ACCA Advanced Taxation (ATX) Practice Exam

What tax is applicable during the 3 to 5-year holding period for SIP shares?

1. Only capital gains tax is applicable

2. Income tax on the initial market value of the shares

3. No tax implications occur

4. Income tax on dividends only

The correct answer is: Income tax on the initial market value of the shares

The correct answer relates to the tax implications of holding shares in a Stock Incentive Plan (SIP) during a specific period. When shares are held under a SIP, particularly for a duration of 3 to 5 years, the participant may be liable for income tax on the initial market value of the shares at the time they are acquired through the plan. This initial market value is considered as taxable income since it represents a benefit provided by the employer that should be subject to tax. During this period, although capital gains tax may be relevant for any increase in value when the shares are eventually sold, the key taxable event during the holding period is the income tax on the initial share value. This is because the shares could be seen as a taxable benefit in kind, thereby making this income tax applicable. Thus, the tax on the initial market value of the shares reflects the taxable event triggered when acquiring the shares rather than any potential capital gains or dividends that may arise later. This understanding is crucial for individuals participating in SIPs, as it affects their tax liabilities during the holding phase of the shares. The other options present scenarios that do not accurately reflect the tax treatment during the specified period for SIP shares, as they overlook the immediate tax implications tied to the