The Fundamentals of Superannuation - Assignment Example

Diploma of Financial Planning Module 3 Assignment Submission Instructions: Key steps that must be followed: 1. Please complete the Declaration of Authenticity at the bottom of this page. 2. Once you have completed all parts of the assessment and saved it (eg. to your desktop computer), login to the Monarch Learning Management System (LMS) to submit your assessment. 3. In the LMS, click on the file ”Submit DFP Module 3 Assignment” in the Module 3 section of your course and upload your assessment file/s by following the prompts. 4. Please be sure to click “Continue” after clicking “submit”. This ensures your assessor receives notification – very important! Declaration of Authenticity* I certify that the attached material is my original work. No other person’s work has been used without due acknowledgement. I understand that the work submitted may be reproduced and/or communicated for the purpose of detecting plagiarism. Student Name*: Date: * I understand that by typing my name or inserting a digital signature into this box that I agree and am bound by the above student declaration. Important assessment information Aims of this assessment This assessment covers the fundamentals of superannuation. It covers rules around contributing to superannuation such as the work test, as well as contribution limits (both concessional and non-concessional). Salary sacrifice strategies are addressed, as are the differences around a superannuation fund in accumulation phase versus pension phase. Tax consequences across contributions to super, money held within the accumulation phase, and lump sum withdrawal of benefits (inclusive of pension payments) is also explored. SMSFs are addressed including important tests such as the sole purpose test, and in-house asset test. The use of business real property including in-specie contributions into superannuation is also addressed in the context of SMSF strategies. Marking and feedback This assignment contains 4 assessment activities each containing specific instructions. This particular assessment forms part of your overall assessment for the following units of competency: FNSASICU503A FNSFPL502A FNSFPL503A If you are enrolled in SMSF units, the following units are also applicable. FNSSMS501A FNSSMS505A FNSSMS601A FNSSMS602A FNSSMS603A Grading for this assessment will be deemed “competent” or “not-yet-competent” in line with specified educational standards under the Australian Qualifications Framework. What does “competent” mean? These answers contain relevant and accurate information in response to the question/s with limited serious errors in fact or application. If incorrect information is contained in an answer, it must be fundamentally outweighed by the accurate information provided. This will be assessed against a marking guide provided to assessors for their determination. What does “not-yet-competent” mean? This occurs when an assessment does not meet the marking guide standards provided to assessors. These answers either do not address the question specifically, or are wrong from a legislative perspective, or are incorrectly applied. Answers that omit to provide a response to any significant issue (where multiple issues must be addressed in a question) may also be deemed not-yet-competent. Answers that have faulty reasoning, a poor standard of expression or include plagiarism may also be deemed not-yet-competent. Please note, additional information regarding Monarch’s plagiarism policy is contained in the Student Information Guide which can be found here: http://www.monarch.edu.au/student-info/ What happens if you are deemed not-yet-competent? In the event you do not achieve competency by your assessor on this assessment, you will be given one more opportunity to re-submit the assessment after consultation with your Trainer/ Assessor. You will know your assessment is deemed ‘not-yet-competent’ if your grade book in the Monarch LMS says “NYC” after you have received an email from your assessor advising your assessment has been graded. Important: It is your responsibility to ensure your assessment resubmission addresses all areas deemed unsatisfactory by your assessor. Please note, if you are still unsuccessful in meeting competency after resubmitting your assessment, you will be required to repeat those units. In the event that you have concerns about the assessment decision then you can refer to our Complaints & Appeals process also contained within the Student Information Guide. Expectations from your assessor when answering different types of assessment questions Knowledge based questions: A knowledge based question requires you to clearly identify and cover the key subject matter areas raised in the question in full as part of the response. Skill based questions: Where you are asked to write as though you are speaking to a client, your answers must show your ability to: understand your client’s concerns/perspective/views show empathy display a professional response explain ideas clearly and simply so your client can understand the issues Good luck Finally, good luck with your learning and assessments and remember your trainers are here to assist you  Activity instructions to candidates This is an open book assessment activity. You are required to read this assessment and answer all 10 questions that follow. Please type your answers in the spaces provided. Please ensure you have read “Important assessment information” at the front of this assessment Estimated time for completion of this assessment activity: 1-2 hours Required 1. What is the difference between a markets linked fund and a defined benefit fund? Market linked funds can be defined as the funds that are associated with the performance of the market. They allow for contributions to be made by both the employer and the employees. The members of the funds however have a strong interest in the performance of the fund where their money has been invested into. This is because it is this which determines the fund that each member is to receive. A defined benefit fund can be defined as a fund whereby the members who are the employees. This amount is determined through taking into full use a formula. This includes the final average salary of the employees. It also involves the date of retirement of the employees. This fund however has the trait of that the employees are less concerned with them while the employers pay special attention to it. The reason behind the lack of concern from the employees is that the same amount of payout is received regardless of the performance of the fund. The employers are more concerned on their part because they agree to make up on the shortfalls that may exist in case the monies are not adequate to cover the defined benefit pay out. 2. What is the maximum number of members a SMSF can have? Four members 3. Nancy who believes you might as well die when you retire, chooses to continue to work casually as a tour guide. She is 68 years old and works exactly 30 hours each month of the year. She wants to contribute her own funds into superannuation, and seeks your advice as to whether she is able to contribute to super to top it up. Can she contribute into her super fund, based on her age? Why or why not? No. Nancy cannot contribute because she does not satisfy the ‘work test’. Currently, she has an age of 68 years and would be required to be working for 40 hours during the month (30 day period) throughout the year so as to satisfy the ‘work test’. 