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Edited version of your written advice
Authorisation Number: 1012746954725
You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.
Advice
Subject: Superannuation guarantee obligations
Question
Is the relationship between the Principal and the Worker one of employer/employee where the Principal engages the Company who then employs the Worker to provide services to the Principal under section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?
Advice
No. Please see 'Reasons for decision' below.
This advice applies for the following period:
For the duration of the contract
Relevant facts and circumstances
This 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 Commissioner received a request from the applicant on behalf of the Principal for binding advice in respect of superannuation guarantee. The following information was provided with the application:
• The Principal has engaged an incorporated entity, the Company who employs the Worker to provide a service to the Principal.
• Under the arrangement the Company is responsible for performing the terms of the contract on a day to day basis.
• Under the previous arrangement the Worker operated as a sole trader with an Australian Business Number (ABN). The Worker was deemed to be an employee.
• The sole trader arrangement between the Principal and the Worker was then terminated.
• The Company was engaged the next day after the sole trader arrangement was terminated.
• The service under the old and the new arrangements are not changed.
• The following documents were provided:
♥ Copy of the previous contract executed between Principal and the Worker.
♥ Signed copy of the executed new Service Agreement between the Principal and the Company
Relevant legislative provisions
Superannuation Guarantee (Administration) Act 1992 Section 12
Reasons for decision
Summary
Having considered the nature of the working relationship between the parties and the relevant case law, and putting in balance the relevant indicators, it has been determined that a employment relationship does not exist between the Principal and the Company.
It follows that the Worker is not considered to be an employee of the Principal where you have entered into a contract with the Company which subsequently employs the Worker.
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.
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, you advise that under a previous arrangement the Worker operated as a sole trader with an ABN, the Worker was deemed to be an employee of the Principal and superannuation was paid accordingly.
This arrangement was terminated by the Principal and the Company was engaged the following day. You further advise that apart from minor cosmetic changes the new arrangement is similar to the previous one.
SGR 2005/1 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. Of particular reference to your enquiry is the following paragraph:
Paragraph 13, of SGR 2005/1 states:
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 the employee of the intermediary company or trust, depending on the terms of the arrangement.
You have provided a signed and dated copy of the executed Service Agreement between the Principal and the Company. This agreement clearly shows that the parties to this agreement are the Principal and the Company.
Based on this evidence there is no employment relationship between the Worker and the Principal. This is because the Principal has clearly entered into an agreement with the Company to provide a service rather than with the Worker.
Further, the engagement of the Company does not fall within the scope of an individual employee as per paragraph 13 of SGR 2005/1 and as such the Company is not an employee of the Principal for superannuation guarantee purposes.
It follows that the Worker is not considered to be an employee of the Principal either at common law or under the extended definition of an employee in section 12 of the SGAA.
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