Superannuation update – are your contractors entitled to superannuation?

By Anthony Bradica and Todd Bromwich

The Full Federal Court recently handed down its decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek) on the deemed employee test in section 12(3) of the Superannuation Guarantee Administration Act (SGA Act).

In broad terms, section 12(3) extends the requirement of an employer (or principal) to pay superannuation to a person who works under a contract that is wholly or principally for their labour. This may cover many workers who would otherwise be contractors at law and not entitled to superannuation.

Jamsek v ZG Operations Australia

In early 2022, the High Court held that two drivers who worked for ZG Operations were independent contractors. As the drivers were not considered employees of ZG, there was a question whether ZG was required to pay superannuation to them under the ‘deemed employee’ test in section 12(3) of the SGA Act.

The High Court did not address the merits of section 12(3) and whether the drivers were entitled to superannuation as deemed employees under this provision. The matter was remitted back to the Full Federal Court to consider this issue, with the Commissioner of Taxation being joined as a party to the proceeding.

The Full Federal Court recently handed down its decision, finding that the requirements of section 12(3) were not met and that the drivers were not entitled to superannuation as deemed employees.

Importance of this decision

The case is important for a number of reasons.

This was the first time that an appellate court has considered the breadth of the deemed employee test since the decision in Dental Corporation Pty Ltd v Moffett [2020] FCAFC 118. That case has been viewed as expanding the breadth of the deemed employee test and is notable as a case where the superannuation entitlements of a contracting professional were upheld.

Secondly, while the High Court in Jamsek did not deal with the application of section 12(3), it did make some interesting observations that hinted at a possible further extension of the scope of this provision. This caused some consternation among many employers and tax practitioners, as an extension of the scope of section 12(3) would have an enormous financial impact on many businesses. The Full Federal Court’s decision has now watered down those concerns.

Interestingly, following the High Court decision in this matter, the ATO advised that it was reviewing its guidance in SGR 2005/1 Superannuation Guarantee: who is an employee? Significant updates to the ATO guidance to reflect the Full Federal Court’s recent decision on the scope of section 12(3) of the SGA Act may not be necessary, as noted below.

Key takeaways

The upshot of the decision of the Full Court is that a number of the comments made by the ATO regarding section 12(3) in SGR 2005/1 still hold and have been endorsed as reflecting the current state of the law.

The Full Court reiterated the three elements of section 12(3) of the SGA Act:

1. There should be a contract.
2. Which is wholly or principally ‘for’ the labour of a person.
3. That the person must ‘work’ under that contract.

In addressing the three elements, the Full Court then went on to confirm the requirements of those three elements and assess those elements by reference to the particular facts of the case.