ACCA Advanced Taxation (ATX) Practice Exam

For partnership shares purchased out of pre-tax remuneration, what is the nature of the cost?

1. It is a non-deductible expense

2. It is allowable as an investment deduction

3. It is deemed a personal expense

4. It is considered taxable income

The correct answer is: It is allowable as an investment deduction

When partnership shares are purchased out of pre-tax remuneration, the nature of the cost relates to how the investment is treated within tax legislation. The correct position is that this cost is allowable as an investment deduction. This means that when an individual invests in partnership shares using earnings before tax, they are permitted to deduct this investment from their taxable income, thereby reducing the total taxable amount. This treatment aligns with tax benefits aimed at encouraging investment in partnerships, as purchasing partnership shares can be seen as a way of obtaining a stake in a business venture, contributing to economic activity. By allowing the deduction, it acknowledges the nature of the expense as related to generating future income. Other potential options suggest characterization that does not align with tax policy regarding investment in shares. A non-deductible expense typically refers to costs that do not provide any tax relief; personal expenses usually do not qualify for business deductions; and taxable income would relate to income earned, not directly to the cost of investment. Thus, the option for investment deduction accurately reflects the tax treatment of the expense incurred for purchasing partnership shares.