ACCA Advanced Taxation (ATX) Practice Exam

What should be the correct order of rearranging items in a CGT computation?

1. Capital loss brought forward, Trading loss converted to capital loss, Annual exempt amount

2. Trading loss converted to capital loss, Annual exempt amount, Capital loss brought forward

3. Annual exempt amount, Trading loss converted to capital loss, Capital loss brought forward

4. Trading loss converted to capital loss, Capital loss brought forward, Annual exempt amount

The correct answer is: Trading loss converted to capital loss, Annual exempt amount, Capital loss brought forward

In a Capital Gains Tax (CGT) computation, the order in which items are considered is essential to arrive at the correct taxable gain. The correct order starts with trading losses that may be converted into capital losses, as they can reduce the overall capital gain in the computation. By applying trading losses first, you effectively minimize the profit that will be taxed. Following the conversion of trading losses to capital losses, the annual exempt amount is then considered. This is a fixed amount that individuals can claim against their total capital gains, reducing their taxable gain. It is important that this exemption is applied after any losses have been taken into account, as it pertains to the net gain after losses have been considered. Finally, capital losses brought forward are taken into account. These are losses from previous periods that can offset current capital gains. Since they are used after the annual exempt amount is deducted, they further reduce the taxable figure. This sequence ensures that potential reductions in taxable gains occur in the most beneficial manner, making it the proper method for organizing the computation. Following this logical order guarantees the taxpayer maximizes their allowances and minimizes tax liability compliant with regulations.