Part 1 Question 1 SallyPeterSalary50000100000Managed Fund 3500Dividend1400 Franking credit600 Assessable income52000103500less Allowable Deductions Union fees600 less Allowable Deductions Donation 1200Taxable income51400102300Gross tax payable717223714less non-refundable tax offsets (i.e. LITO, LMITO) LITO229 LMITO1080711Less refundable tax offsets private health insurance rebate franking credit600 Plus Medicare Levy/ Medicare Levy Surcharge Medicare Levy10282046Medicare Levy Surcharge00Net tax payable629125049.50 Question 2 Personal insurance requirements Endowment life insurance is a combined death and savings policy. A large proportion of the premium is channeled into savings which traditionally has paid low returns. If the son requires a savings/investment vehicle, other opportunities exist which pay better returns. The son would be advised to acquire the following types of policies: Life insurance (preferably term insurance)Provides protection in event of premature death of policy holderTotal and permanent disability insurancepays benefit in event of insured becoming totally and permanently disabled and insured prevented from working in chosen occupation/ performing basic living activities.Income protection insuranceprovides an income stream in the event of incapacitation as a result of an accident or sickness and unable to work:typical coverage normally up to 75% of average pre-tax weekly income obtained from personal exertionTrauma insurancelump sum paid upon the insured being diagnosed with any one of a number of major critical illness, e.g. heart attack, malignant tumours, blindness, multiple sclerosis. benefit paid upon diagnosis, not death.provides lump sum when funds are needed most Question 3 A Will is a legal document signed by the Will maker, which disposes of the Will maker’s assets to their beneficiaries. It will determine: -who will be in charge of the administration of the Estate; and -how the assets of the Estate are to be distributed after death Question 4 Suggested solution: Investment recommendations Problem areas: couple does not possess adequate diversification (funds tied up in either property or fixed interest)other than managed funds and cash, there is little liquidity availableability to fund change in home from existing reservessuperannuation balance is relatively low for Sallylevel of debt outstanding given available assets and agefunds tied up in superannuation and allocated pension possess little growth prospectslongevity risk (retired early)as Peter is on a lower marginal tax rate, investments should be in his name Possible strategies: – look at moving into a less expensive beach home as probably unable to fund proposal look at obtaining greater diversification from investments (e.g. exposure to shares). Probably advise to commence investing into an appropriate balanced managed fund. need to invest at least part of the superannuation and allocated pension into some growth type asset classes. Otherwise there is the risk that the funds may not last for the couple’s life expectancylook at feasibility of selling investment property and paying off loan. However, would need to consider CGT implications of selling investment Property. as funds become available (term deposit, savings) pay off credit card, investment loan and mortgage. All debts should be paid off prior to Sally’s retirement.ensure couple has appropriate and up-to-date Willsmaximize contributions into Sally’s superannuation (tax effective) Part 2 Question 1 Analysing the risk profile of an investor is one of the most important aspects of the planning process as it is a key factor in helping to formulate the asset allocation model of the portfolio and the selection of investments. Other important factors in determining the asset allocation model are client goals and objectives, lifestyle issues, time frame etc. The risk profile will help to assist in determining whether the asset allocation model will be conservative, balanced, assertive or aggressive. Once this is determined, the selection of investments can be made taking into account the importance of diversification. One of the problems that a Planner faces in the planning process of a client is in determining the best means of determining the risk profile of the client. There is no foolproof means for ascertaining this. Usually determined by asking a series of questions. Getting the risk profile wrong can lead not only to the recommendation of inappropriate investments, but also to the possibility of litigation if the client incurs losses. Question 2 Some possible financial objectives of a couple in their mid 40’s: To accumulate wealthPlan for possible retirement within next 10-15 yearsMaximise contributions to pension schemePay off any debt outstanding (house, car)Have sufficient funds to ensure children can be put through tertiary education where requiredHave