When the operator engages the pilot/instructor under what purports to be a contract for service rather than a contract of service. Under a contract for service the contractor does not become any kind of employee and, therefore, the operator is not responsible for the person's superannuation or PAYG tax (provided the person has provided an ABN) etc. If you think these pilots/instructors hold their own AOC or are employees of another organisation, think again.
Whether the arrangement does or does not result in the pilot/instructor being an employee as a matter of law is a matter for a court to decide. The arrangement is treated by the parties as one with an independent contractor and not employee, which is why it is described as "sham contracting".