Edited version of administratively binding advice

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Advice

Subject: Superannuation Guarantee

Question 1

Is the relationship between Company No 1 and the workers employed by or engaged by Company No 2 to provide directorial services on the board of Company No 1 to represent Company No 3, a shareholder of Company No 1 and No 2, one of employer/employee under section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer:

No, please see Reasons for decision below.

Question 2

Based on the facts provided, does Company No 1, on whose board the workers are appointed but to which Company No 1 makes no payment of salary or wages to the workers, have the obligation to pay any superannuation guarantee charge (SGC) in accordance with section 16 of the SGAA in respect of any superannuation guarantee shortfall amount determined under section 17 of the SGAA?

Answer: No, please see Reasons for decision below.

This advice applies for the following period:

From 1 July 2012

The arrangement commences on:

After 1 July 2012

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

· Company No 3 is a shareholder of Company No 1.

· Company No 3 is also a shareholder of Company No 2

· Workers are employed by or are engaged by Company No 2 which bears the cost for their services.

· The workers are directors of Company No 1 pursuant to an agreement between Company No 2 and Company No 1 to provide directors to represent Company No 3 as a shareholder.

· No fees have been paid to date by Company No 1 for directorial services provided.

· It is proposed Company No 1 will, in future, pay fees to Company No 2 for directorial services provided. This is considered fair so that Company No 2 may recover some of the costs associated with engaging the workers. GST will be charged and a tax invoice will be issued in respect of this.

· As the workers are already engaged by Company No 2, they will receive no additional remuneration. Their service as a director is seen as part of their duties for Company No 2 and Company No 3.

Even if they were to receive any fees, they would not be entitled to retain the benefit and these would need to be accounted for to Company No 2.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Section 12.

Reasons for decision

Question 1 & 2

Summary

Based on the facts provided the workers are employed by or engaged by Company No 2 pursuant to an agreement between Company No 2 and Company No 1 to provide directorial services to the board of Company No 1 to represent Company No 3 as a shareholder of Company No 2. There is no contractual relationship between the workers and Company No 1 on whose board they sit therefore they are not employees of Company No 1 either at common law or under the extended definition of an employee in section 12 of the SGAA.

As the workers are not the employees of Company No 1 on whose board they sit, either at common law or under the extended definition of an employee in section 12 of the SGAA, Company No 1 on whose board they sit on does not have the obligation to pay any superannuation guarantee charge that may arise in relation to any superannuation guarantee shortfall determined under section 17 of the SGAA.

Detailed reasoning

Employment Relationship

The SGAA defines 'employee' in section 12. The definition is both a clarifying and extending provision. Subsection 12(1) defines the term 'employee' as having its ordinary meaning - that is, its meaning under common law. If a worker is held to be an employee at common law, then they will be an employee under the SGAA (unless one of the limited exceptions in subsections 12(9A) and (11) applies).

Superannuation Guarantee Ruling, Superannuation guarantee: who is an employee? (SGR 2005/1) explains when an individual is considered to be an 'employee' under section 12 of the SGAA. The expressions 'employee' and 'employer' in the SGAA have both their ordinary meaning and an extended meaning. It also discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term. In addition, it clarifies which persons are employees under the extended definition and also considers the circumstances in which an individual who may otherwise be an employee is specifically exempted from the scope of the SGAA.

Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA.

The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship. While the definition includes persons who at common law would be regarded as employees, it also extends to include:

· a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate (subsection 12(2));

Subsection 12(2) of the SGAA states:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate. 

Superannuation Guarantee Determination SGD 93/10 dealt with the question of whether a director is an employee, where the director is entitled to fees but must account for them to others. The determination held that where a director is entitled to a fee ie; the contract is between himself/herself and the corporate body, the director is an employee, whether or not they have to pass on those fees to their partners, a company or any other entity.  

However, at paragraph 3 the determination stated,

3. A director is not entitled to the payment of fees if the only contract is between the company and a party appointing the director under which the appointer agrees to provide directorial services in return for a payment to itself. 

Superannuation Guarantee Determination SGD 93/10 was withdrawn 26 February 1997 and replaced with Superannuation Guarantee Determination SGD 97/1. 

Superannuation Guarantee Determination SGD 97/1 deals with a director who is a partner in a professional partnership and who must pass on director's fees to the partnership. This determination held that the director would not be considered an employee as the appointment is as an agent for the partnership and the income is derived by the partnership. At paragraph 5; 

However, in the case where an appointment as a director is unrelated to the partner's membership of the partnership, the appointed partner is beneficially entitled to any directors fees. The partner is an employee of the paying company for the purposes of the SGAA, notwithstanding any agreement to pay the directors fees over to another entity or person. 

