ACCA Advanced Taxation (ATX) Practice Exam

What happens to a loss on disposal to a connected person?

1. It can be used against any future gain

2. It can only be used against future gains to the same connected person

3. It is lost for tax purposes

4. It can be carried forward indefinitely

The correct answer is: It can only be used against future gains to the same connected person

When a loss on disposal occurs involving a connected person, the treatment of that loss is notably specific. The correct understanding is that the loss can only be utilized against future gains that the same connected person might realize. This emphasizes the principle of keeping transactions between connected parties distinct from those involving unrelated individuals. Essentially, if the loss was incurred in a transaction involving a connected person, it aligns with tax rules designed to prevent manipulation of losses for tax benefits. Since the aim is to ensure that tax advantages aren't unjustifiably exploited within closely held relationships, the loss becomes restricted to future gains realized by that same connected party. This approach maintains the integrity of the tax system by ensuring that losses between connected parties are not applied broadly against unrelated parties or general gains. Consequently, any loss on disposal in this context cannot be freely utilized against unrelated gains or indefinitely carried forward without restrictions.