Update: Taxation of Premium Exercise Price Options (PEPOs)

PEPOs are used by some companies by applying a sufficient premium to produce a nil value for employee share scheme (ESS) taxing purposes when the taxation valuation approach available under the Regulations is applied.  When such PEPOs are not at risk of forfeiture they are taxable at grant under the ESS taxing provisions on a nil value. 

In a new release by the Australian Taxation Office (ATO) – ATO ID 2012/68 - it accepts nil taxable value for the employee under the ESS taxing provisions but finds that the market value of the PEPOs is taxable for fringe benefits tax (FBT) purposes to the company.  This arises because the ESS option valuation method in the Regulation does not apply for FBT purposes and therefore another method needs to be used.  Other valuation methods would attribute a market value to the PEPOs and therefore the company would be liable for FBT on the grant in the year of the grant.

PEPOs which have a taxable value for ESS taxing purposes are not liable for FBT no matter how small the ESS taxable value.

Companies using PEPOs need to be aware of their potential FBT liability and should review the premium attached to future grants of PEPOs.