Financial planning context - Case Study Example

ADFP Module 4 assignment Important assessment information Aims of this assessment This assessment focusses on providing comprehensive advice in a financial planning context. It covers eligibility for Centrelink benefits with a focus on Age Pension. It looks at the assets test and incomes test including deeming. Taxation is a key focus including income splitting, and using superannuation versus non-superannuation strategies to ensure a tax effective financial planning outcome. Tax implications on superannuation pensions, and accessing lump sum superannuation benefits are also canvassed. Addressing investment strategies by assigning target asset allocations to meet specified goals and objectives are addressed, as is the financial planning review process. Marking and feedback This assignment contains 2 assessment activities each containing specific instructions. This particular assessment forms part of your overall assessment for the following unit of competency: FNSFPL603 FNSFPL606 FNSPRM601 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 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 Background Michael and Amanda Jamieson are new clients who come to seek your professional advice. The Jamieson’s have 2 children, Jenny and Matthew, both of whom are financially independent. Jenny is married to Adam and does not work as she is presently raising their 4 children. Matthew is an executive with a large Bank and he and his wife Belinda have no children at this time. Michael and Amanda provide you with the following information about their assets. Neither Michael nor Amanda has any liabilities: Assets Michael (67 yrs.) Amanda (65 yrs.) Joint Home $220,000 Car $ 40,000 $25,000 home contents $ 18,000 bank account $ 7,000 Savings Account $ 25,000 shares - Coles Myer (acquired 1990) $ 10,000 - Pasminco (acquired 1992) $ 7,000 - ANZ (acquired 1984) $ 14,000 - BHP (acquired (1981) $ 21,000 managed fund – BT Future Goals Fund $ 26,000 Superannuation $220,000 investment property (acquired 1984) $142,000 - (rental income $ 6,500 per yr.) Total $480,000 $25,000 $270,000 Michael retired from work 2 months ago as he required a major heart operation but was earning $100,000 per annum prior. He has since recovered and his prognosis for a full recovery is excellent. Amanda does not work but spends 6 hours a week as a volunteer for Community Aid Abroad. The Jamieson’s have been living off a payout which included both sick leave entitlements and long service leave entitlements whilst Michael has been recuperating. At this point in time Michael has left his superannuation with his employer’s super fund. He is considering drawing an account based pension later in the year. You have agreed to address some of their queries which arose at your recent interview with them. Michael and Amanda would like to access a part Age Pension if possible and want to know whether they would be eligible. You have advised them to speak with someone from Centrelink, but they want to know some information before they attend any interview with Centrelink. Required: 1) Michael is concerned that you have incorrectly assessed his age pension eligibility with respect to calculating the incomes test, because you included deemed income for his bank account, which is not an interest bearing account. Explain to Michael how deeming works? Deeming rules give investors a chance to earn more income from the savings they have and if Michael does respond to the deeming rules by investing so as to get higher returns his total income will increase. Deeming income is calculated by multiplication of the deeming rates to the total value of a customer’s financial investment. Later deeming income is added to any other income in Michael’s case to his total incomes together with the others including rental income and shares. 2) What total amount of income will Centrelink “deem” Michael and Amanda to be earning for the purpose of assessing their pension entitlement? (Ignore the superannuation). Show your workings. As per the current deeming rates Centrelink will deem Michael and Amanda the following amount: Michael will be personally deemed 3.5% of (480,000 – 220,000) = 3.25% * 260,000 thus he will be deemed $8450 Amanda will be personally deemed 1.75% of 25,000 = 1.75% * 25 000 thus she will be deemed $437.5 Michael and Amanda will be jointly deemed 3.25% of 270,000 = 3.25% * 270,000 thus they will be deemed $8775 3) Michael and Amanda have a will in place but they believe it needs to be reviewed in light of their changed circumstances. They have told you that they are planning to leave the home to their daughter, Jenny, and the shares, the managed fund and the investment property to their son, Matthew. They feel this is an equal distribution of assets as both have an approximately equal value of $220,000. Explain to Michael and Amanda why capital gains tax will likely result in this being an unequal distribution of assets. Capital gain tax is the tax on the price of an asset when sold compared to its original price Capital gain taxation rate is affected by length of ownership and since Michael and Amanda home didn’t acquire their home the same time they did acquire the shares, the managed fund and the investment property the taxation will lead to inequality. Also home is exempt of capital gains taxation in most cases depending on a set of conditions. When conditions are met one can exclude up to a certain amount $250,000 and in this case jenny will be exempted One can deduct capital losses only on investment property but not on personal property and for the case of Michael he cannot deduct tax losses on the home but only on the shares, the managed fund and the investment property. 