ACCA Advanced Taxation (ATX) Practice Exam

What are the conditions for qualifying loan interest payments to be deductible when buying shares in a close trading company?

1. The individual must be a minority shareholder

2. Ownership of 5% or more or a managerial role

3. Be employed in a non-managerial role

4. Only be a shareholder with no employment

The correct answer is: Ownership of 5% or more or a managerial role

For loan interest payments related to the purchase of shares in a close trading company to be deductible, the condition that the individual must own 5% or more of the company or hold a managerial role is essential. This provision is rooted in tax regulations that specifically allow for the deduction of interest payments on loans taken out to buy shares when the shareholder has a significant stake or an active role in management. Owning at least 5% aligns the shareholder's interests with the company's performance, ensuring that the interest is viewed as a legitimate cost of generating income from the investment. Additionally, being in a managerial position implies a role that can affect the company's operations and profits, which ties the interest expense to the shareholder's income-generating activities more closely. While minority shareholding and employment in non-managerial roles may have implications for tax treatment, they do not satisfy the criteria for deductibility as clearly as the requirement for ownership or management involvement. Therefore, the owner's stake in the company or role in management must meet specific thresholds to ensure that the expense can be justified as wholly, exclusively, and necessarily incurred for the purpose of trade.