the Courts will apply the defence in practice.

 
These penalties can apply irrespective of whether the failure to make SG contributions was an inadvertent mistake or misunderstanding in applying complex legislative provisions. The Commissioner does not have discretion to remit the SGC. This area of the law should be revised in view of the complexity of contractor arrangements that currently exist.
 

Conclusion

 

The inherent difficulty in the SG regime is the uncertainty of the ‘deemed’ employee test and whether a contract is wholly or principally for the labour of the worker. Determining whether a contractor is in fact an employee for SG purposes requires various factors to be weighed up and considered and a decision made on a case by case basis. Inevitably, there are factors that suggest a worker could be both a contractor and an employee (either under the common law definition or the expanded definition of employee for SG purposes) and the weighting given to each factor can vary depending on the specific circumstances. Therefore, principals cannot be certain that a worker is in fact an independent contractor merely because the worker is engaged via a company, especially where a key person is required to carry out the services.
 
If there is a SG exposure on any contractor arrangement, the PAYG implications should also be considered. Moreover, the workcover insurance and payroll tax legislation should also be considered as each area of the law has specific provisions dealing with contractors, even for those that operate via companies.

 

Please let knp know if you require any assistance in determining whether a contractor falls within the scope of the SG regime or whether you require a review of any contractor arrangement to see if it needs restructuring.

 

Anzac Day – April 25
 
"They shall grow not old, as we that are left grow old; 
Age shall not weary them, nor the years condemn. 
At the going down of the sun and in the morning 
We will remember them."

 

 

 

Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
 
 
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.
 
Yours faithfully,


 
The ASG Team
 

Deadline looming for SMSF collectables compliance

 

The ATO has reminded trustees of self managed super funds (SMSFs) that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure their SMSFs meet the requirements of the superannuation law for these assets. Assets considered collectables and personal-use assets include artwork, jewellery, antiques, vehicles, boats and wine.

From 1 July 2011, investments in collectables and personal-use assets have been subject to strict rules to ensure they are made for genuine retirement purposes and they do not provide any present day benefit. SMSFs with investments held before 1 July 2011 have until 1 July 2016 to comply with the rules.
 
The ATO says SMSF trustees have had since July 2011 to make arrangements, and it expects that they will take appropriate action to ensure the requirements are met before the deadline.
 
TIP: Appropriate actions may include reviewing current leasing agreements, making decisions about asset storage and arranging insurance cover.
 


Overseas student debts: repayment thresholds


From 1 July 2017, anyone with a Higher Education Loan Programme (HELP) or Trade Support Loans (TSL) debt who is living overseas and earning above the minimum repayment threshold will be required to make loan repayments to the Australian Government, just as they would if they were living in Australia. The HELP minimum repayment threshold for 2016–2017 is $54,869.
 
TIP: If you have a student loan debt and are planning to move overseas for longer than six months, you need to provide the ATO with your overseas contact details within seven days of leaving Australia. You should also factor in potentially having to make repayments from 1 July 2017.
 

ATO data-matching for insured “lifestyle” assets


In January 2016, the ATO advised it was working with insurance providers to identify policy owners on a wider range of asset classes, including marine vessels, aircraft, enthusiast motor vehicles, fine art and thoroughbred horses. The ATO has since formally announced the data-matching program that covers these “lifestyle” assets, and will acquire details of insurance policies for these assets where the value exceeds nominated thresholds for the 2013–2014 and 2014–2015 financial years.
 
The ATO said it will obtain policyholder identification details (including names, addresses, phone numbers and dates of birth) and insurance policy details (including policy numbers, policy start and end dates, details of assets insured and their physical locations). The data-matching program will provide the ATO with a more comprehensive view of taxpayers’ accumulated wealth, as well as assist in identifying possible tax compliance issues.
 
TIP: It is estimated that records of more than 100,000 insurance policies will be data-matched. The ATO has released a list of insurers involved with the data-matching program. Please contact our office for further information.
 

