ACCA Advanced Taxation (ATX) Practice Exam

How does rollover relief apply to proceeds from a sale when calculating gains?

1. It reduces taxable income directly

2. It affects only investment properties

3. It compares chargeable gain against not reinvested proceeds

4. It is irrelevant to capital gains calculations

The correct answer is: It compares chargeable gain against not reinvested proceeds

Rollover relief is a significant relief in capital gains tax that allows taxpayers to defer the payment of tax on capital gains when they reinvest the proceeds from the sale of an asset into a qualifying replacement asset. When calculating chargeable gains, rollover relief specifically looks at the proceeds from the sale and the amount that is reinvested. By comparing the chargeable gain against the proceeds that have not been reinvested, rollover relief effectively allows taxpayers to reduce the immediate taxable gain based on how much of the sale proceeds they have chosen to reinvest into similar assets. This mechanism is essential for encouraging reinvestment and can help to mitigate the tax burden when selling one asset and purchasing another. The other options do not accurately describe the mechanism or application of rollover relief. For instance, while it may seem reasonable to think that rollover relief reduces taxable income directly, it’s more accurate to say it defers gains rather than reducing income. The notion that it only applies to investment properties overlooks that rollover relief can extend to a broader range of assets under specific qualifying conditions. Lastly, claiming that rollover relief is irrelevant to capital gains calculations contradicts the intent of this tax provision, as it explicitly supports the calculation process by offering deferment based on reinvestment.