The directors of many corporate businesses remain unaware that they can be made personally liable to the Australian Tax Office for SGC and 200% penalties if their company fails to make statutory superannuation contributions (currently 9.5%) in respect of their employees.

Many also remain unaware that individuals who qualify as ‘contractors’ and are not subject to employee PAYG withholding on payment for their services may, nevertheless, be entitled to receive statutory superannuation contributions. That is because the definitions of ‘employee’ for PAYG withholding and for statutory superannuation contributions are different.

Recent Full Federal Court and AAT decisions have helpfully highlighted, but not resolved, the uncertainty resulting from those differing definitions.

Directors’ liability

Since 2006, directors have been personally liable to the Commissioner of Taxation for any failure by their company to withhold and remit PAYG instalments from the wages of employees. The relevant Director Penalty Notice provisions are now found in Schedule 1 to the Taxation Administration Act 1953 (TAA).

In 2012, that liability was extended to SGC liabilities arising under the superannuation contribution regime established for the benefit of employees in the Superannuation Guarantee (Administration) Act 1992 (SGAA).

In addition to the payment of SGC (in effect, a tax equal to the amount that should have been contributed to superannuation on behalf of employees, plus interest and an administrative fee), the company’s liability borne by the director can also attract ‘additional superannuation guarantee charge’ (in effect, a penalty equal to 200% of the amount which should have been contributed).

An important feature of the SGC liability is that the definition of ‘employee’ under the SGAA is broader than the definition of ‘employee’ for PAYG purposes in the TAA.

Expanded definition of ’employee’ for SGC

For PAYG purposes, the definition of ‘employee’ follows the common law (called ‘a contract of service’).

For SGC purposes, section 12 of the SGAA includes the common law concept of ‘employee’, but modifies and expands it.

In particular, s 12(3) expands the common law component of the definition by adding:

‘If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.’

That expansion potentially covers many individual service providers who are not subject to PAYG withholding because they are contractors at common law (called ‘a contract for services’), not employees.

For the purposes of s 12(3) the relevant issue is whether the contract is ‘wholly or principally for the labour’ of the individual concerned.

The scope of operation of the section has not been resolved.

In Roy Morgan Research v Commissioner of Taxation [2010] FCAFC 52 it was argued that the section does no more than act as a safety provision to ensure that employees who were required to provide their own tools or equipment (and may technically be contactors), are included as ‘employees’ for the purposes of the SGAA. However, that argument did not require to be authoritatively addressed in the judgment.

Recent decisions

S 12(3) has recently been addressed in two Full Federal Court decisions on appeal (Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119 and Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118) and in one Administrative Appeals Tribunal Objection decision (MWWD and Commissioner of Taxation [2020] AATA 4169).


Jamsek involved two truck drivers (one of whom was Mr Jamsek). Both drivers had been engaged over a period of nearly 40 years with the same business, working full time as truck drivers for various owners of that business. Their contracts were described in each case as a ‘Contract Carriers Arrangement’ and they were each described in those contracts as being in partnership with their respective wives.

On termination of their engagements, the drivers sought declarations from the Court that they had been ‘employees’ at common law under the Fair Work Act 2009 and under the SGAA (and that they were also ‘workers’ for the purposes of the NSW Long Service Leave Act 1955).

The drivers were successful on all claims.

The Full Court noted that it had been established in the Court at first instance that neither driver had any goodwill in any separate business. Contrary to that earlier decision, the Full Court held that this was an important indicator that tipped the scales in favour of both drivers being employees.

With regard to s 12(3), although a specific application had been made for a declaration that the subsection applied, the Court held that it was not necessary to make a determination on that point – the fact that both drivers were employees for common law purposes ruled out the need to go any further and consider the expanded definition.

Dental Corporation

Dental Corporation acquired the dental practice of Dr Moffet in 2007. The company and the practitioner entered into a Services Agreement under which Dr Moffet agreed to provide his services as a dentist to the practice.

On his termination in 2014, Dr Moffet sought entitlements to holiday pay, long service leave and superannuation.

At first instance, the Federal Court had held that Dr Moffet was not an employee for holiday or long service leave purposes, but that he was covered for superannuation purposes by s 12(3) of the SGAA.

