ACCA Advanced Taxation (ATX) Practice Exam

If a company’s management changes completely without change in ownership, how are losses treated?

1. They can be carried forward without restriction

2. There is a restriction based on previous ownership

3. The losses are forfeited

4. Losses can only offset capital gains

The correct answer is: They can be carried forward without restriction

When a company's management changes completely but there is no change in ownership, the treatment of losses typically allows for the losses to be carried forward without restriction. This is because tax legislation generally stipulates that the continuity of ownership is a key factor when determining whether losses can be utilized by the company. In this scenario, since the ownership remains unchanged, the losses incurred by the company prior to the management change can still be carried forward to offset future taxable profits. This rule aims to support the continuity of the business operations despite changes in management, allowing the company to benefit from its previous tax losses without additional burdens. The other options suggest various restrictions or forfeiture of losses, which generally would apply in situations where there are changes in ownership that impact the company's identity for tax purposes. Since there is no ownership change here, those considerations do not apply, reinforcing why the losses can be carried forward without restriction.