ACCA Advanced Taxation (ATX) Practice Exam

For directors, when is payment deemed to occur regarding bonuses?

1. On the day the bonus is announced

2. On the actual payment date or entitlement date, whichever is earlier

3. On the last day of the accounting period

4. Only when the earnings are reported on personal tax returns

The correct answer is: On the actual payment date or entitlement date, whichever is earlier

In the context of taxation for directors' bonuses, payment is deemed to occur on the actual payment date or the entitlement date, whichever is earlier. This interpretation is crucial for understanding when a bonus is recognized for tax purposes. When a bonus is declared, it creates a right for directors to receive that payment in the future. However, the actual tax implications are determined by when that right to receive the payment becomes effective. If directors have an entitlement to the bonus, it is recognized as income, and therefore, the date it becomes payable or the date they are entitled to it is significant. This approach aligns with the principles of income recognition in tax law, where income is often recognized at the point when the taxpayer has a right to receive it, which is legally enforceable. By using the earliest of these dates (either the actual payment date or the entitlement date), tax authorities ensure that income is reported in a timely manner when it is effectively earned and payable. The other options do not accurately reflect how payment is typically deemed for tax purposes. Announcing a bonus without having a clear entitlement or without it being payable does not constitute recognition for tax purposes. Similarly, the last day of the accounting period might not capture the actual timing of the director's right