ACCA Advanced Taxation (ATX) Practice Exam

When calculating the base cost of EMI shares, which factor is particularly important?

1. The total number of shares sold

2. The market value at the time of disposal

3. The amount subject to income tax on exercise

4. The share price at listing

The correct answer is: The amount subject to income tax on exercise

In the context of calculating the base cost of EMI (Enterprise Management Incentive) shares, the amount subject to income tax on exercise is particularly important because it directly impacts the cost basis used for future capital gains calculations. The base cost is essential for determining any gain or loss when the shares are ultimately sold. When employees exercise their stock options under EMI, the difference between the market value of the shares at that time and the amount they pay (if any) will be considered for income tax purposes. This amount becomes part of the cost basis for the shares. Therefore, it influences how the gains will be calculated upon the eventual disposal of those shares. The correct answer emphasizes the significance of understanding how this income tax amount plays a role in determining the overall base cost, which is pivotal for future tax calculations related to capital gains. Knowing the exact amount subject to income tax allows the shareholders to accurately assess their profit or loss when they decide to sell the shares. Other factors, such as the total number of shares sold, the market value at disposal, or the share price at listing, do not play a direct role in determining the initial base cost related to income tax liabilities. Instead, they are more relevant in broader aspects of share transactions or valuations rather than