ACCA Taxation (F6) Practice Exam

What happens to the taxable gain calculation if brought forward losses exist?

1. Brought forward losses are ignored

2. They increase the taxable gain

3. They are deducted from the gains

4. They convert gains into losses

The correct answer is: They are deducted from the gains

When brought forward losses exist, they play a significant role in the calculation of taxable gains. Specifically, these carried-over losses can be used to offset current year gains. This means that the losses are deducted from the total gains to arrive at the taxable gain figure. The purpose of allowing losses to be carried forward is to ensure that taxpayers are not unduly penalized for previous losses when calculating their tax liabilities in future periods. The deduction of these losses provides a more accurate reflection of the taxpayer’s economic position, as it recognizes that gains in a current period should be evaluated in light of previous periods' losses. Consequently, if a taxpayer had incurred losses in prior years and has gains in the current year, the taxable amount reflects only the net positive economic outcome after accounting for these losses. This mechanism exists to ensure fairness in taxation, thereby preventing taxpayers from being taxed on gains they may not have fully realized after accounting for past losses.