4. Ignoring any potential Low Income Superannuation Contribution refund, excess contributions or additional tax for individuals earning over $300,000 p.a., what tax rate is applied to concessional contributions? Is the tax rate different for non-concessional contributions, and if so explain? The tax rate that is applicable to concessional contributions is 15%. The tax rate is different for non-concessional contribution since the contributions do not attract tax. This is because the tax has already been paid on them. 5. Explain how salary sacrificing can reduce a person’s marginal tax rate? The process of salary sacrificing reduces a person’s marginal tax rate by the concerned employee. This in turn directs the before tax salary to superannuation as contributions. In this case, the fund deducts 15 cents in the dollar in tax as opposed to the employee’s marginal tax rate that may be much higher. For instance, if an employee’s marginal tax rate is 37% and he sacrifices $10,000 of his salary, the $10,000 will attract 15% tax, which is much lower than the 37% marginal tax rate. 6. In the accumulation phase of a super fund, how much tax is paid on super earnings (eg. interest on cash)? 15% 7. In the accumulation phase of a super fund, what is the tax rate applied to capital gains that are generated from selling shares at a profit? 10% 8. In the accumulation phase of a super fund, if fully franked dividends are paid, would there be any net tax payable by the fund on those dividends (…disregarding any other income or capital gain from other assets)? Explain. The tax payable would be less than 15% on the fund’s earnings/ dividend. To avoid double taxation, the fund would receive an imputation credit for the pre-paid company tax. This hence means that no tax would be paid on the fully franked dividends. 9. In pension phase, what tax is payable on earnings? There is no tax payable on earnings in the pension phase. 10. John is 62 years old and is withdrawing the minimum amount required (under law) from his account based pension. (a) How much tax is payable on his investment earnings? No tax is paid (b) Would that change if he generated capital gains? Explain. No. No tax would be paid (c) Is the pension income he withdraws taxable? Why or why not? No. No tax is imposed on the pension income which he withdraws. This is because he is already aged above 60 years and is therefore not entitled to pay any taxes on his pension payments, because they are tax-free. (d) If John was 57, would the tax status on his pension income be different? Explain. Yes. The status that he has on the pension would be completely different. This is because the people who are aged below 60 years have their pensions divided into small components that are taxable and others that are not taxable. For the taxable component, this would attract taxes at his marginal tax rate and would as such be added to his taxable income. However, he would be entitled to receive a 15% tax offset for the taxable component. Assessment Activity 2 Case Study Superannuation Activity instructions to candidates This is an open book assessment activity. You are required to read this assessment and answer both questions that follow. Please type your answers in the spaces provided. Please ensure you have read “Important assessment information” at the front of this assessment Estimated time for completion of this assessment activity: 1-2 hours Background It is important to understand the workings of a financial planning office. It is likely that you will be looking after clients that have investments in superannuation across industry funds, retail funds, wholesale funds, corporate super funds and SMSFs. For clients that are in receipt of pension income, it is a requirement that all funds (except for SMSFs) provide a bank account into which pension income can be paid (at least annually). If the minimum pension at the end of the financial year has not been paid out (for whatever reason) from the super fund, all funds (except for SMSFs) will automatically pay the minimum out, whether the member likes it not, in order to comply with the prevailing legislation. The complexity exists when SMSF members are also the trustees. Sometimes SMSF members don’t remember to pay out the minimum pension income. Such clients often rely on you as the adviser to remind them of their obligations. The penalty for breaching the rules is harsh so it is important you ensure you have strict procedures in place to ensure none of your clients breach the law in regard to their superannuation obligations. Required 1. Explain 2 common sense procedures you could put into place in your office to ensure a client with a SMSF complies with their obligations to draw the minimum from their pension. The first process in the creation of the complete compliance with the obligations is informing the clients of the Rules and regulations which he should comply with. This is the first process in the creation of utmost compliance. The second process is notifying them of the effects of not complying with the regulations that are set and Put in place. This includes the fines and other penalties that would arise in this effect. 