Employers and superannuation obligations – common mistakes

A number of business owners, CEOs, CFOs, HR managers and business advisors still think that because a worker has told them they have an ABN or there is an Independent Contractor Agreement in place, this automatically means they do not have to pay superannuation.

This is a common mistake.

It doesn’t matter if the worker negotiated a higher rate of remuneration or even expressly waived their superannuation entitlements in writing. The obligation to pay superannuation is statutory and cannot be contracted away. If the Australian Taxation Office (ATO) conducts an audit, any agreement on superannuation with the worker is irrelevant.

Employers bear 100% of the risk.

The ATO administers the superannuation system.

When employers do not pay superannuation entitlements, the ATO enforces the laws. It does this by auditing a business and requesting evidence of compliance.

Increasingly, an employee or an ex-employee will make a complaint to the ATO and this will trigger an audit within months.

If the ATO audit, employers could face the prospect of a substantial back payment of superannuation, a penalty double that amount, interest and the cost and pressure of dealing with the ATO.

On an unpaid superannuation exposure of $1 million, the penalty could be as high as an additional $2 million and the interest could be $500,000 (for example). That’s a total exposure of $3.5 million.

Directors also face personal liabilities of the unpaid superannuation (i.e., the $1 million).

Even where a worker self-characterises him or herself as a contractor and an “independent contractor” agreement is entered into, employers continue to run the risk on their statutory liabilities such as minimum wages, taxation withholding, superannuation, workers compensation insurance and payroll tax.

Superannuation law extends the definition of ‘employee’ to capture any worker who provides services the major part of which is their labour or time.

However if contractors work through a company, trust or partnership, the ATO will not treat them as employees.

Based on yet to be enacted law, we believe the ATO is currently providing a small window within which employers who self-declare unpaid superannuation obtain a 100% waiver on the penalty. In addition to this, the business may potentially be able to claim the full amount of the back payment as an income tax deduction. Certain requirements must be complied with.

While the amnesty hasn’t been passed into law yet, we have examples of the ATO administering it as if it applies.

The window is meant to end on 23 May 2019.

You should know:

  1. Are the workers employees or contractors? Superannuation law extends the definition of employee and casts a wider net capturing workers who principally provide their labour or time. However if contractors work through a company, trust tor partnership, the ATO will not treat them as employees.
  2. What should I do if I think my workers may be contractors or it is not clear? The legal distinction between employees and contractors is not clear cut. Do not contact the worker or ex-worker. Do not rely on the ATO checklist. Seek privileged legal advice and clarity on a strategy and options to manage your risk.
  3. Can I restructure the way I engage contractors? Yes, it may be possible to do so. Often businesses do not maintain the right level of records and evidence and are vulnerable if audited.

Macpherson Kelley’s Employment, Safety and Migration and Tax teams have significant recent experience in assisting employers take the appropriate action to manage their risk. Contact us for more information.