H & R Block Basic Course Chapter 3

HINTS

• Trust statements can be tricky at first. Remember that the figure that goes in the income column on the I form must have the tax on that income included. This principle is exactly the same as for salary/wage income, and all other income on the I form except item 11.
• The undeducted purchase price (UPP) represents the taxpayer’s own contributions which they have not been able to claim as a tax deduction, because only people who are primarily in business or don’t have employer super contributions can claim a deduction. Note the special rules for calculating UPPs on government UK, Dutch, and Italian pensions (around the world most government pensions are contributory. Australia is an exception in this regard).
• Any taxpayer who was under 18y on June 30 (birthday after June 30 1989) MUST have item A1 filled in on their I form. It is easy to confuse the two kinds of minor’s income. Remember that basically EXcepted income is EXertion income.

Question 1

a) Remember – the assessable amounts must have the tax included.

164.33 (this includes the 65.55 franking credit).

9.86 (this includes the 2.44 tax withheld. 7.42 was actually received plus 2.44 = 9.86 assessable).

TOTAL $174 assessable.

b) A cash management trust. The trust statement issued should not be confused with a notification of term deposit interest. Be careful.

c) At item 17. ‘Did you have a capital gains event during the year?’ should be Y, even if it is only a distribution from a trust.

d) Dividends are declared for the financial year of the date of payment.

Trust distributions are declared for the financial year notified, irrespective of when the distribution was paid.

The reason is that trusts have the same financial year as individuals, and so the income will not be finalised until the next financial year. Companies have a different financial year.

Question 2

a) The income will be exempt, since he was employed for more than 90 days continuously. He should fill out the net income after deductions at label 19N.

He does not get a foreign tax credit on this exempt income, and he doesn’t need receipts for the deductions against this exempt income.

b) NO. He only shows the gross amount received with a foreign tax credit for any withholding tax.

c) She will get a tax credit for the New Zealand tax that she has paid. If New Zealand tax rates are higher than Australia’s tax rates, the credit will be limited to what she would pay in Australia.

d) Exempt. A ten day return to Australia for an emergency would not break his continuity of employment. Therefore the income would go at label 19N on his Australian tax return.

Question 3

a) He has elected that the first $1000 of the discount value of the employee shares will be exempt from tax. The discount amount over $1000 must be declared in the year of issue of the shares at item 22 category 1.

b) The discount amount is 5500 – 4000 = 1500; 1500 – 1000 = 500 must be declared at item 22 category 1.

c) If they were not qualifying shares then the whole discount must be declared in the year of issue. He has no choice. So he must declare 1500 at item 22 category 1 for the year that the shares were issued to him.

Question 4

a) His taxable professional income is 25780 – 2094 = 23686 which is written at label 22Z.

b) The amount written at item A1 is the excepted net income, i.e. his exertion income or ‘adult’ income. So 8047 – 45 = 8002 is written at item A1, as well as on the I form in the normal way.

TRUST INCOME CODES

The main ones to remember are M (cash management trusts), D (deceased estates – not for the basic course) and P is the most likely code for public managed funds. Here is a full list:

CODES

nearly all H & R Block client trust income will code P (managed funds), M or D.

MISCELLANEOUS TRUSTS		DISCRETIONARY TRUSTS (‘FAMILY TRUSTS’) Distributions are made at the discretion of the trustee. The distributions are often timed to minimize beneficiaries’ tax liability.		FIXED TRUSTS Nearly always public trusts. The investors have fixed entitlements according to their interest: usually the number of units held.
DECEASED ESTATE	D	Service trust – trust established to provide services (e.g. office space, assets) to operating business entities.	S	Public unit trust listed on stock exchange	P
		Trading trust – a business trust, set up in preference to a company.	T	Public unit trust not listed on stock exchange	Q
CASH MANAGEMENT A cash management trust only earns interest. It is easily confused with a term deposit bank account.	M	Investment trust – discretionary trust investing in shares, property etc.	I	Fixed unit trust other than the above	U
		HYBRID TRUST Partly fixed, and partly discretionary.	H	Fixed trust other than the above	F