MLL227 - Superannuation Law Week 2 PDF

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Topic 3 - Superannuation Contributions - INTRODUCTION There are 2 types of contributions that can be made to a superannuation account: • Concessional contributions • Non-concessional contribution Concessional Contributions Concessional contributions are ones that are made by any of the following methods: • By the employer contributing to the employee’s superannuation account. This will consist of up to three types of payments: A) The Superannuation Guarantee Contribution that employers must pay to employee’s superannuation accounts. This is currently set at 9.5% of the employee’s salary. So for instance, if an employee has a salary of $60,000, the employer must contribute $5700 into the employee’s superannuation account. This will be regarded as a concessional contribution. B) Any amount that an employer chooses to pay into the employee’s superannuation account on top of the 9.5 % Superannuation Guarantee Contribution, or is obliged to do so, eg under an Enterprise Agreement. EG Some employers, might pay 17% instead of 9.5% - this would all be a concessional contribution.

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C) Any amount that an employee agrees with their employer to have “salary sacrificed” into their superannuation account. For instance, someone with a salary of $90,000 could request their employer to only give them a salary of $80,000 but put an extra $10,000 (on top of the standard 9.5% contribution) into that employee’s superannuation account. By people who put money into their superannuation accounts which they elect to be a concessional contribution. NOTE – up until 1 July 2017 only ‘self employed’ people could do this. However, now this is available to everyone. Need to lodge a form with super fund if doing this: https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/spr86434n71121.pdf

Non-Concessional Contribution Lacks some of the tax advantages of concessional contributions. Non-concessional contributions are usually those that are any of the following: • made by the employee or self-employed person out of their own money, eg, out of their after tax salary or their capital/savings and they have NOT elected for such contributions to be concessional contributions •

Contributions that a taxpayer makes into their spouse’s superannuation account.

SUPERANNUATION GUARANTEE  

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A system of guaranteeing that employees receive a minimum amount of superannuation. Currently it is 9.5%, climbing to 12%. The previous government had legislated this to increase to 12% in a staggered manner till 2019/20. However current government has changed this so that it will remain at 9.5% until 30 June 2021 and then increase by 0.5 percentage points each year until it reaches 12% .

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Basically, how is works: employers pay this % of workers salary into employees’ superannuation – if they don’t THEN they are liable to pay the Superannuation Guarantee Charge (SGC) to the ATO (plus penalty and interest) – the government will then pay this money into employees’ superannuation. Furthermore, this SGC won’t be tax deductible, whereas if employer pays straight into employees’ super account, it is tax deductible. So if doesn’t pay 9.5% to employee, and instead has to pay to government, 3 negative consequences:  Has to pay penalty  Has to pay interest  Not tax deductible meaning employer has a relatively higher income tax liability. Only applicable to ‘employees’ who have earned at least $450 per month. The relevant statutes are: o Superannuation Guarantee (Administration Act) 1992 (“SGAA”) o Superannuation Guarantee Charge Act 1992 (“SGCA”) (very short legislation, that actually imposes charge) Specifics of Legislation: S 16 SGAA says: An employer's superannuation guarantee shortfall for a quarter is payable by the employer. S 17 SGAA What is the superannuation guarantee shortfall? It is the total of the “Individual superannuation guarantee shortfalls” + plus interest + admin penalty S 19 SGAA – Says how to calculate the “Individual superannuation guarantee shortfalls” – basically a percentage (now 9.5) of “salary or wages” paid to employee BUT… 23(2) This shortfall is reduced by the amount employer has contributed to an employee’s super fund. In other words, if have contributed right amount of super, won’t be a shortfall. NOTE: according to these sections only need to give 9.5% on ‘ordinary time earnings’ to employee’s superannuation to not have a shortfall. This includes most salary/wages, does not include leave that paid out upon termination of employment. Also, does not include overtime IF the award/industrial agreement stipulates what hours to be worked. Note: there is such a thing known as “Maximum Superannuation Contribution Base.” For the 2020/21 tax year, is $57,090. What does this mean? If earn more than $57,090 per quarter (x 4, works out to be $228,360) then only need to pay 9.5% super on this maximum amount. So say earn 500K per year, employer will only need to pay 9.5% x $228,360 super per year.