This determination does not mention directors who are directors of another company and must pass on their fees to that company. However the same reasoning would apply. Where a director is appointed as consequence of a contract between his/her company and the paying company, he/she would not be considered an employee.

Contract necessary for employment

Superannuation Guarantee Ruling: work arranged by intermediaries (SGR 2005/2) explains the Commissioners view of how the definitions of "employer" and "employee" in the SGAA apply to contractual and working arrangements involving three or more parties. These tripartite employment arrangements may involve various relationships (whether contractual or otherwise) between the entity requiring the services or work of an individual (end-user), an intermediary firm, and the individual performing the work or services.

Whatever the circumstances of a particular tripartite working arrangement, it is first necessary to determine whether a contract for the performance of work exists and with whom it exists. Only after this is established can the precise nature of the relationship (whether employee or otherwise) be determined.

If there is no contract between the worker and end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user. Similarly, if there is no contract between the worker and the intermediary, the worker cannot be an employee of the intermediary.

In tripartite working arrangements, it is the ultimate or legal control over the worker that is most relevant; not the day-to-day direction and control. A contract between the intermediary and worker can still be a common law contract of employment even though the work is done for the immediate benefit of the end-user.

The relationship between an employer and an employee is contractual. An employment relationship cannot exist in the absence of a contract. The indicators listed by the courts in determining whether a contract is one of employment can only be applied once it is determined that a contract exists. They cannot be applied to determine whether a contract exists in the first place. The issue of whether a contract exists is a separate and distinct matter from the categorisation of a contract as one of employment or otherwise.

Therefore, to establish whether a worker is an employee of the intermediary firm or end-user under the SGAA, it is first necessary to determine whether:

· a contract (whether written, oral or implied) exists between the worker and the intermediary;

· a contract (whether written, oral or implied) exists between the worker and end-user; and

· a contract exists between the intermediary and end-user.

Determining whether a contract exists is a matter of applying the ordinary principles of contract law. An agreement between parties will not be given effect by the courts as a legally enforceable contract unless a number of elements are present. In particular:

· the parties must intend to be legally bound by their agreement;

· there must be an offer by one party and its acceptance by the other; and

· the promises which constitute the agreement must be supported by consideration (unless the agreement is in the form of a deed).

If, after applying the principles of contract law, it is found that there is no contract between the worker and the end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user for the purposes of the SGAA. Similarly, if there is no contract between the worker and intermediary, the worker cannot be an employee of the intermediary under the SGAA.

The courts and various State Industrial Relations Commissions which have considered the nature of tripartite working arrangements in an industrial relations, workers compensation and pay-roll tax context have confirmed in a number of cases the principle that an employment relationship cannot exist unless a contract exists between the worker and either the end-user or intermediary. These cases also illustrate the importance of applying the principles of contract law to determine whether a contract exists.

Application to your circumstances

In this case, the workers are employed by or are engaged by Company No 2 who bears the cost of their provision of services to the board of Company No 1 under an agreement between Company No 2 and Company No 1 to provide directors to represent Company No 3 as a shareholder of both entities.

Because each director is entitled to the payment for the performance of duties as a member of the executive body of a body corporate, under subsection 12(2) of the SGAA the director would be an employee of the body corporate. However, the requirement to provide payment for the performance of these duties is with Company No 2 and not the body corporate (Company No 1) on whose board they sit.

It is proposed that Company No 1 will pay fees to Company No 2 for the directorial services provided. In this case the fees are paid under a remuneration agreement Company No 2 and Company No 1. As the workers are already engaged by Company No 2, they will receive no additional remuneration for their services to the board. You advise that their service as a director is seen as part of their duties for Company No 2 and Company No 3. Even if they were to receive any fees, they would not be entitled to retain the benefit and these would need to be accounted for to Company No 2.

Based on the facts provided, the appointment of the director's to the board of Company No 1 outlines a contractual relationship of employer and employee between Company No 2 and the directors.

In SGR 2005/1 at paragraph 13 the Commissioner has ruled that where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be an employee of the intermediary company or trust, depending on the terms of the arrangement.

In your case, the directors perform work for the board of Company No 1 through Company No 2. Therefore, there is no employer-employee relationship between the workers and the company on whose board they sit for the purposes of the SGAA, either at common law or under the extended definition of an employee. This is because Company No 2 has entered into an agreement with Company No 1 to provide the directorship services to Company No 1 rather than with the individual directors themselves. Under the terms of the arrangement the directors are considered to be employees of Company No 2.

As the directors are not the employees of the company on whose board they sit, either at common law or under the extended definition of an employee in section 12 of the SGAA, the company on whose board they sit on does not have to pay any superannuation guarantee charge in relation to any superannuation guarantee shortfall under the SGAA.

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