By Mark Churchmichael, Head of Compliance & Tax

Engaging contractors can feel commercially efficient. But from a tax and compliance perspective, contractor arrangements remain one of the most common sources of unexpected liability for Australian businesses.

What appears to be a “contractor” relationship can quietly trigger obligations for superannuation, PAYG withholding, payroll tax, workers compensation, and annual reporting. When errors occur, it is the business, not the contractor, that bears the cost.

Taxation Ruling TR 2023/4 came into effect in December 2023 provides the Commissioner’s view on when an individual is an “employee” for superannuation guarantee (SG) purposes. Where you engage contractors, this is critical in understanding your potential super obligations.

This article examines the key tax traps from an employer’s perspective, with a detailed focus on superannuation, the ATO’s tests, payroll tax exposure in NSW, Victoria and Queensland, and the limits of subcontractor agreements.

Contractors vs Employees: Why Labels Don’t Protect You

Calling someone a “contractor” does not determine their tax treatment. Different regulators apply different legal tests:

• ATO – Superannuation and PAYG
• State revenue offices – Payroll tax
• Workers’ compensation authorities – Premiums and coverage

A worker can be:

• A contractor at common law,
• But still treated as an employee for superannuation, and
• Included for payroll tax purposes.

This overlap is where most employers are caught out.

Trap 1: Superannuation Guarantee on Contractors

Under the Superannuation Guarantee (Administration) Act 1992, a business must pay super for a contractor where the contract is “wholly or principally for the labour of the individual.”

The ATO does not rely on job titles or ABNs. It applies three core tests.

1. Is the Contract Mainly for Labour?

If the contract is primarily for the worker’s personal effort or skills, and not for a specific result or product, super is likely payable.

Indicators of labour:

• Paid by the hour, day or week
• No meaningful materials or equipment supplied
• Payment reflects time worked rather than outcomes

Example:

• A compliance consultant invoices $140 per hour, provides advice only, and does not supply materials or assets.
• The contract is for labour. Super at 12% is required, even though they issue invoices and hold an ABN.

2. Can the Contractor Delegate or Subcontract?

If the individual must perform the work personally and cannot send a substitute without approval, the arrangement looks employment-like.

Genuine contractors:

• Have an unrestricted right to delegate, and
• Bear responsibility for any substitute’s work.

Example:

• A bookkeeper must personally attend your office each week and cannot send another staff member.
• Strong indicator that super is payable.

By contrast:

• A web developer is engaged to deliver a finished website and can subcontract design, coding or testing.
• Points away from super liability.

3. How Is the Contractor Paid?

• Hourly / daily / weekly rates → labour → super likely
• Fixed price for a defined result → genuine contracting → super less likely

Example 1: Super Payable

• A site supervisor is paid $1,800 per week to oversee safety and compliance.
• Payment is for labour. Super must be paid.

Example 2: Super Not Payable

• An engineer is paid $30,000 to design and deliver a completed plant upgrade using their own systems and subcontractors.
• Payment is for a result. Super generally not required.

Why This Trap Is Costly

If super is missed, the employer becomes liable for the Superannuation Guarantee Charge (SGC):

• Unpaid super
• Interest backdated to the start of the quarter
• Administration fees
• Loss of tax deductibility

What looks like a minor classification issue can become a significant financial exposure.

Trap 2: PAYG Withholding

PAYG is usually not withheld from contractors. However, withholding may apply if:

• The contractor does not quote an ABN, or
• The relationship is later found to be one of employment

If reclassified, the ATO may assess:

• Unpaid PAYG
• Penalties and interest

Even where the contractor has already paid their own tax.

Trap 3: Payroll Tax on Contractor Payments

(NSW, Victoria & Queensland – Year Ended 30 June 2026)

Payroll tax is one of the most significant hidden risks when engaging contractors.

All three states apply “relevant contract” rules, which deem many contractor payments to be taxable wages unless a specific exemption applies.

Current Thresholds and Rates (30 June 2026)

(Higher rates apply to very large employers, but the above are standard rates for most small and medium businesses.)

When Contractor Payments Are Taxable

Contractor payments are included in payroll tax unless an exemption applies, such as:

• The contractor provides services to the public generally
• The contractor works for multiple clients
• The engagement is for less than 90 days in a financial year
• The contractor is genuinely carrying on an independent business

Having an ABN, charging GST, or issuing invoices does not automatically create an exemption.

Example:

A business engages an IT contractor for $180,000 per year. They work solely for the business, cannot delegate, and do not advertise to the public. No exemption applies.

Payroll tax impact:

• NSW: $180,000 × 5.45% = $9,810
• Victoria: $180,000 × 4.85% = $8,730 (metro area)
• Queensland: $180,000 × 4.75% = $8,550

That is per contractor, per year, and can apply retrospectively if reviewed.

Trap 4: Workers Compensation

Many workers compensation schemes extend beyond common-law employees. If a contractor:

• Works mainly for your business, and
• Does not employ others,

their payments may need to be included in wage declarations, increasing premiums and potentially creating uninsured liability if an injury occurs.

Trap 5: Flow-On Compliance Risks

Incorrect classification can also trigger:

• Fair Work claims for leave and entitlements
• Sham contracting penalties
• Backdated payroll tax registration
• Superannuation Director Penalty Notice exposure
• Penalties for failing to lodge required reports

Liabilities often compound across several years.

The Role of a Subcontractor Agreement

A well-drafted agreement is essential, but never decisive on its own. A strong agreement should address:

• Right to delegate
• Payment for results, not time
• Contractor’s responsibility for insurance and risk
• No exclusivity
• Control over hours and work methods
• No employee-style benefits

However, authorities assess what happens in practice, not just what the contract says. If the contractor works fixed hours, reports to a manager, and cannot delegate, the agreement will not protect the business.

ATO Reporting: Taxable Payments Annual Report (TPAR)

Many industries must lodge an annual Taxable Payments Annual Report for contractor payments, including:

• Building and construction
• Cleaning
• Courier and road freight
• IT, security and labour-hire

Reported data is cross matched against:

• Income tax returns
• BAS lodgements
• Payroll tax reviews

Errors commonly trigger audit activity.

Practical Risk Management

1. Apply the ATO super tests, not just “employee vs contractor” labels
2. Check payroll tax exemptions before excluding payments
3. Align contracts with real working arrangements
4. Confirm workers compensation treatment with your insurer
5. Review TPAR obligations annually

Final Thought

Contractors are one of the highest-risk areas of employer tax compliance. Most liabilities arise not from intent, but from:

• Applying the wrong legal test
• Overlooking state-based rules
• Assuming an ABN means “no obligations”

The most effective approach is not avoidance, it is structured compliance: understanding where obligations arise and building arrangements that reflect both the law and the commercial reality.

Did you find these insights valuable? Follow Stewart & Smith Advisory for more expert guidance on navigating the complexities of business finance.