sufficient liquidity for holidays, leisure pursuits etc.Estate planning It is very difficult for the planner to determine the exact needs and objectives of the client. Quite often, the client themselves will not be aware of exactly what they want. The skills for being able to extract the information from the client will come from experience and will include the ability to: Asking open ended questionsListening carefullyBeing able to ask the right questionsGaining the respect of the client so that they open up to you. Question 3 Question asks for future value for investment. FV = PV (1 + i)n = 20000 (1 + (.035/2))15×2 = 20000(1+.0175)30 =20000(1.68280 ) = $33656.00 (b) The expected balance of the savings account at the end of the 2-year term = the future value of the initial sum of $4,000 + the future value of the regular end- of-month payment of $500 The future value of the regular end-of-month payments will be: Need to determine the future value of an annuity i= 6 %/12 = .5% or .005; C= $500; n= 12 x 2 FV = C [((1+i)n -1)/i] = 500 [(1+0.005)24 -1 /0.005] = 500 (1.1272) -1 /.005 500 (25.44) = $12,720 The future value of the initial sum will be: FV = PV(1 + i)n = $4,000 (1 + 6% / 12)24 = $4,000 (1.1272) = $4,508.80 The expected balance at the end of the 2-year term will be $17,228.80 ($12,720 + 4,508.80). Question 4 (a) His employer must contribute 9.5% of his taxable income. 42,000 x 9.5% = $3,990Outline two strategies that Jason could adopt to increase his superannuation balance in retirement. Firstly, he could make concessional contributions – tax deductible contributions e.g. salary sacrifice. This is a tax-effective means of investing in superannuation, especially if marginal tax rate is above 15%. He can also make personal voluntary contributions after tax (Non concessional contributions). Contributions made by an employee from their ‘after-tax’ monies which is invested towards their own superannuation fund, are classified as non-concessional contributions, and can be made at any time. As personal contributions are made from after-tax income, they are treated as non-concessional contributions, therefore not subject to the 15% contribution tax. They also form part of the tax-free component when eventually withdrawn upon retirement. Another option is to contribute for longer by working longer. He could also increase the risk he takes with his superannuation as greater risk, this may result in greater return and increase his savings in retirement. Question 5 (a) Calculate the amount of age pension payable to Deborah under the asset test. Deborah is 67, has reached the eligible age for pension. Asset test Assessable assets: Contents40,000Savings account10,000Term deposit30,000Managed fund50,000Investment property160,000Total290,000 Pension equal to full pension $850.40 less reduction amount Reduction amount ($290,000 -268,000)=>($22,000 ÷ 1000) x 3 = 66=>860.60-66=>794.60 + 37.40 + 14.10 = $846.10 (290,000 – 268,000) = 22,000 /$1000 x $3 = $66.00 Pension = $860.60 – $66.00 = $794.60 Full pension $794.60 + Pension supplement $37.40 + Energy supplement $14.10 = $846.10 total payment Eligibility to the age pension is based on an assessment to both the assets and income test whichever gives the lower payment, as well as meeting the pension age eligibility. Income test Rental property income (fortnightly) $7500/26 = $288.46 Asset subject to deeming: Savings10,000Term deposit30,000Managed investment50,00090,000 First $53.000 assessed at .25% = $132.50 Excess over 53,000 ($37,000) assessed at 2.25% = $832.50 Total deemed income (fortnightly) = $965/26 = $37.12 Total fortnightly assessable income = $288.46 + $37.12 = $325.58 Pension equal to full pension $860.60 less reduction amount ($325.58 – $178= $147.58 X 0.50 = $73.79) equals $786.81 per fortnight. Total payment $786.81 + Pension supplement $37.4 + Energy supplement $14.10 = $838.31 Deborah is entitled to a pension based on the test which provides the lower payment i.e. $$838.31from income test. Question 6 Capital loss on sale of property: $150,000 – $180,000= (-$30,000) Capital gain on disposal of shares: CGT discount method: 50% of gain = 50% x 40,000 = $20,000 or Frozen indexation method: $45,000 x 68.7/66.9 = $46,210.76 Note: 66.9 is the indexation factor for June 1997. $85,000 – $46,210.76 = $38,789.24 Use the method that gives lowest capital gain i.e. CGT discount method Net capital gain: Gross capital gain 40,000 Less capital loss ($30,000) Net capital gain $10,000 Taxable capital gain @ 50% =$5,000 Notes: Property is acquired after September 1999, CGT discount method applies, but there is a capital loss and discount doesn’t apply to capital loss. Shares are acquired after September 1985 and before September 1999, apply both methods and choose the one which gives lowest capital gain. Discount factor is only applied after offsetting any capital losses made.
