ACCA Advanced Taxation (ATX) Practice Exam

What occurs when non-share consideration is received upon incorporation?

1. A chargeable gain arises

2. No gain is realized

3. An immediate tax liability is triggered

4. It is treated as a gift

The correct answer is: A chargeable gain arises

When an individual or business receives non-share consideration upon incorporation, it results in a chargeable gain. This occurs because non-share consideration represents a form of compensation or value transferred to the individual incorporating the business that is not in the form of shares. In the context of incorporation, if a business owner receives assets or other benefits that exceed their adjusted basis in the property transferred to the corporation, capital gains tax may be triggered on those assets. Essentially, the gain is calculated based on the difference between the market value of the assets (non-share consideration) received and the basis the individual had in those assets prior to incorporation. This treatment stems from the principles laid out in tax regulations where non-share consideration is treated differently from share consideration, which does not typically trigger immediate tax consequences upon incorporation. The recognition of gains ensures that taxpayers account for the economic value they receive in the corporate formation process. Conversely, other options like the absence of a realized gain or immediate tax liability do not apply in this context since a chargeable gain does arise from the receipt of non-share consideration.