Do You Have to Pay Super for Subbies? Superannuation for Subcontractors Under Section 12(3)

krsmith1987

Sep 6

12 min read

General information. Current as at 5 September 2026. Applies to payments made on or after 1 July 2026.

Short answer: Sometimes — and an ABN doesn't settle it either way. Superannuation for a subcontractor depends on what the contract is for, not on how the worker invoices you. If a contract is wholly or principally for an individual's labour, that person is an employee for super purposes under section 12(3) of the Superannuation Guarantee (Administration) Act 1992, and you owe 12% on the labour component. But three specific features take a contract out of that net entirely, and one of them — a written right to delegate — is far more powerful than most people realise.

Since 1 July 2026, where a subbie is caught, the super has to reach their fund within 7 business days of the day you pay the invoice.

This covers subcontractors in trade and construction businesses — chippies, sparkies, plumbers, concreters, labourers — but the test is the same for any industry.

Which rules apply, and where they come from

The ATO's guidance on this changed recently, and a lot of material still circulating online is out of date.

Superannuation Guarantee Ruling SGR 2005/1 was withdrawn on 26 June 2024. The current guidance sits in Taxation Ruling TR 2023/4, Appendix 2, consolidated on 11 December 2024. It reflects the Full Federal Court decisions in Moffet, JMC and Jamsek, and it takes a different approach on some points — most notably delegation.

One caveat worth stating plainly: Appendix 2 of TR 2023/4 is not legally binding on the Commissioner for section 12 purposes. The ATO's stated position is that if you act in accordance with it and the Commissioner later takes a less favourable view, that would be a relevant factor in your favour when penalties are considered.

Three separate tests, regularly confused

Question	Test
Is this person an employee for Fair Work purposes?	Whole-of-relationship assessment under the Fair Work Act 2009
Is this income personal services income?	The PSI rules in Part 2-42 of the ITAA 1997
Do I owe them super?	Section 12(3) of the SGAA

These produce different answers on the same facts. TR 2023/4 notes there is some overlap between the PSI results test and section 12(3), but section 84-10 of the ITAA 1997 makes clear that being caught by the PSI rules does not make someone an employee for super purposes. Assess super on its own.

The section 12(3) test

Following Moffet, TR 2023/4 sets out three elements, all of which must be satisfied:

There must be a contract — a bilateral exchange of promises: labour on one side, payment on the other.
The contract must be wholly or principally for the labour of a person.
The person must work under that contract — a concept of personal exertion and personal effort.

Two framing points matter more than they look. The test looks at rights under the contract, not how the contract was performed. And "principally" carries its ordinary meaning of chiefly or mainly, assessed from the perspective of the engaging entity — what benefit are you getting out of the bargain? Labour isn't limited to physical toil; it includes mental and artistic effort.

Who section 12(3) cannot reach at all

Section 12(3) only applies where the person providing the labour is a natural person who is a party to the contract in their individual capacity. It does not apply where they contract as:

a company
a trustee of a trust
a partner in a partnership

So a contract with Smith Electrical Pty Ltd, or with a husband-and-wife partnership, has no individual for section 12(3) to attach to. Any super obligation sits inside that entity, for its own workers.

The exception noted in TR 2023/4: a different conclusion may be reached where the worker uses an interposed entity but is also directly a party to the contract with you.

Labour hire is different again. Where a worker comes through a labour hire firm and section 12(3) is satisfied, TR 2023/4 puts the worker as an employee of the labour hire firm, not of the business they're sent to. The worker works under their contract with the firm, not under the firm's contract with you.

The three ways a contract falls outside section 12(3)

TR 2023/4 identifies three circumstances in which a contract is not wholly or principally for a person's labour.

A right to delegate, subcontract or assign

This is the big one, and it is broader than the old ruling.

A contract that contains a right allowing the worker to delegate, subcontract or assign their work to another is not wholly or principally for their labour — whether or not the engaging entity's consent is required.

