A lot of business owners assume that because someone has an ABN and sends an invoice, they do not need to pay them super. That is not always true, and it never has been, but Payday Super has made the timing of getting it wrong considerably more expensive and much easier for the ATO to notice.
What Payday Super actually changes
Payday Super changes when super contributions must be paid. It does not change who is entitled to receive them.
If you were already required to pay super for a contractor, that obligation simply continues under the new timing rules. If you were not required to before, Payday Super does not create a new obligation.
This distinction matters because a lot of the confusion around Payday Super and contractors is really confusion about super eligibility rules that have existed for years, simply brought into sharper focus by a new, faster payment deadline.
When you need to pay super for a contractor
The key question is not whether someone is legally a contractor, but what they are actually being paid for. You generally need to pay super where you engage a contractor mainly for their labour, personal effort, skills or time, rather than to achieve a specific result using their own tools, staff or equipment. This can apply even if the contractor:
- has an ABN
- invoices your business for their work
- is described as a “contractor” in a written agreement
The extended definition of employee
Beyond the general labour test, super law also treats certain specific categories of worker as employees for super purposes, even if they would not usually be considered employees in any other sense. This extended definition can capture:
- sportspeople paid to play, and performers paid for music, dance or other entertainment
- people paid to take part in promotional activities
- individuals providing services connected with filming or recording a television or radio broadcast
How the timing works
Where a contractor is entitled to super, the contribution must be paid for each payday and must reach their super fund within 7 business days after that payday.
If you pay a contractor by invoice, their payday is the date you pay that invoice, so the 7 day clock starts from there. A contract that is ‘wholly or principally for labour’ is generally one where more than half its dollar value relates to the person’s own personal effort and skills, rather than to materials, equipment, or other workers they employ or subcontract to.
Reporting through STP
It is not mandatory to report payments to independent contractors through Single Touch Payroll (STP).
If you choose to report them voluntarily, you then need to meet the full STP reporting requirements, including qualifying earnings and super liability information.
What happens if you get it wrong
Getting contractor super wrong carries two separate risks. The ATO can raise a super guarantee charge if contributions should have been made and were not, which includes interest and an administration fee on top of the missed contribution.
Separately, because super is an entitlement under the National Employment Standards for employees, including deemed employees under the extended definition, a contractor may also be able to take action under the Fair Work Act to recover unpaid super directly, independently of anything the ATO does.
A simple way to think about the labour test
A useful starting question is this: if the contractor could send someone else to do the work instead, and you would be equally satisfied, the arrangement is less likely to be mainly for their personal labour. If the value of the contract is genuinely about their individual skill, time and effort, and they could not simply substitute another person to do it, that points towards a super obligation.
This is not a legal test on its own, but it is a useful first check before looking at the detail of a particular arrangement.
Good practice for businesses that regularly use contractors
If your business regularly engages contractors, it is worth reviewing your arrangements periodically rather than only when a new contractor starts. Useful habits include documenting whether each contract is mainly for labour or for a broader result, keeping a simple register of which contractors you pay super for, and revisiting that assessment if the nature of the work changes significantly.
This kind of review is far cheaper to do proactively than to reconstruct several years of history after a query from the ATO.
Frequently asked questions
Q. My contractor has their own business and staff. Do I still need to pay them super?
Probably not, if they are being paid to deliver a result using their own business structure, rather than mainly for their personal labour. This comes down to a “wholly or principally for labour” test, and it is worth checking with JMB if you are unsure.
Q. What happens if I have been paying a contractor for years without checking their super entitlement?
It is worth reviewing now. If they should have been receiving super, you may have an outstanding super guarantee charge to deal with, and getting ahead of it is far better than having the ATO find it first.
Q. Does this apply to performers, artists or entertainers?
Yes. There is a specific extended definition of employee for super purposes that can capture performers and similar workers, even where they would not usually be considered employees.
Q. Do I need to offer my contractor a choice of super fund?
Yes, if they are entitled to super, you generally need to offer them a choice of fund within 28 days of their start date, the same as for an ordinary employee.
Q. What if my contractor does not choose a fund?
If they are eligible to choose but do not, you generally need to request their stapled super fund details from the ATO before making a payment, to avoid penalties for paying into the wrong fund.
Sources
ATO, Contractors: when to pay super under Payday Super: https://www.ato.gov.au/businesses-and-organisations/small-business-newsroom/contractors-when-to-pay-super-under-payday-super