ACCA Advanced Taxation (ATX) Practice Exam

What is the implication of capital losses in terms of offsetting against income?

1. They can offset against income if classified correctly

2. They can be combined with income for tax purposes

3. Capital losses can only be offset against chargeable gains

4. They can be carried forward forever without restrictions

The correct answer is: Capital losses can only be offset against chargeable gains

Capital losses have specific implications when it comes to offsetting against other types of income for tax purposes. The correct response indicates that capital losses can only be offset against chargeable gains. This is fundamental to tax law, as it distinguishes between different categories of income and losses. Capital losses arise from the disposal of chargeable assets and are primarily designed to offset capital gains, reducing the taxable amount. In contrast, they cannot be used to reduce other forms of income, such as salary or rental income. This limitation ensures that capital losses are managed within the confines of capital gains, maintaining a clear separation between capital and income taxation systems. Understanding this concept is vital for taxpayers when planning their tax strategy, as it highlights the importance of recognizing the nature of losses and their appropriate applications in tax returns. Other options suggest incorrect treatments of capital losses, such as offsetting against income directly or carrying them forward without restrictions, which do not align with standard tax regulations.