Superannuation and GST Pitfalls in Locum Engagements: A Case Study

The Story

James, a pharmacist locum, was engaged by a local pharmacy at an hourly rate of $80. He held an ABN, was registered for GST and the arrangement was made without a written contract. The pharmacy assumed that, because James had an ABN, he was an independent contractor and therefore responsible for his own superannuation. In practice, James added an additional line item for “superannuation” on his invoices and applied GST to the total amount.

Relevant Legislation

To understand the compliance issues in James’ case, it is necessary to look at the key provisions of the law:

• Superannuation Guarantee (Administration) Act 1992 (SGAA):

  • Section 12(3): Extends the definition of “employee” to contractors whose contracts are “wholly or principally for their labour.”

  • Section 11: Payments under such contracts are deemed “salary or wages” for SG purposes, meaning the engager must make superannuation contributions.

• A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

  • Section 9-10 (Supply): Defines “supply” broadly as “any form of supply whatsoever,” including services, rights, and obligations.

  • Section 9-5 (Taxable supply): Provides that a supply is taxable if made for consideration, in the course of an enterprise, connected with Australia, by an entity that is registered or required to be registered for GST (unless GST-free or input taxed).

• ATO Guidance:

  • The ATO confirms that if you pay contractors mainly for their labour, they are employees for SG purposes.

  • The ATO also states that on-charged costs generally take the GST character of the underlying supply (see GSTR 2006/9).

    
    

What Went Wrong?

1. No written agreement

In the absence of a written contract, both the pharmacy and James have operated in a grey zone, with unclear expectations. A properly drafted contract would have clarified the nature of the engagement, established the responsibilities of each party, and significantly reduced the risk of compliance issues or potential legal disputes.

2.      The Superannuation Obligation

• Superannuation Guarantee contributions must be paid by the pharmacy directly into Jame’s nominated superannuation fund.

• Making payment via an invoice does not discharge the obligations under the Superannuation Guarantee (Administration) Act 1992 (Cth).

  
  

3.      GST risk in “on-charging” superannuation

• By adding a separate line item for “superannuation” to his invoice, James effectively treated what is a statutory employer contribution as part of a taxable supply.

• Although some suppliers might attempt such “on-charging” in practice, doing so does not necessarily align with the SGAA or the GST Act, and may be challenged by the ATO.

  
  

Suggested Approach

• For the pharmacy:

  • Pay James’ invoice for services (GST included).

  • Separately pay SG (12%) into James’ nominated fund.

• For James - the locum:

  • Invoice only for professional services (plus GST).

  • Provide fund details so the payer can make SG contributions directly.