Labour hire and employment agencies operate a business model where the agency employs or engages workers and supplies them to host employers. The margin business — paying workers one rate and billing clients a higher rate — sounds straightforward, but the bookkeeping involves high-volume payroll, mandatory state licensing compliance, specific GST on labour supply, and an increasingly scrutinised worker classification landscape. This guide covers the key compliance areas.
Labour Hire Licensing Obligations
Since 2019-2020, labour hire licensing laws have been enacted across multiple states and territories. Victoria (Labour Hire Licensing Act 2018), Queensland (Labour Hire Licensing Act 2017), South Australia (Labour Hire Licensing Act 2017), and the ACT all require labour hire providers to hold a current licence before supplying workers. Similar legislation is proposed in other jurisdictions.
The licensing obligation falls on the provider (the agency supplying the workers), not the host (the business receiving the workers). However, host employers also have obligations: they must only engage licensed providers. A host that knowingly engages an unlicensed provider commits an offence.
From a bookkeeping perspective, the licensing fee (typically an annual charge based on the size of the business) is a deductible operating expense. The bookkeeper must also maintain records to support licence renewal — income from labour hire activities, number of workers supplied, and evidence of compliance with other conditions specified in the relevant state Act.
PAYG Withholding on Labour Hire Workers
Labour hire workers placed with host employers are, in virtually all cases, employees of the agency for PAYG withholding purposes — or, where genuinely in business for themselves, contractors subject to the contractor PAYG withholding provisions under Subdivision 12-BF of Schedule 1 of the Taxation Administration Act 1953.
The contractor withholding provisions (s.12-60 of the TAA Schedule 1) require labour hire firms to withhold PAYG from payments to working contractors — workers who are not employees but who are placed with clients under a labour hire arrangement. The withholding rate defaults to the rate stated on the worker's Tax File Number declaration, or 45% if no TFN is provided. This provision catches situations where the worker has structured themselves as a company or trust to receive their labour hire payments — unless an exemption applies (e.g., the worker can demonstrate they are not carrying on a personal services business).
The Superannuation Guarantee applies to labour hire workers at the standard SGC rate on their ordinary time earnings, regardless of whether they are employed under a contract or supplied through the agency. The agency — as the entity that employs or contracts directly with the worker — is the SGC obligor.
GST on Labour Supply
The supply of workers by a labour hire agency to a host employer is a taxable supply for GST purposes. The agency charges GST at 10% on its client invoice (the full billable amount, including the labour cost margin). The host employer has an ITC for the GST charged on that invoice.
This is one area where the principal-agent analysis matters. In some arrangements, the labour hire company merely introduces workers to clients — in which case only the agency's introduction fee (not the worker's wages) is the agency's taxable supply. But in a true labour hire arrangement — where the agency remains the employer and the host directs the worker's activities — the full charge-out rate is the agency's taxable supply.
Where a labour hire company on-charges worker expenses to the client (accommodation, travel, protective equipment), these on-charges are also taxable supplies unless specifically exempt. On-charged expenses do not retain the GST character of the original expenditure — the agency's supply to the client determines the GST treatment.
Billing and Margin Accounting
The core of a labour hire business's P&L is the spread between the charge-out rate (billed to the client) and the cost rate (wages, super, workers' comp, leave entitlements). The margin must be tracked per worker or per contract to identify profitable and loss-making placements.
Revenue is recognised when the labour service is provided — typically on a weekly timesheet basis. The bookkeeper should ensure client invoices are raised promptly after timesheet approval to avoid revenue recognition timing differences. A labour hire firm that raises invoices on 30-day payment cycles but recognises revenue only on cash receipt is misapplying AASB 15.
Leave entitlements (annual leave, long service leave) accrue on each payroll run and are a balance sheet liability. For labour hire companies with large permanent workforces, leave liabilities can be substantial. The on-cost calculation (leave loading, SGC on leave) must be included in the accrual.
Workers' compensation premiums are calculated on total remuneration paid to workers. Labour hire companies pay premiums in the state where the work is performed — not necessarily the state where the agency is registered. Multi-state operations require separate registrations and premium calculations in each jurisdiction. Misclassifying workers as contractors to avoid workers' comp exposure is a significant compliance risk and is closely monitored by state regulators.
Taxable Payments Annual Report (TPAR)
Labour hire companies are required to lodge a Taxable Payments Annual Report (TPAR) by 28 August each year, reporting all payments made to contractor workers during the previous financial year. This reporting obligation applies regardless of whether the workers are also subject to PAYG withholding under the contractor withholding provisions.
The TPAR requires the contractor's ABN, name, address, and the total of gross payments made. The ATO uses TPAR data to identify contractors who under-report income — particularly those who do not include labour hire income in their tax returns. Labour hire businesses that fail to lodge TPAR face penalties per contractor omitted.
How Reconlink Supports Labour Hire Agencies
Labour hire agencies handle hundreds of payroll disbursements weekly across multiple bank accounts — payroll accounts for workers, accounts receivable inflows from clients, workers' comp premium payments, and SGC payments. Reconlink imports all those transactions from your bank statements (CSV, Excel or PDF) — or you forward each statement to a per-client email inbox and it auto-imports. The automated coding rules distinguish between payroll outflows (coded to the correct cost-of-labour accounts), client receipts (coded to revenue by account reference), and compliance payments (workers' comp, SGC clearing). BAS export ensures GST on client invoices is correctly reported in G1, and contractor withholding remittances are coded to the correct PAYG liability accounts.