ACCA Advanced Taxation (ATX) Practice Exam

What does terminal loss relief offset against?

1. Total income

2. Fringe benefits

3. Trading profit only

4. Capital gains

The correct answer is: Trading profit only

Terminal loss relief is a provision that allows businesses to claim relief for losses incurred in their last trading period against previous trading profits. This means that terminal losses can be set off against profits that the business made in the prior accounting periods before ceasing operations. When considering the options, trading profit is the only category of income that directly relates to the losses incurred from trading activities. Therefore, terminal loss relief can effectively reduce the trading profit of earlier years, allowing the company to receive a tax refund or reduce their tax liability. The other options do not apply to terminal loss relief. Total income encompasses all sources of income, including investments and rental income, which are not related to trading; fringe benefits specifically refer to non-cash benefits provided to employees and do not connect to losses from trading activities; and capital gains relate to profits from the sale of capital assets, which are distinct from trading profits. Thus, terminal loss relief is specifically designed to offset trading profit only.