Both parties appealed to the Full Court.

In effect, the position at first instance was upheld on the appeal – Dr Moffet was not a common law employee (and so missed out on holiday pay and long service, but was an ‘employee’ for SGAA purposes. However, although the Full Court agreed that the expanded definition of s 12(3) applied, it did so for different – and more clearly expressed – reasons than those given in the original decision.

A relevant consideration in those reasons was clause 3 of the Services Agreement, which provided:

‘The Practice Principal acknowledges that he or she must provide the Dentistry Services personally during the Term.’

The Full Court looked at this and other terms of the Services Agreement and concluded that Dental Corporation’s sole source of revenue under that document was the performance of Dr Moffet’s services. There was no obligation to deliver a specific result in terms of revenue – if Dr Moffet did not perform the services, there was no revenue. Consequently, from Dental Corporation’s perspective, the benefit which it received under the Service Agreement was sourced ‘wholly or principally’ from the provision of Dr Moffet’s labour and s 12(3) therefore applied.


This was an objection by an employer against a superannuation guarantee charge assessment made by the Commissioner of Taxation for recovery of SGC in respect of contractor ‘Andrew Smith’ (a pseudonym).

Mr Smith was one of a number of service technicians for a particular type of machinery and operated out of the depot of MWWD. Some technicians were under contracts of employment and others were independent contractor agreements.

The Tribunal determined that the relationship was one of principal and contractor, rather than employer and employee.

With regard to s12(3), it determined that, under the terms of the contractor agreement, Mr Smith had the power to either do the work himself or to employ others to do it.

Although Mr Smith had not, in fact, ever done so, the Tribunal was satisfied that if he had wished to take advantage of that provision in the contract he was entitled to do so and to provide those services to MWWD through an employee or other suitably qualified person.

The Tribunal concluded that s 12(3) did not apply and therefore MWWD was not liable to pay SGC.

In doing so, reference was made to Jamsek and Dental Corporation, but ultimately reliance was placed on Neale v Atlas Products (Vic) Pty Ltd [1955] HCA 18 to come down on the side of the relationship being one of principal and contractor.


As matters presently stand, there is a lack of certainty regarding the scope of operation of s 12(3). As a result, company directors may find themselves exposed to personal liability for SGC for contractors engaged by their companies, notwithstanding the absence of any PAYG exposure.

There is obvious scope for some slippage between characterisations in an area of law where, as stated in Dental Corporation:

‘… what is called for is a multi-factorial assessment of the totality of the relationship, as ascertained from the surrounding factual matrix with no one matter being determinative: Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 160 CLR 16 (“Stevens”) at 24. The contractual terms are part of that factual matrix but the nature of the relationship is not determined merely by reference to them: Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21 (“Hollis”) at 33 [24]’.

In particular, the extent to which s 12(3) modifies (or merely begs) the questions that need to be addressed in any given fact situation to determine whether there is a common law contract ‘of service’ or ‘for services’ remains to be clearly resolved.

Application for special leave to appeal to the High Court has been made in Dental Corporation and it will be important to see whether the Commissioner of Taxation appeals the MWWD decision.

Meanwhile, the clear implication from the Dental Corporation and Neale cases is that an important step in avoiding the operation of the section, is for the contract between the parties to clearly be cast in terms of the person engaged achieving a given result, rather than engaging that individual for his or her labour as the means of achieving that result.

A right on the part of the contractor to use an employee or other person to perform the work is therefore a helpful inclusion.

However, that is not to say that the matter will always be resolved solely by the terms of the contract. In Neale, the High Court first determined it was satisfied that the contract in that case was ‘the real measure of the relationship between the parties’. The facts of a different case may not provide that satisfaction.

In the interim, the risk:

  • may be ameliorated (but not extinguished altogether) by careful advice having regard to the contract document and all relevant circumstances; and
  • will not arise where the contractors in question are incorporated (ie, the services are provided by Pty Ltd companies).


If you have any queries about this article, please contact the author or a member of our Tax or Employment Teams.


This information and the contents of this publication, current as at the date of the publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.