2. Your clients, Bob and Tamana Liu, have a SMSF and have just purchased a residential property at auction. They purchased this property with the intention of including it as an asset in their super fund. The property will make up about 98% of the total assets of the fund. They are both in pension phase, and ask you whether there are any issues they should know about. (a) Explain two risks of having one asset comprising such a big portion of the fund. The first risk that they face is the risk of loss of capital value. This is also known as the market risk. This occurs When the asset that is bought losses its value and the loan amount still has to be repaid in full. Another risk that they should be aware of is the risk of inflation. This is the substantial loss in the value of the assets. It is caused by market factors and or the change in the value of the local currency used in valuation of the asset. (b) Bob heard a friend talk about the “sole purpose test”. Explain to him what that test means. This is a test that is designed to ensure that the trustees have as their main objective the investment of funds for The purpose of providing benefits in retirement for its members. (c) What happens if the property couldn’t be tenanted for a significant period of time? Could your client move into it and pay rent to themselves? Explain. No. for residential properties, the tenant must be a related party. With this, they are not allowed to have any Share or to rent the property to related parties. (d) Explain the In-house asset rule? What percentage of In-house assets could your client have within their fund? The in-house asset rule states that a SMSF cannot purchase a residential property for investments purposes from The members if it comprises more than 5% of the portfolio. (e) Would your answer to question (c) above differ if the property was business real property and your client leased the property for their own business? Explain. Yes. For commercial property, the tenant can be a related party or an unrelated party under lease. This also applies to property acquired for individual use. Activity instructions to candidates This is an open book assessment activity. You are required to read this assessment and answer all 5 questions that follow. Please type your answers in the spaces provided. Please ensure you have read “Important assessment information” at the front of this assessment Estimated time for completion of this assessment activity: 1-2 hours Leah age 55 and her friend Sophie age 59 have come to your office to seek advice in regards to their superannuation. Leah has $320,000 in her superannuation accumulation fund which comprises $80,000 as a tax free component and $240,000 as a taxable component. Leah is planning to go an extended overseas holiday with her daughter as she has recently retired and would like to spend a year in Paris. She has a few questions she wants you to clarify. Required Provide a clear explanation to Leah for each of the following. a. Can Leah access her tax free component first as she wishes to use the $80,000 towards her trip and would rather keep the remaining $240,000 invested? No. of the first withdrawal, only the first 15,000 is tax-free. The remaining amount of 65,000 will be taxable for her. b. How much of the total $320,000 can Leah access as a lump sum tax free from her superannuation accumulation fund? She is entitled to a lump sum amount of $120,000. The rest has to be withdrawn in intervals. This is Because she is under the age of 60 years. c. At what age can Leah access all her funds tax free? On the attainment of 60 years, she will be able to access her funds tax free. d. Leah’s friend Sophie is considering setting up her own SMSF. She has $460,000 in superannuation. What options does Sophie have in terms of who can be the trustees of her SMSF? She can be the sole director of the trustee company She can also appoint a second person to be a trustee provided that there is no employer employee Relationship between the two unless they are relatives. e. Sophie has a beach house worth $310,000 which she only uses during the very warm months of summer. She wants her SMSF to purchase that house. Can she do so and what issues must she consider when using her SMSF to purchase assets? SMSF is prohibited from buying assets from members or other related parties. This has exemptions when; The property is business real property In-house assets are not valued at more than 5% of a fund assets If it is the case of term deposits If they are listed securities on an approved stock exchange Activity instructions to candidates This is an open book assessment activity. You are required to read this assessment and answer all 6 questions that follow. Please type your answers in the spaces provided. Please ensure you have read “Important assessment information” at the front of this assessment Estimated time for completion of this assessment activity: 1 hour Required 1. Explain why salary sacrificing is not suitable for all employees. The contributions will be taxed within your super fund at 15%. The tax may be payable when one withdraws the benefits from the funds The use of salary sacrifice could reduce the amount of SG that the employer pays. This needs clarifications with the employer. 2. What are the minimum and maximum amounts that must be withdrawn from a superannuation pension if the pensioner is under age 60? The minimum is 4% The maximum is 10% 3. Why is there a requirement for those accessing a superannuation pensions to withdraw a minimum amount? The main reason to put a minimum levels of accessing the superannuation premiums is to see to it that that is Equity in the levels of returns that are made. This is also in order to see to it that there is a balance in the deductions that are made. Through this, there will an improvement in the livelihood of the people. 4. What is the difference between a dependant for superannuation purposes and a dependant for taxation purposes? Former spouses make up the dependants for tax purposes but do not qualify for superannuation purposes. Children over 18 years of age make up the dependants under superannuation purposes but do not make up for dependants for tax purposes. 5. What are death benefits and what are the tax implications for different beneficiaries? If the beneficiaries are non-dependants e.g. adult children, then those non-dependants will be taxed on the taxable component of the death benefits Death benefits have different tax implications. If they are paid to a dependant for tax purposes, the lump sum will be tax-free. If they are paid to another person who is not a dependant for tax purposes, the tax-free component of the lump sum amount will be also tax-free. Tax at a rate of 15% plus Medicare levy will the payable in respect of the taxable component of the lump sum. 6. What is the difference between a binding death benefit nomination and a non-binding death benefit nomination? A binding death benefit nomination is whereby the trustees will not have no consider the nominations of the members before paying out the death benefits. A non-binding death benefit nomination is also known as an invalid binding death benefit nomination. It is where the trustees will need to consider the nominations of the members before paying out any death benefits Read More