Independent contractors give businesses flexibility, yet the line between contractor and employee is blurred under Australia’s superannuation guarantee (SG) and state payroll tax regimes. Recent High Court authority emphasises that contractual rights and obligations – not labels – determine liability.
This article, written by an employer lawyer, explains how to recognise when superannuation and payroll tax obligations arise, summarises key cases, and sets out practical steps to reduce exposure.
Key Takeaways
- Contractors can be deemed employees for SG if the contract is wholly or principally for their labour
- A contract for services may still be a “relevant contract” for payroll tax unless an exemption applies
- Look to the written contract first, but actual performance can rebut sham arrangements
- Engaging contractors through a company or trust may exclude SG but often still attracts payroll tax
- High Court cases CFMMEU v Personnel Contracting (2022) and ZFZ v Commissioner of Taxation (2024) confirm the primacy of contractual terms
Understanding Contractor Classification
Common-Law v Statutory Tests
The common-law multifactor test continues to be the primary method for determining employment status under the Fair Work Act 2009 (Cth). This test examines the totality of the relationship between parties by considering multiple factors including:
- Control over how work is performed
- Integration into the business
- Right to delegate work
- Risk assumption
- Tool and equipment provision
- Working hours and scheduling
- Payment methods (hourly vs task-based)
- Leave entitlements
- Tax arrangements
- Intention of the parties
Recent High Court decisions, particularly in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, have emphasised the primacy of contractual terms when applying this test, but the multifactor approach remains fundamental to Fair Work Act determinations.
Superannuation guarantee and payroll tax adopt their own deeming provisions that override common-law characterisation. Therefore, the multi-factor test under employment law does not apply in relation to superannuation and payroll tax.
High Court Guidance
Section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) deems a person an employee if they work under a contract that is wholly or principally for their labour. Indicators include:
- Payment primarily for time, skill or effort
- Obligation to perform work personally
- Minimal use of substantial assets or employees
Exemptions From SG
Employers are no required to pay superannuation for independent contractors where:
- The contractor is engaged through a company, trust or partnership (s 12(2))
- Payment is to an entity that hires out labour of multiple workers and bears responsibility for superannuation
Practical Tips for SG Compliance
Australian employers should take the following steps to ensure they are compliant with the superannuation guarantee law:
- Identify contracts where payment is mainly for an individual’s labour
- Obtain ABN and entity details to confirm whether the contractor is an individual or through an incorporated structure
- Insert clauses allocating responsibility for SG where applicable, but note that liability cannot be contracted out
Payroll Tax and "Relevant Contracts"
Legislative Framework
Each state and territory harmonises the “relevant contract” model. Section 32 Payroll Tax Act 2007 (NSW) is typical: payments to contractors are taxable wages unless an exemption applies.
Key Exemptions at a Glance
Exemption | Typical Requirement | Example |
90-day rule | Services performed for no more than 90 days in a financial year | One-off IT upgrade lasting eight weeks |
Services ordinarily required | Contractor provides services not ordinarily required by the principal’s business | Café hires electrician for rewiring |
Result-based contracts | Payment to produce a specific result and contractor supplies materials and tools | Graphic designer engaged for logo package |
Two or more workers | Contractor employs two or more people to perform the work | Cleaning company with three staff |
(Refer to Revenue NSW, Payroll Tax Ruling PTA 018)
Interaction With SG
A contractor may escape SG via a corporate entity yet still fall within payroll tax if the contract is predominantly for labour supplied to the principal.
Consequences of Non-Compliance
- ATO may issue superannuation guarantee charge (SGC), comprising unpaid super, interest and penalties
- State revenue authorities impose payroll tax assessments covering up to five years, plus 25%–75% penalty tax and interest
- Directors may be personally liable for SGC and payroll tax in certain circumstances
Practical Steps for Compliance
Conduct a Worker Review
- Audit all contractor agreements annually
- Map payments against statutory definitions
Draft Clear Contracts
- State the contractor supplies services through an incorporated entity where applicable
- Define deliverables (result-based) rather than hours worked
- Permit delegation and substitution to diminish “personal labour” character
Maintain Evidence
Keep copies of invoices with ABN, proof of separate business establishment, insurances, tools and equipment owned by the contractor.
Align Payroll and Finance Systems
- Flag contractor payments for SG assessment triggers
- Configure payroll software for contractor payroll tax reporting if thresholds met
Seek Binding Rulings Where Uncertain
Apply for ATO private ruling or state payroll tax ruling to lock in treatment.
Frequently Asked Questions
Do I have to pay super if the contractor invoices through an ABN?
Not necessarily – the key question is whether the contract is for the individual’s labour and whether they operate through a separate entity.
Can a written contract stating "independent contractor" prevent SG liability?
No – the statute overrides contractual labels if the substantive arrangement is for personal labour.
Is payroll tax payable on overseas contractors?
Payroll tax generally applies only to services performed in Australia, but sourcing rules differ between jurisdictions.
How far back can the ATO or state revenue office audit contractor payments?
The ATO has no statutory limit for SG where no statements were lodged; state payroll tax audits usually cover five years.
What records should I keep to support a payroll tax exemption?
Contracts, invoices, evidence of contractor’s employees, proof of materials supplied and records showing services were incidental or less than 90 days.
Are director penalty notices issued for unpaid SG?
Yes – directors can receive DPNs making them personally liable if SG statements are not lodged on time.
