ACCA Taxation (F6) Practice Exam

What is the tax treatment when gross proceeds exceed £6,000 but the cost is less than £6,000?

1. The taxpayer is taxed on the normal gain

2. The taxpayer is taxed on the higher of normal gain or gross proceeds

3. The taxpayer is taxed on the lower of normal gain or 5/3 (gross proceeds - £6,000)

4. The taxpayer is exempt from CGT in this situation

The correct answer is: The taxpayer is taxed on the lower of normal gain or 5/3 (gross proceeds - £6,000)

When gross proceeds from the disposal of an asset exceed £6,000 and the cost of that asset is less than £6,000, the tax treatment is outlined by specific rules relating to gains and thresholds. In this scenario, the correct choice indicates that the taxpayer is taxed on the lower of the normal gain or a calculated amount based on a formula involving the gross proceeds. The rationale for this treatment stems from provisions in capital gains tax legislation aimed at simplifying the tax burden on individuals disposing of small assets. Here, the threshold of £6,000 plays a crucial role; it serves as a limit that determines the amount of taxable gain. When the cost of the asset is less than £6,000, the situation suggests that there is potential for a minimal gain, but not necessarily a substantial tax on the gain achieved from the sale. Therefore, the formula involving 5/3 of the excess of gross proceeds over £6,000 is employed. This methodology ensures that the taxpayer benefits from a more favorable calculation where the tax impact is limited to the lesser of the straightforward gain or the defined formula. In this way, the chosen option reflects the intention of providing a tax-deductive advantage to individuals who might be realizing modest gains, preventing