Dental service organisation Pacific Smiles Group (ASX: PSQ) has received a Determination Letter from Revenue New South Wales concerning the treatment of its Services and Facility Agreements (SFAs) with dentists for payroll tax purposes. The authorities claim that the fees held by dentists in Pacific Smiles’ embrace should face the payroll tax guillotine. Pacific Smiles, however, does not share that view.

According to Revenue NSW, the fees retained by dentists working with Pacific Smiles under relevant contracts will be subject to payroll tax, unless specific exemptions apply. Revenue NSW’s Determination references a recent payroll tax case involving Thomas and Naaz Pty Ltd, a GP clinic operator, in the NSW Civil and Administrative Tribunal. Pacific Smiles is carefully reviewing the Determination and seeking legal advice. 

The Company, which has been offering SFAs to dentists for over 20 years, disagrees with Revenue NSW’s views expressed in the Determination and intends to submit a detailed response.

Currently, no payroll tax assessment has been issued by Revenue NSW. If Revenue NSW’s position withstands the challenge, the maximum amount potentially due for the 2023 financial year would range between $2 million and $2.5 million. However, this estimation would need to be reviewed on a contract-by-contract basis, considering other available payroll tax exemptions.

Revenue NSW retains the right to retroactively assess Pacific Smiles for payroll tax dating back to the 2019 financial year and impose penalties and interest. The result of Pacific Smiles’ discussions with Revenue NSW will determine the amount they may need to pay.

Pacific Smiles Group operates dental centres not only in New South Wales but also in Victoria, Queensland, and the Australian Capital Territory. In addition, the Company manages dental centres in Western Australia under a Managed Service Agreement called HBF Dental.

Considering Revenue NSW’s Determination, Pacific Smiles intends to initiate early discussions with revenue authorities in Victoria, Queensland, and the Australian Capital Territory to understand their stance on similar issues. Notably, Western Australia’s payroll tax legislation does not impose a payroll tax on relevant contracts.

Pacific Smiles highlights that the imposition of payroll tax on dentist service organizations and other medical clinic operators would result in increased fees and charges for patients going forward. This development could have adverse effects on millions of Australians who require primary health care, including dental services. As no additional payroll tax assessment has been issued and Pacific Smiles is expected to formally oppose any such assessment, the Company has not made any provisions for this matter.

Furthermore, Pacific Smiles has recently appointed two new Non-Executive Directors to its Board, Jodie Leonard and Steven Rubic, effective May 8, 2023.

Despite the ongoing payroll tax matter, Pacific Smiles affirms its commitment to achieving its Financial Year 2023 guidance. The Company expects patient fees of $270 million and underlying EBITDA of $24 million. This guidance includes a $3 million EBITDA drag from newly established centres that are currently operating at a loss. 

It also assured stakeholders that it will maintain transparency and promptly communicate any significant updates regarding this matter in compliance with its continuous disclosure obligations.

A battle of opinions awaits, as Pacific Smiles prepares to challenge the authorities’ tax grip, questioning the very foundation of their claim.