Payroll tax on service contracts – integral vs incidental functions

2 November 2017

The recent decision in JP Property Services Pty Limited v Commissioner of State Revenue [2017] NSWSC 1391 said contracts for service to perform integral functions in a client’s business invoke the employment agency payroll tax rules, but not contracts for incidental functions.

The distinction adds an extra dimension of necessary fact sensitive analysis about the services and each client’s business. The judge, Justice Kunc, said identical services provided to different clients that operate broadly the same business could yield different answers.

The case itself involved a cleaning contractor. The judge concluded that regular cleaning of the floor of supermarkets outside trading hours was not integral to the supermarket business, and therefore the contracting company was not subject to the employment agency rules. To highlight some subtlety, the judge said cleaning floor spills during trading hours, or regular cleaning of equipment used in the business, would be integral.

Justice White in UNSW Global [2016] NSWSC 1852 had already decided that literal application of the employment agency rules gave them an absurd ambit and instead confined them to contracts for services performed ‘in’ the client’s business.

Whether work was ‘in’ the client’s business needed to be determined by whether the work was:

 “to help the client conduct its business in the same way, or much the same way, as it would do through an employee”.

The workers in USNW Global were experts engaged to produce results, generally reports, and were not subject to the general control and direction of the clients. They were not employee-like and not considered to be working ‘in’ the clients’ businesses.

Conversely, in Knight Watch [2017] NSWCATAD 223, security guards provided by the contracting company to supermarkets were subject to the general control and direction of the supermarket managers, and were considered to be working ‘in’ the client’s business.

However, JP Property shows the distinction is far from that simple when the focus shifts from the nature of the engagement to the nature of the service and its function in the client’s business.

Issues to watch

Perhaps some core issues and uncertainties are now:

  • overnight services in business premises that operate all hours like hospitals, nursing homes and hotels, for businesses that are technically open overnight but only with skeleton customer service staff, and in buildings like apartment towers that are not traditional businesses at all;
  • loss of ‘relevant contract’ exemptions, and application of chain of hire rules, because employment agency re-characterisation shifts the contractor that is primarily liable for payroll tax from the bottom entity to the top entity closest to the end client; and
  • whether consistently contracting out a function means it ceases to be an integral function of the business. Saying it remains integral is at odds with ‘relevant contract’ examples in payroll tax rulings concerning building industry sub-contracting of core construction work. That industry is perhaps where the bigger issues now lie. Whether those rulings are altered by NSW and each other state will be a development to watch.



Andrew White



Graham Warren

Special Counsel