Chief Commissioner cleans up again in payroll tax dispute

The New South Wales Court of Appeal has unanimously dismissed an appeal by commercial cleaning companies SKG and Ezko against the decision of Justice Hmelnitsky at first instance. In this article, we discuss SKG Cleaning Services Pty Ltd v Chief Commissioner of State Revenue [2026] NSWCA 122 (SKG Cleaning).

This is the latest decision in a line of cases in which the Chief Commissioner has successfully argued that outsourced services contracts performed using subcontracted workers constitute "employment agency contracts" under s 37 of the Payroll Tax Act 2007 (NSW) (the Payroll Tax Act), thereby attracting payroll tax on amounts paid to subcontractors.

The employment agency contract provisions have been the subject of significant litigation in recent years, with the Chief Commissioner targeting a variety of industries including security, retail (e.g. trolley collection) and cleaning. Any business that provides regular, onsite services that are integral to its clients’ operations should consider whether there is potential exposure to payroll tax under the employment agency provisions.

Employment agency contracts and the “in and for” test

Broadly, a contract is an employment agency contract if it is a contract under which a person (i.e. the employment agent) procures the services of another person (a service provider / subcontractor) for their client. Where an employment contract exists, the person who is the employment agent is liable to pay payroll tax on the “wages” paid to the subcontractor for the services provided in connection with that contract. 

The Courts have held that services being procured by an employment agent are “for a client” if they are services that are provided “in and for” the client’s business. Whether services are procured “in and for” a client’s business requires a consideration of the connection between the services performed under the contract in question and the ordinary conduct of the client’s business. This is a question of fact and degree.

Control is not determinative

In assessing whether services procured are “in and for” a client’s business, Revenue NSW and the Courts often have regard to a number of indicia, including whether or not the client has a significant degree of control over the workers performing the services under the contract. 

In SKG Cleaning, the taxpayers contended that a number of the contracts held by Hmelnitsky J to be employment agency contracts were not such contracts because those contracts merely described the cleaning work to be done and when that work was to be done, but did not give the client any control over who performed the work or how that work was to be performed. 

Justice Ball of the Court of Appeal, with whom Leeming JA and Free JA agreed, rejected this contention, finding that the focus on control to the exclusion of other considerations was overly narrow. His Honour then went on to observe at [49]:

Relevant to the question whether liability for payroll tax might be avoided is the extent to which, in the normal course of events, it could be expected that the relevant activities would be undertaken by employees of the client if they were not supplied by an employment agent under an employment agency contract. The degree to which the client has control over the activities of the service provider may assist in answering that question, but it is not necessarily determinative. [Emphasis added.]

The Court of Appeal agreed with Hmelnitsky J that the correct focus is on the closeness of the relationship between the services (i.e. cleaning services) and the ordinary conduct of the business requiring those services. The nature of the businesses carried on by the taxpayers’ clients meant their business premises would require regular and continuous cleaning (i.e. the cleaning of premises occupied by a business is typically part of the ordinary activities of that business), being the type of regular and continuous cleaning performed by the subcontractors under the contracts the subject of the appeal:

[i]n the normal course of events, it is to be expected that as part of carrying on their ordinary business those clients would employ cleaners to undertake that work, unless the work was performed by a commercial cleaning business. In each case, the work required to be performed by the service providers under the contracts between the appellants and their clients was of that nature. (At [55].)

While the contracts in question on appeal were described as “no-indicia” contracts by the taxpayers and as “no control” or “limited control” contracts by Ball JA, it was observed that the degree of control that was given to the clients under the contracts (such as by requiring only persons of “proper character” be employed and permitting a client to object with due cause) was sufficient to reinforce the conclusion that the contracts were employment agency contracts. 

Key considerations for taxpayers

This decision confirms that whether a contract is an employment agency contract requires a consideration of the degree of connection between the ordinary activities of a client’s business and the services being provided under the contract. This is a question of fact and degree and the presence or absence of any one indicia (such as control over the activities of a service provider) while relevant to the analysis is unlikely to be determinative. 

It is also important to note that the Court of Appeal did not find that all subcontracted cleaning services will be employment agency contracts because it is possible to envisage there are cleaning services which would not normally be expected to be required by a business. For example, Ball JA specifically acknowledged that cleaning services that are of a specialised nature and only need to be performed infrequently, like external window cleaning on high-rise buildings, may not be caught as they may not be a service which is ordinarily expected to be undertaken by the client’s business. 

Finally, the decision highlights the importance of properly documenting service arrangements and maintaining proper records. The Court of Appeal noted that a number of the contracts which the Court had been asked to characterise were materially incomplete and missing terms. The incomplete nature of the contracts meant that the taxpayers could not discharge their onus of proof (i.e. that the contracts were not employment agency contracts). 

Our team has deep expertise in tax advisory and dispute resolution. We can assist taxpayers with undertaking a risk assessment and recommending a strategy to mitigate against any tax risks identified. If you would like to discuss these issues further, please contact Annemarie Wilmore, Julian Wan or Gina Iskander.