ACCA Advanced Taxation (ATX) Practice Exam

What is the formula to calculate CGT relief withdrawn on an arm's length basis?

1. (Amount of IT relief withdrawn + Gain) x Sales price

2. (Amount of IT relief withdrawn / Original IT relief given) x Gain

3. (All original IT relief - Amount of IT relief withdrawn) x 50%

4. (Sales proceeds - 50%) x Original IT relief

The correct answer is: (Amount of IT relief withdrawn / Original IT relief given) x Gain

The formula described in the correct choice is designed to determine the capital gains tax (CGT) relief that has been withdrawn on an arm's length basis. In this context, the calculation takes into account the amount of income tax relief that was initially granted and the total gain realized from the asset's sale. The reasoning behind this formula lies in its focus on the relationship between the amount of initial relief and the gain recognized upon disposal. By dividing the amount of IT relief withdrawn by the original IT relief given, the formula assesses the proportion of the relief that has been effectively retracted in relation to the total benefit originally conferred. Multiplying this fraction by the gain ensures that the impact of the withdrawn relief is accurately reflected in the calculation of CGT. This method is consistent with principles of tax law, where the goal is to determine the appropriate taxable amount based on the benefits received. The other choices do not correctly represent the steps or logical connections between the elements of relief and gain, leading to inaccuracies in the calculation of CGT relief withdrawn.