In a previous article (see September 2020 TaxEd Update re Moffet case) we examined who is an employee for superannuation guarantee (‘SG) purposes, in particular the extent to which contracts for the ‘labour’ of a person cause the person to be an employee of the other party. In the Moffet case a dentist was held to be entitled to SG having previously sold his dental practice to a dental clinic at which he continued to work. The case is on appeal.
A contract that is wholly or principally for the labour of the person?
‘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.’
The ATO’s interpretation of s. 12(3) is set out in Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee : who is an employee ? (SGR 2005/1). ). According to the ATO a contract is considered to be wholly or principally for the labour of the person engaged where the terms of the contract and the conduct of the parties indicates that:
‘the individual is remunerated (either wholly or principally) for their personal labour and skills; the individual must perform the contractual work personally (there is no right of delegation); and the individual is not paid to achieve a result.’
If a narrow interpretation of SGR 2005/1 were to be adopted, then if one of the above characteristics is absent from the arrangement, the contract would arguably not be wholly or principally for the labour of the person engaged.
In this article we examine the above conjecture in the context of a recent case MWWD and Commissioner of Taxation [2020] AATA 4169 (16 October 2020) (‘ the MWWD case’).
Broadly, the applicant in the MWWD case was a company that provides repair and maintenance services to businesses operating a particular type of machinery. Mr. Smith (a pseudonym) was one of the applicant’s service technicians who was described as an independent contractor. The terms of the contract did not prevent Mr. Smith from working on his own account (and he did so in some cases). The contractual terms also contemplated Mr. Smith having employees of his own or using sub-contractors subject to the company’s consent. Mr. Smith’s evidence made clear that he had a lot of control over his working day, he was free to perform the work he undertook at any-time, anywhere with minimal supervision and without detailed direction. Mr Smith invoiced the company for the work when it was completed and was paid in respect of the invoiced work based on agreed rates for defined services. Mr. Smith did not delegate or engage employee or sub-contractors, yet the contract makes it clear he had the right to do so.
The Tribunal held that Mr. Smith was not an employee under common law. The Tribunal also concluded that Mr. Smith would not qualify as an employee within the meaning of s. 12(3) of the SGAA on the grounds that the contract made it clear that Mr. Smith had the right to delegate performance of the work.
In reaching this decision the Tribunal relied on the reasoning in Neale v Atlas Products (Vic) Pty Ltd [1955] HCA 18;(1955) 94 CLR 419. The High Court in that case explained that ‘if a contract leaves a contractor free to do the work himself or to employ other persons to carry out the work the contractual remuneration paid is not payment made wholly or at all for the labour of the person to whom the payments are made…’.
This case supports the interpretation of s.12(3) on the narrow view of the ATO’s interpretation in SGR 2005/1 (see above). So long as the contractual work was delegable, the contract is not wholly or principally for labour of the engaged person.
However, on the facts, the overall impression (in TaxEd’s opinion) is that the contractual relationship as a whole supports it being a ‘result-based’ contract and not one wholly or principally for Mr. Smith’s labour.
Nonetheless, this case confirms that if the economic reality of the business transaction including all evidence thereof supports a result-based contractual arrangement, s. 12(3) SGAA should not apply to treat the person engaged as an employee of the other party to the contract.