H & R Block Basic Course Chapter 1

HINTS

· The primary document in this course is the I form. You should be thoroughly familiar with it by the end of the course. Have an unused copy that you can read through in your spare time so that you understand how it is set out. Take it to bed with you. Read it on public transport. If you want to print off another copy, there is a pdf on the CD that you were given.

· Your homework should be neatly set out. In tax work neatness is not just desirable; it is essential. A return may have to be studied and understood in a few years time because of an ATO audit.

· Note carefully the difference between:

1] Non-assessable income – this is often ‘windfall’ income such as non-professional gambling or lottery winnings, inheritance, or money which is found. It has no tax implications whatsoever.

2] Exempt income – e.g. exempt pensions, Defence Force Reserve pay. Even though it is exempt from tax, exempt income does have tax implications.

Question 1

NO	QUESTION	ANSWER
1	Give two reasons why it is important to determine tax residency status for an individual.	1] Non-residents only need to declare their Australian income. 2] To work out the basic tax owing correctly. 3] Non-residents are Medicare exempt. 4] Because interest, dividends and trust income are taxed differently in the case of non-residents.
2	How much must a non-resident have earned in Australia before being required to lodge a tax return?	$1
3	List three circumstances in which a tax resident must lodge a tax return even though their taxable income is below the tax-free threshold.	See list on p1.2 – 1.3. The most important are: tax credits to recover, running a business, having carry-forward losses, paying child support.
4	Andrew won a very large cash prize on a quiz show. Does he have to declare it on his return? ATP reference?	No. This kind of ‘windfall’ income is non-assessable, and has no tax implications. ATP 4.130.
5	If there is an error on an employee’s PAYG payment summary, what action must be taken, and why?	There are four copies of a payment summary: · One is sent to the ATO · One is retained by the employer · One is attached to the tax return · One is retained by the taxpayer When the ATO received the tax return it matches the payment summary lodged with its own copy of the payment summary. For this reason a payment summary cannot be altered. The employer must provide a letter correcting the error and showing the right amount, and forward a copy of the letter to the ATO so that everything matches.
6	Reportable fringe benefits are not included in taxable income but any shown on a taxpayer’s PAYG payment summary must be included in the taxpayer’s tax return. Why?	1] Affects some tax calculations such as Medicare surcharge and HECS. 2] Affects child support and entitlement to government benefits.
7	Samantha has a PAYG payment summary from her employer with no tax withheld. At what item on the I form should the details be recorded?	Item 2. Because no tax has been withheld the income is essentially treated as cash-in-hand income, and so goes at item 2.
8	Kyle is 23 years old and has a lump sum B amount of $1033 shown on her PAYG payment summary. Why is this an error, and what needs to be done?	Lump sum B only refers to unused long service leave accrued before August 16 1978. Therefore it must be a pay office error. She should contact the pay office and obtain a letter correcting the figures, and a copy of the letter should be sent by the employer to the ATO, so that everything matches.
9	After six complete years of service Alma accepts a redundancy package from her employer. Of the $34,700 she receives, how much will be tax-free and how is the balance treated?	6783 + (3392 x 6) = $27,135. This amount is tax-free and is listed as lump sum D. 34,700 – 27,135 = $7565 will be paid as an untaxed element of an ETP, and will go at item 4.
10	If a taxpayer has lost his PAYG payment summary and is unable to obtain a replacement copy from his employer, what should he do so that he can lodge a tax return for the relevant income year?	A special statutory declaration should be lodged with the return, showing an estimate of earnings and tax withheld, as accurately as can be calculated.

Question 2

PART	RESIDENT / NON-RESIDENT
Part A Steffan	1] He is living the lifestyle of an Australian resident: he has a settled abode, and has joined local clubs and charities. 2] If somebody comes to Australia for longer than six months for the purposes of pre-arranged employment or study, this settled lifestyle will normally be the case, and so the person will be a resident for tax purposes.
Part B Conchita	1] She is not living the lifestyle of an Australian resident. Rather, she is living the lifestyle of a holiday-maker: she is moving from one holiday resort to another in order to relax and renew her energy. 2] Even though she has been in Australia for more than six months, her lifestyle takes precedence. She is in a different position from somebody who may have been in Australia for a shorter time, but is here to study or work, and has a settled lifestyle.
Part C Jana	1] If a person is in Australia for less than six months they will normally be considered a non-resident, because such a short period is not seen as sufficient to establish a settled lifestyle. The only exception would be a person who intends staying for a longer period, but has to return home because of some sudden unforeseen circumstance such as family illness. For example, a person might have pre-arranged employment in Australia for two years, come out here with their family, take a 12 month lease on a house, and then have to suddenly return after only three months. For those three months they would be considered a resident for tax purposes because of their original intention. 2] Jana would be considered a resident for tax purposes: a) Pre-arranged employment b) Settled lifestyle c) Present in Australia for more than six months, even though her original intention was only to stay for five months.