ACCA Advanced Taxation (ATX) Practice Exam

For a depreciating asset under rollover relief, when is the gain deferred until?

1. When sold for a profit

2. At the end of the financial year

3. When the replacement asset is sold, no longer used, or 10 years after purchase

4. When the asset is fully depreciated

The correct answer is: When the replacement asset is sold, no longer used, or 10 years after purchase

Rollover relief is a mechanism that allows taxpayers to defer the gain on a depreciating asset when they sell it, provided that the proceeds are reinvested in a qualifying replacement asset. In this context, the gain is not immediately realized upon the sale of the original asset but is instead deferred. The correct answer indicates that the gain is deferred until certain triggering events occur: when the replacement asset is sold, when it is no longer used in the business, or after a period of 10 years from the date of acquisition of the replacement asset. This means that the taxpayer does not have to account for the gain at the point of sale of the original depreciating asset, thus providing immediate cash flow benefits while still ensuring that the gain is eventually taxed once the replacement asset is disposed of or ceases to be used. This approach is beneficial for businesses as it helps to facilitate asset exchange without an immediate tax burden, promoting investment in new assets. Understanding the specific timings for gain recognition within rollover relief is crucial for accurate tax planning and compliance.