ACCA Advanced Taxation (ATX) Practice Exam

When a loan is taken to acquire an investment property, how is it classified?

1. Trading

2. Non-trading

3. Capital

4. Non-capital

The correct answer is: Non-trading

When a loan is taken to acquire an investment property, it is classified as non-trading. This classification arises because investment properties are typically held for rental income or capital appreciation, rather than for resale in the normal course of business operations. In the context of taxation, non-trading activities generate different tax treatments compared to trading activities. Non-trading entities do not engage in buying and selling goods or services, which is characteristic of trading activities. Since the primary purpose of obtaining a loan for an investment property is to enhance wealth through long-term investment rather than to generate immediate profit from sales, it firmly falls under the non-trading category. Investment properties that are maintained for rental income or price growth illustrate this classification well. The returns derived from such an investment are not considered trading profits but rather income from an investment pathway, which is distinct in tax treatments and accounting from activities classified as trading. Understanding the nature of the loan and the intended use of the property is crucial as it influences how the financials will be treated in respect to tax liability and reporting. Loans related to non-trading activities such as investments in property tend to have different implications for interest deductibility and reporting requirements compared to loans tied to trading operations.