ACCA Advanced Taxation (ATX) Practice Exam

What tax implications follow if the sales proceeds from a rights issue are considered 'small'?

1. No implications, as they are ignored

2. They are treated as capital gains only

3. They do not result in part disposal of the original shares

4. They can lead to a deemed part disposal of the original shares

The correct answer is: They can lead to a deemed part disposal of the original shares

In the context of a rights issue, the tax implications that arise when the sales proceeds are considered 'small' can indeed involve a deemed part disposal of the original shares. This concept centers around how capital gains tax is applied when shares are sold or disposed of. When proceeds from a rights issue are minimal, tax legislation allows the disposal of shares to be considered a part disposal of the original shares held. This means that the gains realized from these small sales can trigger capital gains tax implications, which may not be the case had the sales proceeds been significant. A deemed part disposal is acknowledged as it affects the overall base cost of the original shares, potentially altering the capital gains calculations for future disposals of those shares. The answer indicating that they can lead to a deemed part disposal highlights the significance of understanding tax rules around disposals and capital gains. This is relevant for shareholders because they must accurately report these disposals to ensure compliance with tax obligations and to understand the potential tax liabilities arising from their investment activities. This understanding helps in properly assessing future capital gains on remaining shares, given that the base cost of the original holding may be adjusted due to these small disposals.