Market value of shares is not the selling price


The Administrative Appeals Tribunal (AAT) has ruled that the “market value” of a parcel of shares in a private company that a taxpayer sold in an arm’s-length transaction (together with the other two shareholders’ shares in the company) was not the proportion of the sale price he received from the sale of all the shares. Instead, the AAT agreed it was a discounted amount; the taxpayer was a “non-controlling” shareholder, so the market value was less than simply his one-third share of the sale price.
 
As a result of this AAT decision, the taxpayer passed the $6 million “maximum net asset value test”, allowing him to qualify for small business capital gains tax (CGT) concessions, where otherwise he would not have.
The Commissioner has appealed to the Federal Court against this AAT decision.
 
TIP: This decision demonstrates that the actual selling price of an asset may not always represent its “market value”. In this decision, the AAT agreed with the taxpayer’s valuer that “all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control”.
 

Individual not a share trader


The Administrative Appeals Tribunal (AAT) has found that a taxpayer (a childcare worker) was not carrying on a business of share trading, and accordingly was not entitled to claim a loss resulting from her share transactions. In the year in question, the taxpayer turned over approximately $600,000 in share transactions (including both purchases and sales).
 
In deciding that the taxpayer was a share investor and not a share trader, the AAT considered each of the key indicators established in case law. The AAT decided that a lack of regular and systematic trade, especially in the second half of the income year, when only 10 transactions were made, went against the taxpayer’s contention that she was conducting a share trading business.
 
TIP: The AAT weighs up all the relevant factors in cases like this. There have been cases where the AAT has found that a taxpayer was carrying on a business of share trading, and has therefore allowed them to claim a deduction for their losses.
 

Small business restructures made easier


The Government has made changes to the tax law to provide tax relief for small businesses that restructure. The tax law changes provide an optional rollover for small business owners who change the legal structure of their business on the transfer of business assets from one entity to another. The effect of the rollover is that the tax cost of the transferred assets is rolled over from the transferor to the transferee.

This optional rollover is in addition to existing rollovers available where an individual, trustee or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.
The changes to the tax law will take effect on 1 July 2016.
 
TIP: You must meet strict eligibility requirements in order to access the rollover. Among other things, the rollover must be part of a genuine business restructure that does not change the ultimate economic ownership of the assets. There are also tax consequences you should be aware of.


Tax law changes to treatment of earnouts


The Government has recently amended the tax law concerning the capital gains tax (CGT) treatment of the sale and purchase of businesses involving certain earnout rights.
 
Specifically, the changes provide for a “look-through” treatment. Under the amended tax law, capital gains and losses that arise in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying assets to which the earnout arrangement relates when they are received or paid (as the case may be).
 
The changes apply from 24 April 2015.
 
TIP: These changes to the tax law do not apply for events that occurred before 24 April 2015. However, transitional protection is provided, subject to conditions, for taxpayers who have reasonably anticipated these changes to the tax law, which were originally announced by the former Government.

 

 

Reconsidering Incorporated Contractors


(Article by Daniel Butler & Rebecca James, DBA Lawyers)
 
Determining whether payments to a contractor are covered by the superannuation guarantee (‘SG’) regime can be a vexed and difficult exercise. Of particular interest is whether an incorporated contractor is automatically outside the scope of the SG regime, such that SG contributions are not required to be made on their behalf to avoid a shortfall under the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’).
 
This article will consider the legislative provisions and key Federal Court decisions, as well as providing practical guidance on the application of the SG regime to incorporated contractors. 
 

Background


Definition of an employee
For the purposes of the SGAA, an employee is defined in Sec. 12 as a common law employee and a worker that falls within the expanded definition of an employee, which includes a person that works under a contract that is wholly or principally for their labour (s 12(3) of the SGAA). 

 

 
What is a contract for labour?

