ACCA Taxation (F6) Practice Exam

If an asset is destroyed, what are the deemed proceeds for capital gains tax purposes?

1. The market value of the asset just before destruction

2. The cost of replacing the asset

3. The compensation received

4. The original purchase price of the asset

The correct answer is: The compensation received

For capital gains tax purposes, when an asset is destroyed, the deemed proceeds are based on the compensation received. This is because capital gains tax is concerned with the gain or loss realized upon the disposition of an asset, which in the case of destruction, is typically considered to be the amount that an individual or entity receives in compensation for their loss. If an owner receives compensation for a destroyed asset, that amount is treated as proceeds from the disposal of the asset, reflecting the financial outcome of the event. This ensures that the tax treatment aligns with the reality of how much the owner has effectively lost or gained financially due to the destruction. Although the market value of the asset just before destruction might seem relevant, it does not form the basis for deemed proceeds in this scenario. The cost of replacing the asset and the original purchase price of the asset also do not apply, as they do not directly represent what the owner has received or will receive in compensation for the loss of the asset. The focus on actual compensation received provides an accurate reflection of the economic transaction that has taken place in the event of destruction.