Critically: it is the existence of the right that matters, not whether it is ever exercised. The withdrawn SGR 2005/1 emphasised actual exercise. TR 2023/4 does not.

The position is subject to the right not being:

a sham
limited in scope (that is, the worker can delegate the entirety of the work, not just discrete tasks)
legally incapable of exercise

TR 2023/4 also draws a distinction worth understanding: arranging a substitute — asking a mate to cover when you're crook, where you aren't responsible for paying them — is not delegation.

A contract for a result

Where the essence of the contract is to achieve a specified result rather than to do work, the worker falls outside section 12(3).

TR 2023/4 describes a "result" as the performance of a service where the party is free to employ their own means — third-party labour, plant, equipment — to achieve the contracted outcome. Consideration is often a fixed sum on completion of the job rather than an amount referable to hours worked.

The ruling adds an important qualification: piece-rate or output-based payment is often perfectly consistent with employment, where paying per task is simply the natural way to remunerate that kind of work. Getting paid per square metre doesn't automatically make it a results contract.

Principally for a benefit other than labour

Where a contract is partly for labour and partly for something else — hire of plant, supply of materials — whether it is principally for labour is a question of fact, assessed by reference to the benefit or benefits you receive.

Two points here are commonly misstated.

There is no published percentage threshold. TR 2023/4 requires a quantitative valuation, or where appropriate a qualitative analysis, using available evidence. In ZG Operations Remittal the Full Federal Court indicated the relevant evidence included the market value of hiring similar equipment on similarly favourable terms and the market cost of the labour involved. If you have seen a "more than 50%" rule quoted, it derives from the withdrawn ruling.

The benefit may be a single integrated benefit. In ZG Operations Remittal, the benefit received was a delivery service — not separable benefits of driving labour plus the use of a truck. You can't always split the invoice into labour and non-labour and compare the two.

TR 2023/4 does confirm that where providing the service requires the use of a substantial capital asset, that is a factor supporting the contract not being wholly or principally for labour.

Caught or not caught: the two columns side by side

Points toward super being payable	Points away from super being payable
Contract is with the individual personally	Contract is with a company, trust or partnership
No right to delegate, subcontract or assign	Written right to delegate — even if never used, even if your consent is required
Paid for time or personal effort	Contract is genuinely for a specified result
You supply the materials and plant	Work requires a substantial capital asset the subcontractor supplies
Labour is the benefit you're contracting for	The benefit you receive is principally something other than labour
Engaged directly by you	Supplied through a labour hire firm (super sits with the firm)

No single row decides it. The test looks at the contract as a whole, from the perspective of the business doing the engaging.

Four things that don't get you out of it

An ABN. TR 2023/4 addresses this directly: a person with an ABN may hold that ABN legitimately and still be an employee under section 12(3) if they've been contracted wholly or principally for their labour.

A clause saying no super is payable. The obligation is statutory.

A small amount of money. The $450 monthly threshold was removed from 1 July 2022.

Calling them a contractor. Labels the parties choose to describe their relationship are not determinative. Note, though, that TR 2023/4 treats requirements to use an ABN, to hold a business name, or to invoice as operative terms rather than mere labels — they carry some weight, just not decisive weight.

One exclusion that does survive: under-18s are only entitled to super where they work more than 30 hours per week.

If a subbie is caught, what do you pay super on?

The ATO's guidance is to calculate the super guarantee on the labour component of the invoice.

Worked example A subbie invoices $6,600 including GST — $6,000 excluding GST.The invoice itemises materials of $1,500 (GST-exclusive).Labour component: $4,500.Super: $4,500 × 12% = $540.

Where an invoice is a single undifferentiated line, there is nothing on the document supporting a smaller labour figure. Keeping labour and materials visibly separated is straightforward record-keeping and worth doing consistently.

What Payday Super changed

Payday Super commenced on 1 July 2026. It did not change who is entitled to super. It changed when it has to arrive.

