Reducing Super Guarantee Payments
In 1972 the Keating Labour government introduced a compulsory ‘Superannuation Guarantee’ system as part of a major reform package addressing Australia’s retirement income policies. Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees’ income, and has been gradually increased by the Australian government.
Under the superannuation guarantee legislation employers are required to make quarterly superannuation contributions for employees at the rate of 9.5% of ‘ordinary times’ earnings (up to a maximum threshold amount per quarter).
Section 12 of the Superannuation Guarantee (Administration) Act 1992 extends the definition of employee to also include:
- Contractors engaged under a contract that is wholly or principally for their labour,
- Members of Parliament.
This means a business making $100,000 of payments to an independent individual contractor (who is only supplying their labour) will also need to pay $9,500 superannuation guarantee payments as well.
To avoid these super guarantee obligations the business should ensure that it only contracts with contractors operating through an entity (a partnership, company or trust). If this arrangement is genuine the contractor can never be a common law employee so no super guarantee obligations would arise. This is confirmed by the ATO in Superannuation Guarantee Ruling SGR 2005/1.