ACCA Advanced Taxation (ATX) Practice Exam

In terms of tax treatment, what distinguishes an individual’s capital loss from a company’s?

1. Individuals cannot carry forward losses

2. Only companies can offset losses against income

3. Companies can only use losses in the year they occur

4. Individuals are limited on loss claims compared to companies

The correct answer is: Individuals are limited on loss claims compared to companies

An individual’s capital loss differs from that of a company primarily because individuals face specific limitations when claiming losses. Individuals can only offset their capital losses against capital gains in the same tax year. If their capital losses exceed their capital gains, they can carry the unused capital losses forward to future years, but they cannot offset these losses against other types of income, such as salaries or earnings from self-employment. On the other hand, companies have more flexibility when it comes to using losses. Companies can offset their trading losses against their profits from other sources and can carry these losses back to offset profits in previous periods as well, or carry them forward to future periods. This broader use is not available to individuals. Thus, the correct answer highlights that individuals are restricted in their ability to claim losses compared to companies, which is a fundamental aspect of tax treatment that affects how both entities handle their financial positions for tax purposes.