The QE day is the day you pay the invoice. The ATO's position for contractors paid by invoice is that the payday — the qualifying earnings day — is the date the invoice is paid. Legislative Instrument LI 2026/20 confirms that payments to an eligible contractor remunerated on invoice are not out-of-cycle payments, so the ordinary deadline runs from that date.

Seven business days, received. The contribution must be received by the fund, with enough information to allocate it to the member's account, within 7 business days after the QE day. Not sent — received. If you use a commercial clearing house, their processing time comes out of your window.

"Business day" has a precise meaning. Any day other than a Saturday, Sunday, or a public holiday that applies to the whole of any Australian state or territory. A state-wide holiday anywhere in the country stops the clock, even if you're not in that state. A holiday covering only part of a state — the ATO's own example is Royal Hobart Show Day — is still a business day.

Longer windows exist in four situations:

First contribution for a new worker, or into a new fund for an existing worker: 20 business days.
Out-of-cycle payments (bonuses, back payments, payments in advance): due with the contribution for the next regular payday.
Exceptional circumstances: the ATO can determine that a class of employers is affected by a natural disaster or a widespread IT or communications outage, extending the window to 20 business days. You don't apply — the ATO issues a determination and you self-assess whether it covers you, keeping records that show it does.
Bunching: where an extended due date for one payday falls after the ordinary due date for the next, the second contribution takes the later date.

The SBSCH is closed. The Small Business Superannuation Clearing House closed on 1 July 2026. On the other side, the New Payments Platform is now available for contributions and can allow same-day receipt by the fund, depending on the provider.

Reporting. Reporting contractors caught by the extended definition through Single Touch Payroll is not mandatory. If you do report them, you must report both qualifying earnings and super liability.

The practical problem for trade businesses is structural: subbies are paid through accounts payable, not payroll. Nobody in that process is watching a super deadline.

What happens if a contribution is late

There is no longer a super guarantee statement to lodge. The ATO calculates the charge from its own data and issues an assessment. It is assessed per QE day — every payday is its own calculation.

The charge has four components:

Individual final super guarantee shortfalls — the unpaid super for each worker, after applying on-time and late contributions.
Individual notional earnings — the general interest charge rate applied to the base shortfall, compounded daily, accruing from the day after the deadline until the earlier of the day a late contribution reduces the shortfall to nil, or the day before assessment.
An administrative uplift — initially 60% of the total shortfalls plus notional earnings.
Choice loading — 25% of contributions for any payday where the choice of fund rules weren't followed, capped at $1,200 per notice period.

Paying late before assessment reduces the shortfall, but you may still be liable for the notional earnings, the uplift and any choice loading.

The uplift is where the money moves

Voluntary disclosure lodged	No ATO-initiated assessment in prior 2 years	ATO-initiated assessment in prior 2 years
Within 30 days of the payday	0%	20%
31–60 days	5%	25%
61–120 days	10%	30%
More than 120 days	25%	45%
Not lodged before assessment	40%	60%

Charges incurred before 1 July 2026 are ignored for the two-year test, as are assessments based on a voluntary disclosure.

Worked example — one payday A subbie is paid $6,000 of labour on 3 August 2026. The individual super guarantee amount is $720. Nothing is paid, and the ATO assesses. Shortfall: $720, plus notional earnings compounding daily from the day after the deadline. Uplift at 40% (no ATO-initiated assessment in the prior two years, no voluntary disclosure): 40% × ($720 + notional earnings).A disclosure inside 30 days would have taken that uplift to nil. That's one invoice. Twelve monthly invoices are twelve separate QE days, each assessed on its own.

Deductibility has reversed. For QE days from 1 July 2026, all four components of the charge are tax deductible. General interest charge accruing on a late payment of the charge, and any late payment penalty for failing to pay it, are not. Neither are charges relating to quarterly periods before 1 July 2026.

Unpaid super guarantee charge is a debt owed to the Commissioner, and directors can be made personally liable for it.

