ACCA Advanced Taxation (ATX) Practice Exam

What is true about purchasing non-depreciating assets concerning deferred gains?

1. Deferred gains must always be taxed

2. They can be rolled over against the base cost of non-depreciating assets

3. They are lost if purchases occur outside the reinvestment window

4. They can be avoided through proper accounting

The correct answer is: They can be rolled over against the base cost of non-depreciating assets

The correct answer indicates that deferred gains can indeed be rolled over against the base cost of non-depreciating assets. This principle exists within tax regulations to support businesses that reinvest their gains in certain types of assets, allowing them to defer the taxation that would normally apply to those gains. When a business sells an asset and realizes a capital gain, rather than paying taxes immediately on that gain, it may have the option to reinvest the proceeds in qualifying non-depreciating assets. By doing so, the gains are essentially rolled into the new asset's purchase price, reducing the taxable amount at the time of reinvestment. This mechanism encourages investment by allowing businesses to defer tax liabilities until later, fostering growth and capital expenditure. In contrast, the other options illustrate different aspects of deferred gains that do not align with the principle of rolling over gains against asset costs. For instance, deferred gains being taxed at all times fails to acknowledge situations where reinvestment can defer those taxes. Similarly, stating that gains are lost when purchases occur outside a reinvestment window overlooks the possibility that businesses can still benefit from other tax treatments even if they miss specific timelines. Lastly, the notion that deferred gains can be avoided through proper accounting suggests a misleading understanding of tax obligations