Key observations
We have outlined our key observations below:
The Extended Test’s composite elements
Consistent with the decision in Moffet, the Full Federal Court concluded that the Extended Test has three elements that each needs to be assessed. These are:
- “that there should be a “contract”;
- which is wholly or principally “for” the labour of a person; and
- that the person must “work” under that contract”.
The judgement explored each of these elements in detail.
The “contract” must be with a natural person
The FFC held that the Extended Test only has application where the worker is an identified person who is party to the contract in their individual capacity. The worker must work under the contract, and the party on the other side must make payment to the worker in respect of their labour under the contract.
This reaffirms long standing views held by the ATO that a contract exclusively between a principal and an incorporated entity cannot result in a SG obligation for a principal in relation to the entity’s workers. In their judgement, the majority (Perram and Anderson JJ) outlined that this accords to the original legislative intent of the SGAA, being to provide for adequate living standards in retirement for natural persons, individuals workers and employees.
However, it was outlined that for contracts which name multiple parties (noting that, in Moffet, there were three parties including the worker that were party to the Services Agreement), one needs to look at the two parties who have a bilateral exchange of promises. In Moffet, it was concluded that, despite the service entity also being a party to the contract, it was the individual (Dr. Moffet) who had promised labour and was in turn promised payment. In our view, this necessity to understand a bilateral exchange of promises is also likely to be relevant for oral contracts where there is an incorporated entity, with the contracted services provided by a given worker under the arrangement with the principal.
Contracts “for” results are not “for” labour
In applying precedent, the majority (Perram and Anderson JJ) concluded that the Extended Test is not satisfied where a contract is properly characterised as being for the provision of a result, as opposed to being “wholly or principally for [the] labour” of the specific person. Again, this stands to preserve long-standing ATO doctrine from SGR 2005/1.
The majority also noted that remuneration by the hour will generally signal against a contract being for a given result. For completeness, we note that the Moffet arrangement was structured to have two remuneration components, a personally generated revenue component (based on percentage of monthly revenue) and a performance bonus based on the overall practice’s revenue (set as a percentage of the increase in annual cash flow over a threshold). There was also a minimum annual cash flow requirement for the practice, where Dr. Moffet would need to compensate the principal (Dental Corporation) for any shortfall.
In that case, whilst not elaborated upon in the judgement, the same three judge panel (as for the Jamsek FFC matter) concluded the application of superannuation, suggesting that the arrangement should not be viewed as “for” a result, even though underlying remuneration components could be argued as being (at least to some degree) based on specific output.
Contracts which have a right to delegation may not be “for” labour
Noting that the contract must be wholly or principally "for" labour, the majority (Perram and Anderson JJ) indicated that if the contract allows for employment or subcontracting, then it cannot be "for" the labour of the person. Again, this aligns to SGR 2005/1.
For completeness, Wigney J, in his judgement, voiced a point of difference to the majority judgement, being that a right of delegation, which is fettered by restriction (in this case, required ZG’s “prior and continuing approval”), may not in and of itself be “determinative” of whether the contract is “wholly or principally for labour”.
Contracts including large capital item is a barrier to being “for” labour
Where an argument is mounted that a contract (which is for labour and something else, such as equipment) is wholly or principally for labour, some method by which the value of each component can be ascertained, is necessary.
In the Jamsek FFC matter, in the absence of such analysis, the materiality of the trucks sought under these contracts, combined with the risk and costs to the partnerships of ongoing operation, maintenance and insurance, permitted a conclusion that “labour” was not the principal object of the contracts.
We also noted that the majority agreed with the Commissioner that consideration must also be given as to whether the equipment or vehicle is specialist in nature, consistent with the findings in Hollis v Vabu Pty Ltd (2001) 207 CLR 21. In Jamsek FFC, it was concluded that a truck is characterised as a specialist and a large capital item, whereas a bicycle (in Hollis) is not.