The first-year compliance approach

The ATO has said it will take a supportive approach through 2026–27 under PCG 2026/1. It will not review employers who are paying super each payday and fixing errors quickly, and will focus compliance action on those not attempting the change, not correcting errors, or not paying at all.

That approach covers 1 July 2026 to 30 June 2027.

Why contractor arrangements are getting attention now

The 2025–26 Taxable Payments Annual Report was due on 28 August 2026. It applies to businesses paying contractors for building and construction, cleaning, courier and road freight, IT, and security, investigation and surveillance services — including mixed businesses where those services are 10% or more of GST turnover.

For the first time, from Tax Time 2026 that data is pre-filled into contractors' own tax returns. The ATO reported approximately $21 billion in contractor payments flowing to around 700,000 sole traders and individuals in business, with most of the data available only after 28 August.

The ATO's stated purpose for TPAR is income tax compliance — identifying contractors not correctly reporting income, and levelling the field for businesses that do declare everything.

A sensible order to work through this

List your contractor payments for the last 12 months. TPAR working papers already contain this for most trade businesses.
Separate individuals from entities. Companies, trusts and partnerships fall outside section 12(3).
Read the contracts, not the invoices. The test looks at contractual rights. Is there a written right to delegate or subcontract? Is the contract for a specified result? Does it require a substantial capital asset?
Check invoice formatting. Labour and materials separated, GST clear.
Time-test your clearing house. Pay one contribution and count the business days until the fund records receipt. That's your real deadline.
Use the ATO's superannuation guarantee eligibility tool for workers you're unsure about.
Take advice on the borderline cases from a registered tax agent, and note that the uplift table rewards early voluntary disclosure heavily.

Frequently asked questions

Do I have to pay superannuation for subcontractors in Australia?

Only where the subcontractor is an employee at common law, or is caught by the extended definition in section 12(3) of the SGAA — that is, where the contract is wholly or principally for that individual's labour. Where it applies, the rate is 12% of the labour component, and since 1 July 2026 the contribution must reach their fund within 7 business days of the invoice being paid.

Does a subbie with an ABN need super?

Possibly. An ABN doesn't determine the answer. TR 2023/4 confirms a person can legitimately hold an ABN and still be an employee under section 12(3) if contracted wholly or principally for their labour.

What takes a subbie outside the super rules?

Three things, per TR 2023/4: a contractual right to delegate, subcontract or assign the work; a contract genuinely for a specified result; or a contract principally for a benefit other than labour, such as the provision of substantial equipment.

Does the right to delegate have to actually be used?

No. TR 2023/4 states it is the existence of the right that is relevant, not its exercise — and it applies even where your consent is required. It must not be a sham, limited in scope, or legally incapable of exercise.

Is there a percentage test for "principally for labour"?

No published threshold. It is a question of fact requiring a quantitative valuation or, where appropriate, a qualitative analysis, assessed by reference to the benefit the engaging entity receives. The "more than 50%" figure often quoted comes from the withdrawn SGR 2005/1.

Do I pay super on the whole invoice?

No. The ATO's guidance is to calculate on the labour component.

When is the super due for a subbie paid on invoice?

The payday is the date the invoice is paid, and the contribution must be received by their fund within 7 business days of that date.

What if the subbie works through a company or a partnership?

Section 12(3) only applies to an individual contracting in their own capacity, so it doesn't reach a contract with a company, trust or partnership. A different conclusion may apply if the individual is also directly a party to the contract.

What about labourers supplied by a labour hire firm?

Where section 12(3) applies in a labour hire arrangement, TR 2023/4 treats the worker as an employee of the labour hire firm rather than of the business they're placed with.

Can we agree in writing that no super is payable?

No. The obligation is statutory and isn't displaced by agreement.

Sources

This article is general information only. It describes publicly available guidance as at 5 September 2026 and does not take into account the circumstances of any particular business. It is not advice, and it should not be relied on as a substitute for advice from a registered tax agent about your own arrangements.

KRS Advisory