Constitutional Challenge The above statutes (SGAA & SGCA) were challenged as being unconstitutional in the following case: Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35 http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2011/35.html? stem=0&synonyms=0&query=roy%20morgan%20and%20taxation  S 51(ii) of the Constitution grants taxation power to the Commonwealth

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As mentioned above, if employers put superannuation into employees’ super accounts (to the required amount) then no tax is imposed. HOWEVER otherwise the employer will have to pay the shortfall to the government as a tax. Under the legislation, the government then takes this shortfall (with interest and penalty) and places it in the super fund of the employee (but doesn’t do so for interest and penalty). Roy Morgan was an employer who didn’t wish to pay the super of its employees They said that: The relevant power of the Constitution was s 51(ii) which allowed government the power to make laws in respect of taxation. In the case of Matthews v Chicory Marketing Board (Vict), Latham CJ defined a tax: "It is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered." Roy Morgan argued that the way the scheme was structured, it was not for “public purposes” and so was not a tax under s 51(ii) of the Constitution. Since didn’t come under s 51(ii), was unconstitutional. HELD: It was constitutional. This was a unanimous decision, 2 Judgments:

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FRENCH CJ, GUMMOW, HAYNE, CRENNAN, KIEFEL AND BELL JJ Referred to Latham CJ in Matthews v Chicory Marketing Board (Vict) where defined a tax as a "It is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered." So issue here is whether it is for public purposes. Majority said that money here that is taxed due to being a shortfall goes to Consolidated Revenue. Because it goes to Consolidated Revenue, it is for a ‘public purpose’. True this money is then spent on individual employees’ super – but its identity has been lost once goes into Consolidated Revenue. In other words, cannot trace the money. HEYDON, J Also referred to the definition of a tax in Chicory and said that what is argued by the taxpayer is that there is no ‘public purpose’ so not a tax. There was a public purpose here: Described the public purpose as follows: “Those public purposes centre on the encouragement of employers to contribute to superannuation funds so as to meet the needs of aged or infirm employees and to reduce the pension burdens which would otherwise have to be funded by the government.” Also brought up the issue that the aim of this tax is not to raise revenue but to modify a behaviour – said this does not prevent it from being a tax.

WHO IS AN EMPLOYEE AND SO COVERED BY SUPERANNUATION GUARANTEE?

Employee v Non-employee S 12 SGAA defines employee – we will be spending quite a bit of time on definition and case law Employee (including ones in expanded definition) entitled to 9.5%, independent contractor isn’t. In most cases, easy to decide. For your typical employee, who works for you on premises, you withhold tax from them, paid per hour, eg hospital, law firm or university employee, no problem. Have to pay 9.5% of what pay them.

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On the other hand, someone that is an independent contractor, eg get builder to extend your house for you, clearly not an employee, don’t need to pay 9.5% on top of what pay them. OR go to solicitor (sole practitioner) as a client, pay them $1000, don’t need to give them 9.5% super. But not always that simple S12 SGAA definition of employee covers both:  Ordinary meaning of employees at ‘common law’;  Situations covered by other parts of s 12, ie, it has an expanded meaning of employee.

