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Superannuation

Our contractor says he has to be paid superannuation, is this true?

To determine if your contractor is actually an employee, see our previous article here.

If you have established that your sole-trader contractor is an independent contractor and not an employee, there are still some circumstances where you may be required to pay their superannuation.

Superannuation Guarantee for Contractors

Legally you must pay superannuation on behalf of an employee who you pay $450 or more (before tax) per calendar month.  Under the Superannuation Guarantee (Administration) Act 1992, section 12 (3), “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract”. 

Helpfully, the Superannuation Guarantee Ruling 2005/1 breaks it down even further and explains that if the individual is paid mainly for their personal labour and skills, there is no right of delegation (they can’t hire someone else to complete the work) and they are not paid to achieve a result, then the individual is considered an employee under this subsection.

Is my sole trader considered an employee under the Superannuation Guarantee?

Does your sole trader contractor meet the following criteria?

  • Paid mainly for their labour (more than half the dollar value of their contract is for labour);
  • Must perform the work personally; and
  • Paid on an hourly or other basis, not on results achieved.

If you answered yes to one or more of the above, and the sole-trader is directly contracted by you, then they are deemed to be an employee for the purposes of the Superannuation Guarantee.

You must consider if they meet the above criteria very carefully and if you are unsure speak to an accountant.  The ATO has published a useful tool that may assist you in deciding if you need to pay superannuation to your contractor or not.

Example

Your independent contractor is a painter and you are paying them an hourly or daily rate for their services, then you would be liable to pay the superannuation guarantee.  In contrast, the painter you have hired is able to subcontract the work and you have agreed upon a fixed quote to paint three rooms.  In these circumstances, it would be considered the painter was being paid for a result and you would not be liable to pay the superannuation guarantee.

How much superannuation do I have to pay ?

Currently the minimum superannuation guarantee you must pay is 9.5% on the labour part of their contract.  It is not acceptable to simply pay an additional 9.5% on top of their contract to the contractor, the 9.5% superannuation guarantee must be paid quarterly into their superannuation fund.

Looking for a Contractor Agreement? Click here for Sole Trader Contractor Agreement template or Incorporated Contractor Agreement.

Sole Trader Contractor Button

Incorporaed Contractor Agreement Button