Companies take a big risk in trying to avoid superannuation contributions

This can work for a while, but if the authorities become aware of the situation the financial penalties can be disastrous.

Q. My husband is employed as a CAD draftsman with an architecture company. He is in his third year with them and works a 40-hour week. His original contract stated he was employed as a contractor and the employer did not have to contribute to his superannuation.

My husband does not invoice his employers and gets a group certificate. Are there circumstances under which an employer does not have to make super contributions for an employee?

A. The situation is not an isolated one. Many businesses, large and small, think they can escape their responsibilities as an employer. This is done either by requiring people to sign a contract that states they are contractors, or requiring them to form a company to contract their services through.

Whether a person is a contractor does not depend on a piece of paper or a company structure, but on the facts of each case. A contractor is normally someone hired to produce a result, supplies all of their tools or equipment, and must rectify mistakes at their own expense.

An employee tends to be a person who only provides labour, performs the work in premises supplied by the employer, and has supplied to them all of the equipment necessary to complete the work.

In your husband's case, it appears he is clearly an employee. He has three options. He can approach the company he is working for and advise that it should be paying superannuation on his behalf. This could lead to his employment being terminated, for which he could possibly claim unfair dismissal.

On the other hand, he could report his employer to the Tax Office as an avoider of superannuation. Given the ATO's workload, your husband's retirement could come before the ATO does anything.

His last option would be to look for a more reasonable employer that does not cheat employees. The architecture company is taking a huge risk trying to class employees as contractors. As well as having to pay penalties on non-tax-deductible superannuation guarantee, it could be made to pay workers' compensation insurance and payroll tax.

Q. Is it practical and reasonable to run accumulation and pension accounts for each member within a self-managed superannuation fund? What are the mechanics and ramifications of starting the pension and continuing an accumulation account?

A. It is practical and reasonable to run both types of accounts within a super fund. It can also make tax sense.

Where a person makes a large non-concessional contribution to a super fund, and plans to make tax-deductible concessional contributions as well, it makes sense to start a pension from the non-concessional superannuation first. This way the pension's tax-exempt status is maximised.

To do this, the non-concessional contributions should be used to buy investments. The income from these would then be deposited into a bank account from which the pension is paid.

A new bank account would then be set up to receive the concessional contributions, used to buy investments

that would be allocated

to the accumulation

account, and also to receive income from those investments.

Email questions to max@taxbiz.com.au

Tax for Small Business, a survival guide by Max Newnham, is now available in bookstores.