S 12(1) makes it clear that those ‘other parts’ of s 12 are there to both:  expand the term; and  make particular provisions to ‘avoid doubt’ as to whether certain persons are employees, ie to clarify the law. We will cover these statutory extensions later. For now, let us look at case law of what is an employee. Ordinary Meaning of Employee Looking at distinction between employee and independent contractor. Often referred to as distinction between contract of service (employee) v contract for services (independent contractor). Earlier case law emphasised the ‘control test’ -- which as the name suggests is based on how much the employer controls someone to determine if they are an employee. However, the modern approach is different – partly because in the modern workplace the prevalence of skilled employees means that control is often less of an issue. In 1996, case involving Vabu Pty Ltd – called Vabu Pty Ltd v FCT (Federal Commissioner of Taxation) (1996) (Court of Appeal, Supreme Court of NSW). This case concerned obligation to pay superannuation. It concerned whether couriers were employees or independent contractors of Vabu. Specifically, the couriers were ones who made deliveries using:  bicycle  motorcycle  car They were paid by delivery. The court found that the couriers were independent contractors and so were not entitled to the SGC. HOWEVER in the case of Hollis v Vabu, (High Court, 2001) at least as far as the bicycle couriers were concerned, there was a different finding – they were employees.

High Court case of Hollis v Vabu Pty Ltd was on a vicarious liability (torts) issue, not on superannuation. However, issue was whether a bike riding courier was an employee or not. In finding that he was, court emphasised that multi-factorial modern approach and said that must examine the “totality of the relationship”.-different from older ‘control test’. Hollis v Vabu http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2001/44.html? stem=0&synonyms=0&query=hollis%20vabu

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A courier from a different company was involved in an accident with a courier from Vabu (courier from Vabu was unidentified). The issue was NOT one of Superannuation – rather the issue was one of vicarious liability. Court said if Vabu’s courier was an employee rather than contractor than Vabu would be ‘vicariously liable’ for the damage caused by Vabu’s courier. Meaning that the injured party (courier from a different courier company) would get damages from Vabu. High Court held that WAS an employee rather than independent contractor- that is what majority found (GLEESON CJ, GAUDRON, GUMMOW, KIRBY AND HAYNE JJ). Majority: cited authority that mentioned that ‘control test’ was more relevant for agricultural society. Court said that these days it is just one of many factors that determine if employee or not employee It is true that couriers supplied their own bicycles, however, this did not show they were contractors – court said that “[a] different conclusion might, for example, be appropriate where the investment in capital equipment was more significant, and greater skill and training were required to operate it.” Bicycle courier can’t make their own goodwill and have independent career as free lancer They had little control in their work – had to work by 9:00 AM and could not refuse jobs They wore clothes bearing Vabu’s logo and had to keep their clothes tidy. They were paid by the delivery, but had little scope for bargaining. Also were limitations on when they could ask for leave. Vabu did control which deliveries each courier undertook.

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McHugh, J said Vabu was liable, but he did not base his finding on the couriers being employees, but rather he widened the scope of vicarious liability. He did note that finding that these couriers were employees would have far reaching implications including IR laws and the superannuation laws, and he did not with to ‘unsettle established business relationships’.

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Callinan, J dissented. Said that bound by concessions of this case in lower court, where plaintiff conceded that couriers did not have employment relationship with Vabu. However, made interesting comment that if found employment relationship here, cost of employing these couriers higher, and this might result in less opportunity for unskilled people (such as couriers) to earn a living – though he did note that this was a matter of balance, and this judgment was not the time to find it.

So in the High Court case of Vabu, found that bicycle couriers were employees. Can we assume that couriers that used cars (some of them) were employees? We don’t’ know what High Court would have decided, but it is less likely that they would have found they were employees, if couriers supplied their own cars, because in such a case, greater use of courier’s capital and skill. Important case from a few years ago on SGC: On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366 http://www.austlii.edu.au/au/cases/cth/FCA/2011/366.html    

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Taxpayer was business used by those that required interpreting (oral) and translating (written) services. However, translating was only 5% of its business Main clients were institutional clients, such as hospitals, universities, courts Had a few staff that were clearly employees, admin people and a small handful of on-site interpreters/translators However, most of work done by others who were on the ‘books’ of this business. In other words, the business would get a job, and contact an interpreter (usually email or phone) whether they would undertake it – they then responded with yes or no. These were

