A plan to build Australia's largest brothel is poised to overcome local government opposition in a victory for Sydney's sex industry over creeping regulation.

The $12 million, three-storey extension to the Stiletto brothel near the city centre can be approved once client numbers are capped, commissioner Susan O'Neill of the Land & Environment Court of NSW said. Ms O'Neill asked for submissions from lawyers on how to limit customers before giving final approval.

Australia's biggest brothel may have overcome its final planning hurdle.

Such a ruling would be a victory for Artazan Property Group, the Sydney firm overseeing the project, and the state's sex industry.

Even after being decriminalised in 1995, NSW brothel owners are increasingly turning to courts to reverse rejections by councils opposed to the industry, said the Scarlet Alliance, which represents Australian sex workers.