ACCA Advanced Taxation (ATX) Practice Exam

What does the formula for gain after rollover relief typically compare?

1. Proceeds of sale against total selling expenses

2. Chargeable gain after sale against proceeds not reinvested

3. Initial investment against net present value

4. Fair market value against book value

The correct answer is: Chargeable gain after sale against proceeds not reinvested

The formula for gain after rollover relief typically compares the chargeable gain after a sale against the proceeds that are not reinvested. Rollover relief applies in specific situations where an asset is sold, and the gains are reinvested in a qualifying asset, thus deferring the tax liability on the gain. In the context of rollover relief, if a taxpayer sells an asset, they can potentially defer the capital gains tax by reinvesting the proceeds into a new asset. The chargeable gain is the profit made minus any allowable costs, and determining how much of this gain is taxable depends on how much of the sale proceeds have been reinvested. Therefore, the comparison focuses on the taxable gain (chargeable gain resulting from the sale) and the portion of the proceeds that are not allocated towards reinvestment, which are subject to tax. This approach effectively means that only the uninvested portion of the gain is considered taxable, aligning with the principles of rollover relief, which is designed to encourage investment by delaying tax liability until an event occurs where the funds are not reinvested.