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“freelancers” and were the subject of this case. Issue was whether they were entitled to be paid superannuation contributions due to them being employees. Most of the freelancers had written to OCI and asked to be on their list. Occasionally, OCI would recruit people from the interpreting/translating accreditation bodies Although some of these freelancers were on written contracts with OCI, most weren’t. The freelancers were on a database with their contact details and their expertise. When OCI got a job, contacted one of the relevant freelancer. They were under no obligation to accept. If didn’t, they then tried another. Was common to reject. Minimum time of assignments was half day for court assignments, 90 or 60 minutes (depending on location and type of job) for other assignments. If finished early, would still be paid for whole block If freelancer cancelled assignment no penalty – but if did so repeatedly might have black mark against their name or be completely taken off the list In general, freelancers paid at standard schedule rates, no room for negotiation. In isolated instances, paid more, eg short notice, or rare language At end of every month, OCI would give ‘remittance advice’ (with list of jobs undertaken) and payment to each freelancer. Freelancers got communication through newsletter of OCI No exclusivity – freelancers did usually work for other agencies Freelancers wore tags on assignments with OCI’s name and logo and were instructed to wear them at all time while on duty. They were told things such as not to give out personal cards, and to not be late because this reflects badly on OCI. Other communications emphasised that needed to comply with industry’s Standard of Ethics, which were also communicated to them. With some rare exceptions, there was no delegating of tasks, eg Interpreter A paid $100 for job, couldn’t then hire Interpreter B for $80 and keep the profit. OCI took out indemnity insurance for work of freelancers. Background to the next point: in general, for employees, employers have to withhold tax from their salaries. For contractors, do NOT have to withhold tax from their payments IF the contractors have and supply an ABN (Australian Business Number). Getting an ABN from the tax office is largely an administrative process. However, if independent contractor does not supply an ABN then payer does have to withhold tax from their payment at the top tax rate. Let’s see what happened here: OCI did not withhold tax from payments to freelancers unless they did not provide ABN. In other words, from an income tax point of view, treated them like contractors.

HELD (Bromberg, J): Were employees, not independent contractors. Consequently, OCI did have to pay them superannuation  

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Endorsed what was said in Hollis v Vabu regarding looking at totality of situation. Furthermore, also endorsed what said regarding that how parties describe each other not determinative. Said that in deciding between independent contractor v employee, need to look at “ultimate question”. To decide this, it cited Hollis which stated: ” in the fact that when personal services are provided to another business, an independent contractor provides those services whilst working in and for his or her own business, whereas an employee provides personal services whilst working in the employer’s business”. Another way of putting it, in deciding if the person is an independent contractor (in Court’s own words): Viewed as a “practical matter”: (i) is the person performing the work an entrepreneur who owns and operates a business; and, (ii) in performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work? This is known as the ‘totality test’.

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First matter – are they operating a business: In deciding if the person offering the services is operating a business, keep in mind business usually involves using tangible/intangible assets to earn a profit, a profit intention, and some kind of businesslike manner (see next points). Furthermore, business has more risk (of making money) than an employee, and part of profit is attributable to a reward for risk. Also business tends to advertise/promote, generates goodwill, they might employ people. NOTE: don’t need all of these, they are indicia. What did court mean by business like manner? “invoicing systems; standard rates and terms and conditions of trade; insurance coverage; payment and debt collection systems; appropriate financial records; budgeting or forecasting systems; business based arrangements with a bank or other financial institution” (not saying need all of these to have a business like manner) Second matter – if answered yes to first step - are they acting as a representative of their own business? If yes then independent contractor : Look at factors such as: o Is the reward negotiable and negotiated o Is there control in the way the activities are carried out o Does payment produce a result o Who bears the risk of a bad outcome o To who does any goodwill created from actions go to? o To what extent is person utilising/creating own tools? o Witholding of income tax & granting annual leave (factors only) o Others So in summary, court is saying there is a two step test. Someone will be independent contractor if : a) Running a business; A...