In determining whether a contractor works under a contract that is wholly or principally for their labour, it is important to first consider what constitutes a contract for labour.
 
The Commissioner of Taxation (‘Commissioner’) has outlined his view on when a contract for labour will be held to exist in Superannuation Guarantee Ruling SGR 2005/1 – Superannuation guarantee: who is an employee? (‘SGR 2005/1’).
 
The Commissioner will look at three key factors as follows:

 

  • Is the contractor remunerated (either wholly or principally) for their personal labour and skills?

 
For example, does the contractor supply tools, equipment or materials and if so, what is the value of the tools or equipment provided as a proportion of the total fee or amount received. If the fee for hiring similar equipment in comparable circumstances would equate to more than 50% of the fee for the particular job, this factor would suggest that the contractor is not in fact remunerated wholly or principally for their personal labour and skills. Further, does the contractor engage employees or subcontractors that the contractor is responsible for remunerating? 
 

  • Is the contractor required to perform the work personally, such that there is no right of delegation? 

 
Importantly, if there is a right of delegation under the contractor agreement, is it a genuine right, and does the contractor exercise this right in practice? 
 
In the case of Neale (Deputy Commissioner of Taxation) v. Atlas Products (Vic) Proprietary Limited (1955) 94 CLR 419 at 424-425, the Court formed the view that the right of delegation under the contract was a genuine right that the contractor could exercise, despite the fact that it had not been exercised to date, and therefore (based on this factor and various other factors), the worker engaged was an independent contractor. 
 
In our experience, it is not uncommon for the Commissioner to seek to argue that the right of delegation must be an unlimited or unrestricted right of delegation, such that if the principal requires any subcontractor engaged by the contractor to have adequate education, training or experience, the right to delegate is effectively discounted or afforded less weight in determining whether the contractor is in fact an employee for SG purposes. However, this interpretation adopted by the Commissioner is not in fact supported by case law and highlights the difficulties principals can face when trying to assess whether SG contributions should be made on behalf of a worker who wishes to be engaged as an independent contractor.  
 
It is not uncommon for incorporated contractors to be engaged under an independent contractor agreement and for a key person who is required to provide the services to the principal to also be a party to the contractor agreement. In this circumstance, the key person of the company has a legal obligation to provide the specified services to the principal and the principal has corresponding legal rights in respect of non-performance by the key person.  
 
The difficulties that arise when contractor agreements are structured in this manner is discussed in greater detail below. 
 
It is also not uncommon for principals to seek to equate delegation with the reallocation of work among a pool of contractors. It is important to remember that effective delegation requires the contractor to be legally responsible for remunerating the person or entity to whom the work is delegated. It is not sufficient for a contractor to arrange for another entity to undertake the work, where the obligation to remunerate the entity continues to rest with the principal. Thus, for delegation to be effective, the contractor would accept the particular job and then resource the job by delegating the tasks required to achieve the specified outcome to a sub-contractor for example. In this scenario, the contractor is legally liable for the fees it has agreed to pay to the sub-contractor, as well as any other applicable legislative requirements, such as workcover premiums. Similarly, the principal continues to be liable to pay the agreed fees to the contractor for the completion of the agreed job.  
 

  • Is the individual paid to achieve a result? 

 
The Commissioner will consider whether the contractor is engaged and remunerated to produce a result, or if they are remunerated for their efforts. While the payment structure is not determinative (ie, whether the contractor is remunerated hourly, or at a fixed rate per assignment), it is likely to indicate whether the contract is a contract for service as opposed to a contract of service (being an employment contract). 
 
Can a company be engaged under a contract for labour? 
 
It is commonly understood to be the case that a company cannot be a common law or deemed employee for SG purposes. This view has been confirmed by the Commissioner in SGR 2005/1 at paragraph 13 as follows:
 
Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement.

