Relations between two Sydney councils have become tense, with one sending another a bill for $22 million it demanded be paid in seven days, as the state government's plans to abandon council mergers threatens to set off some complicated financial disentanglements.

Under the state government's merger of councils, Parramatta absorbed territory from several of its neighbours, including Hornsby Council, last year.

But Parramatta council is demanding financial compensation for providing services to (while not raising rates from) its additional residents.

In a "letter of demand" this month, it gave Hornsby seven days to hand over $22 million in cash before taking the matter to court.