ACCA Advanced Taxation (ATX) Practice Exam

Which type of losses can be reallocated in a losses or gains group?

1. Capital losses

2. Trading losses

3. Both trading and capital losses

4. Other losses not specified

The correct answer is: Trading losses

In the context of a losses or gains group, trading losses can be reallocated among group members. This allows companies within the same group to effectively utilize trading losses against the profits of other group entities, thereby reducing the overall tax liability. Trading losses arise from the ordinary course of business operations and can be offset against profits generated by other companies within the same group. In contrast, capital losses, while they can be offset against capital gains, do not have the same flexibility for reallocation within a group as trading losses do. Capital losses can only be utilized against capital gains for the same tax entity and cannot typically cross over among different group companies. Other types of losses not specified may have their own rules, but they generally do not have the reallocation benefit that trading losses provide within a group context. Overall, the ability to reallocate trading losses enhances tax efficiency for companies operating in a group structure.