ACCA Advanced Taxation (ATX) Practice Exam

What is the treatment of gains from a non-depreciating asset under rollover relief?

1. The gain is taxed at the standard rate

2. The gain is rolled over and deducted from the new asset cost

3. The gain is disregarded completely

4. The gain is delayed until the new asset is sold

The correct answer is: The gain is rolled over and deducted from the new asset cost

Rollover relief allows individuals or businesses to defer the tax on gains made from the disposal of certain non-depreciating assets, provided that the proceeds from the sale are reinvested into a new qualifying asset. In this context, the treatment of gains involves rolling over the gain into the cost basis of the new asset. When the gain is rolled over, it means that instead of being taxed immediately, the gain is effectively deducted from the cost of the new asset. This adjustment reduces the amount of gain that will be considered taxable when the new asset is eventually disposed of. Thus, the taxpayer does not have to account for the gain at the time of reinvestment, leading to an advantageous tax position by deferring the tax liability. This mechanism supports the continuous investment in assets without immediate tax implications, thereby encouraging economic activity and asset utilization. Rollover relief is especially beneficial for businesses looking to upgrade or replace assets without incurring an initial tax burden.