WHEN DO SUBCONTRACTOR ARRANGEMENTS ATTRACT PAYROLL TAX?

The New South Wales Court of Appeal has confirmed that the payroll tax employment agency provisions can apply to outsourced cleaning arrangements even where the client has limited control over the individual workers performing the services.

In SKG Cleaning Services Pty Ltd v Chief Commissioner of State Revenue [2026] NSWCA 122, the Court held that the critical question is not simply whether a client controls who performs the work or how the work is performed. Rather, the inquiry focuses on the connection between the services provided and the ordinary activities of the client’s business.

The decision is particularly relevant to businesses that engage contractors or subcontractors to perform services that would ordinarily be undertaken by their own employees.

Background

The appellants, including SKG Cleaning Services Pty Ltd and entities associated with Ezko Property Services, operated businesses providing cleaning services to commercial and government clients in New South Wales.

The cleaning services were performed using a combination of the appellants’ own employees and subcontractors. The relevant client contracts ranged from short-form standard contracts to more detailed agreements with larger clients.

The contracts generally specified the nature, location and frequency of the cleaning services. For example, contracts required services such as emptying bins, wiping benches, cleaning sinks, vacuuming and mopping, with some services to be performed daily, weekly or fortnightly.

The Chief Commissioner assessed the appellants for payroll tax on the basis that the relevant contracts were employment agency contracts under section 37 of the Payroll Tax Act 2007 (NSW).

Where the employment agency provisions apply, the employment agent is taken to be the employer and payments made to the service provider are treated as wages for payroll tax purposes. The Queensland legislation contains substantially similar employment agency provisions, although the corresponding provisions are found in sections 13G to 13K of the Payroll Tax Act 1971 (Qld).

The appellants challenged the assessments, arguing, among other things, that the relevant contracts were not employment agency contracts because the clients did not have sufficient control over the individual cleaners or the manner in which the cleaning work was performed.

The Supreme Court rejected that argument. The appellants then appealed to the Court of Appeal.

The issue on appeal

The central issue was whether contracts under which cleaning services were provided to clients constituted employment agency contracts.

The appellants argued that a significant degree of client control over the workers or the manner in which they performed their work was necessary before a contract could be characterised as an employment agency contract.

In particular, they argued that the relevant contracts merely described what cleaning was required and when it was to be performed. They did not give the clients significant control over who performed the work or how the work was carried out.

The Court rejected that approach.

The Court of Appeal’s decision

The Court of Appeal unanimously dismissed the appeal and confirmed that the expression “for a client” in the employment agency provisions requires consideration of whether the services are provided “in and for” the client’s business.

The relevant question is therefore the connection between:

• the ordinary activities of the client’s business; and
• the services provided under the contract.

The Court emphasised that the degree of control exercised by the client over the service provider is relevant, but it is not determinative.

As a result, the absence of detailed control over individual workers does not, of itself, take a contract outside the employment agency provisions.

Control is relevant, but not the test

The appellants’ argument placed considerable emphasis on the traditional concept of control associated with an employment relationship.

The Court considered that approach too narrow.

The fact that a client does not determine which particular cleaner attends a site, or precisely how that cleaner performs the work, does not mean that the services are not being provided in and for the client’s business.

Instead, the Court’s analysis focused on the nature of the services themselves and their connection with the client’s ordinary business activities.

This is consistent with the earlier authorities concerning the employment agency provisions, including UNSW Global Pty Ltd v Chief Commissioner of State Revenue, Chief Commissioner of State Revenue v E Group Security Pty Ltd and Chief Commissioner of State Revenue v Integrated Trolley Management Pty Ltd.

The Court’s approach confirms that whether a contract is an employment agency contract is ultimately a question of fact and degree, having regard to the terms of the contract and the circumstances in which it operates.

Why were the cleaning contracts caught?

The relevant cleaning services were:

• regular and continuous;
• performed at the clients’ business premises; and
• services that would ordinarily be expected to be undertaken in the operation of businesses of that type.

The Court considered that, in the ordinary course, if the cleaning services were not supplied through the appellants, the clients would be expected to have their own employees perform that work.

That connection was sufficient to bring the arrangements within the employment agency provisions.

Importantly, the Court did not consider it necessary for cleaning to be part of the client’s core revenue-generating business.

For example, a retail business does not ordinarily operate a cleaning business. However, regular cleaning of its premises may nevertheless form part of the ordinary activities required to operate that business.

Accordingly, the fact that cleaning was ancillary to the clients’ core businesses did not prevent the employment agency provisions from applying.

Are all cleaning arrangements caught?

The decision does not establish that every contract for cleaning services will necessarily be an employment agency contract.

The Court recognised that some services may be sufficiently specialised or infrequently required that they would not ordinarily be expected to be performed by the client’s own employees.

The distinction is therefore between services that form part of the ordinary and ongoing activities of a business and services that are sufficiently separate, specialised or infrequent that they would not normally be undertaken by the client’s employees.

For example, a business that regularly engages cleaners to clean its premises may be within the employment agency provisions. By contrast, a business that engages a specialist contractor on an occasional basis to perform a highly specialised cleaning task may have a stronger argument that the services are not sufficiently connected with its ordinary business activities.

The importance of the contract

The decision also highlights the importance of the terms of the relevant contract and the evidence available to establish how the arrangement operates in practice.

Although the appellants argued that some contracts contained little or no indication of client control, the Court noted that some contracts nevertheless contained provisions dealing with matters such as:

• standards of work;
• worker suitability;
• background checks;
• security requirements;
• the client’s ability to object to particular workers; and
• reasonable directions.

Those provisions reinforced the conclusion that the contracts were employment agency contracts.

The case also demonstrates the evidentiary difficulties that can arise where contractual documentation is incomplete. A taxpayer seeking to challenge a payroll tax assessment bears the onus of establishing the matters necessary to demonstrate that the assessment is excessive.

Accordingly, businesses should retain complete copies of their contractor and subcontractor agreements, together with records demonstrating how those arrangements operate in practice.

Kara Bentley
Senior Associate