However, it is important to keep in mind that SGR 2005/1 is not binding on the Commissioner and represents the Commissioner’s thinking 10 years ago, and that the law in this area has continued to advance. 
In light of this background, we now consider how the Courts have treated incorporated contractors for SG purposes. 
 

Incorporated Contractors 


Roy Morgan Research Pty Ltd v Commissioner of Taxation
 
In the case of Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 (‘Roy Morgan Research’), it was found that some interviewers were engaged under the name of a company. It was held that while incorporation was a relevant factor, it was outweighed by other factors. 

 
Ultimately, the fact that an interviewer was incorporated carried little weight because the entity selected to conduct the interviews was the individual interviewer, and the company featured only as the recipient of the fees.
 
This case highlights the issues involved in engaging a company, but requiring a key individual to perform the relevant services. Further, incorporation by itself is not sufficient to take a worker outside the scope of the SG regime where they would otherwise be caught. Thus incorporation was considered to be merely one factor to be taken into account and weighed in light of the totality of the circumstances. It is not a ‘silver bullet’ that automatically ensures a contractor is outside the scope of the SG regime.
 
ACE Insurance Ltd v Trifunovski 
In Ace Insurance Ltd v Trifunovski [2011] FCA 1204 (‘Ace Insurance’), the Federal Court considered the status of insurance agents.  
 
In this case, all of the contracts permitted the agents to operate, if they chose, through a corporation. As sub-regional representatives, Mr Peries and Mr Trifunovski did at certain times conduct their operations through their respective companies. However, despite these arrangements, the services were provided by Mr Peries or Mr Trifunovski. The Australian financial services (‘AFS’) licence required the individuals to be authorised by the relevant AFS licence holder. This was an important factor in the ultimate decision of the Federal Court. 
 
The Federal Court followed the decision in Roy Morgan research, stating that:
In substance, the corporate vehicle merely allowed the commissions to be received by the companies and for the incurring by them of expenses. As the Full Court noted in Roy Morgan Research at 464 [43] the Tribunal in that case had committed no error in giving this matter little weight when ‘the entity selected to do the work... was the individual interviewer, and the company featured only as the recipient of the fees that would otherwise have been paid to the interviewer’. 

Thus the Federal Court held that a similar conclusion applies in this case as the incorporated contractor merely featured as a payment mechanism for the receipt of fees and payment of expenses. The Federal Court took the view that the relationship between the engaging entity and the company was not in substance a principal/independent contractor relationship.
 
As a result of the Federal Court decisions in Roy Morgan Research and Ace Insurance, it is crucial to consider which entity in practice is actually being engaged to perform the relevant services. It is not sufficient to simply engage an incorporated entity under a contractual arrangement – it is still necessary to consider each factor in determining whether the contractor (or key person) falls within the scope of the SG regime, as the Courts will consider the substance of the relationship between the relevant parties in discerning the relationship. The principal and contractor ‘cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck’ (Re Porter; re Transport Workers Union of Australia (1989) 34 IR 179 at 184).
 
There is a risk that where a contractor operates via a company, but the dealings are in substance between the principal and a key person rather than the company, and the following factors are present:
 

  • the individual operates in all material respects as an individual, such that any fee received is in substance a payment principally for their labour;

  • the company undertakes little other business activities or minimal other clients apart from providing services to the principal; and 

  • the company does not have any substantial business operations, equipment or any goodwill, it may result in a Court being willing to ignore the corporate structure.

 
In contrast, where an incorporated contractor has numerous employees, substantial equipment, business systems and goodwill, it is unlikely that payments to such a contractor will be deemed to be a payment to an individual engaged by the contractor.
 
It is commonly understood that a payment to a contractor that operates via a company is not covered by the SG regime. 
 
However, as the analysis above suggests, this is not a safe position to rely on without a more detailed examination of the overall circumstances to see if, in substance, the arrangement is primarily for an individual’s labour.
 
