Payroll tax on service contracts – integrated workers

25 July 2018

Payroll tax on service contracts – integrated workers

Recent NSW cases have shown that the concept of an “employment agency agreement” under which payments are subject to payroll tax is different to its ordinarily understood meaning.

Historically, the rule was considered to catch contracts under which an agency provided workers to its client to direct in an employee-like manner.

Now the Supreme Court of NSW in HRC Hotel Services Pty Ltd v Chief Commissioner of NSW Revenue [2018] NSWSC 820 has said some sub-contracted work to produce an agreed result (or deliverable) is caught by the rules. The head cleaning contractor in the case was paid by its hotel clients for each room cleaned and made up. It sub-contracted some of that work to other cleaning companies due to seasonal peaks. The sub-contracts were caught by the rules.

In reaching that conclusion Chief Justice Ward held that sub-contracting is caught where the contract worker appears to an outsider to be added to the client’s workforce, and to be working like an employee of the client’s business would. In essence, the rules apply where the sub-contracted worker is “integrated” in the client’s business.

The outcome in the case was significantly influenced by the fact the sub-contract cleaners were working in the hotel client’s business premises wearing hotel branded uniforms. Importantly, Chief Justice Ward said building renovation sub-contracting would not be caught because the work is not done in the client’s business.

Justice Kunc in the earlier case of JP Property Services (covered in our earlier Riposte article) had said the rules catch sub-contracts to perform “integral” (or core) functions in the business of the client, in distinction to “incidental” functions. He had said overnight floor cleaning of shops while closed was incidental only. Incidental functions are by nature not integrated in the client business, which in turn tells you what the true scope of the clients’ core business functions is.

The factual circumstances underlying both decisions and the examples the judges give in those decisions show the ground has moved a long way since Justice White first formulated the employment agency contract test to adopt in the UNSW case at the end of 2015. The other consequence of these case decisions is that the alternative ‘relevant contract’ rules for payroll tax liability have narrower application than historically believed, and the difference results in a shift in which entity in the chain of hire is primarily liable for any payroll tax.



Andrew White



Graham Warren

Special Counsel