As the cases outlined above demonstrate, this area of the law is complex and difficult to apply in practice. As Bromberg J noted in On Call Interpreters and Translators Agency Pty Ltd v Federal Commissioner of Taxation [2011] FCA 366:
 
the absence of a simple and clear definition which explains the distinction between an employee and an independent contractor is problematic… Workers and those who employ or engage them require more clarity from the law. That is particularly so when important legislation such as the Fair Work Act (and its predecessors dating back to 1904) have steadfastly avoided defining what is an employee, yet demand (on pain of civil penalty) that there be no misrepresentation as to the nature of the work relationship: see s 357 of the Fair Work Act.
 

What are the risks of getting it wrong? 


We now examine what happens if the parties get it wrong. It is not uncommon for parties to intend to enter into a contractor arrangement, and for the ATO or the Courts to find that irrespective of each party’s intention, the relationship is in fact an employment relationship. We outline the consequences that may follow below.
 
As the law currently stands, when a principal fails to make SG contributions on behalf of a contractor that is a common law or deemed employee for SG purposes, the principal is liable for the superannuation guarantee charge (‘SGC’), which is calculated as follows:
 

  • a shortfall amount determined by multiplying the employee’s total salary or wages (rather than just their ordinary time earnings (‘OTE’)) against the charge percentage (currently set at 9.5% for the 2016 income year);

 

  • an administration fee of $20 per quarter per employee; and 

 

  • interest at 10% on the shortfall amount from the beginning of the quarter in which the contribution was required to be made (ie, 1 January) until the later of the lodgement of a SG statement outlining the shortfall amount or the 28th day of the second month after the end of the relevant quarter (ie, 28 May for the quarter ending 28 March).

 
Principals may also be liable for: 

  • a penalty of up to 200% of the SGC amount under Part 7 of the SGAA (however, the Government has introduced draft legislation that proposes to remove this penalty. 

 

  • a penalty of up to 100% under the Taxation Administration Act 1953 (Cth);

 

  • a choice of fund penalty up to $500 per quarter per contractor; and 

 

  • an amount equal to the SGC personally if the Commissioner issues a director penalty notice. There is a defence to personal liability that applies specifically to contractors, where the principal believed the contractor was a genuine independent contractor for SG purposes and this belief was reasonable in the circumstances. However, this defence has not been tested to date, so it is unclear how the Courts will apply the defence in practice.

 
These penalties can apply irrespective of whether the failure to make SG contributions was an inadvertent mistake or misunderstanding in applying complex legislative provisions. The Commissioner does not have discretion to remit the SGC. This area of the law should be revised in view of the complexity of contractor arrangements that currently exist.
 

Conclusion

 

The inherent difficulty in the SG regime is the uncertainty of the ‘deemed’ employee test and whether a contract is wholly or principally for the labour of the worker. Determining whether a contractor is in fact an employee for SG purposes requires various factors to be weighed up and considered and a decision made on a case by case basis. Inevitably, there are factors that suggest a worker could be both a contractor and an employee (either under the common law definition or the expanded definition of employee for SG purposes) and the weighting given to each factor can vary depending on the specific circumstances. Therefore, principals cannot be certain that a worker is in fact an independent contractor merely because the worker is engaged via a company, especially where a key person is required to carry out the services.
 
If there is a SG exposure on any contractor arrangement, the PAYG implications should also be considered. Moreover, the workcover insurance and payroll tax legislation should also be considered as each area of the law has specific provisions dealing with contractors, even for those that operate via companies.

 

Please let knp know if you require any assistance in determining whether a contractor falls within the scope of the SG regime or whether you require a review of any contractor arrangement to see if it needs restructuring.

 

Anzac Day – April 25
 
"They shall grow not old, as we that are left grow old; 
Age shall not weary them, nor the years condemn. 
At the going down of the sun and in the morning 
We will remember them." 

 

 

 

 

Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
 
 
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.
 
Yours faithfully,
 


The ASG Team
 

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