4) Michael and Amanda have heard that income splitting is a useful tax effective strategy. As such, they have decided that they will transfer the shares to Amanda’s name. They are planning to do this next week (June 10th) when Michael goes to the city for his next medical check-up. How do you advise Michael to wait a few weeks before transferring the shares to Amanda, and what reasons would you give for the delay? First Michael and Amanda need consult the company’s article of association and the shareholder’s agreement. They should be able to learn the restrictions on the transfer. Also there is the rate of taxation and Michael and Amanda should first seek expert advice from a chartered accountant who can help them with tax matters. Also Michael needs to check shareholder’s agreement for any restrictions that may be there such as Pre-emption rights, buy back options of the company or restriction of transfer to a member of your family. 5) Michael has heard that investments in shares are appropriate for long term investment. He is concerned that now that he is retired, it might be more appropriate to sell his shares and place the funds in the bank account. Advise Michael on the appropriateness of investing in shares versus 100% cash. Is it a matter of either or? How would you explain balancing the need for consistent income with the need to maintain that income in light of the rising cost of living? Investing in shares is advantageous as is has benefits. Some of the key benefits include: There is capital gain in long term as they provide strong returns over long term. Shares tend to have limited liabilities meaning in the event the company loses lawsuit creditors cannot come after personal assets. Shares are a good source of income as companies pass cost increase to their customers. They provide tax advantages as it will allow them to take personal tax credits. Shares provide ease of trading as one can just transfer by just a click of a button Shares are highly liquid and can be converted back to cash quickly with minimal impact to the received price. 6) Explain to Michael and Amanda why it is necessary to review their plan at least on an annual basis. They should revise their plans in annual basis as there are factors that may occur as time goes on. Some of the factors include: Their debts may have grown or they are struggling to make dents in their credit cards personal loans and house mortgage. Their financial goals and their lifestyle may change as time goes on. Their personal situation may have changed example for their case one of the spouses may die. There could be changes in legislation that may affect both Michael and Amanda example superannuation limit. They could be paying more tax than necessary as changes in income situation. 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 Background Fiona is 57 years old, has $500,000 in super and earns $120,000 p.a. plus 9.5% employer superannuation guarantee contributions. She would like to boost her super without affecting her current lifestyle. She decides to sacrifice $25,000 of her income to super and commence a ‘non-commutable’ Account Based Pension (ABP). 1) Based on 2015/16 financial year rates, if she salary sacrifices $25,000, how much tax will she pay on that $25,000 contributed to super? (be careful to consider that she is also receiving 9.5% employer superannuation guarantee contributions) $25,000 + (9.5% * $25,000) = $27,375 is the amount taxable. The rate used is 19 cents for each $1 Hence 19/100 * $27,375 thus the tax that she will pay is $5,201.25 2) Ignoring the impact of Fiona’s future pension, and ignoring any assessable excess contributions, how much will her taxable income be after making the salary sacrifice contributions? Incomes – deductions = taxable income $120,000 – $25,000 = $ 95,000 3) Is the income drawn from her account based pension taxable? Explain. YES. This is because Fiona is less than 60 years old and for one not to pay tax you must be 60 years or older 4) What age will the income she draws from her pension become tax free? Fiona’s income from her pension will become tax free when she reaches the age of 67 years 5) What tax rate was applied to earnings of Fiona’s super fund prior to instituting a non-commutable account based pension? The rate applied on Fiona’s super is 15% and this is due to the employer contributions and salary sacrifice contributions. 6) What tax rate is applied to earnings of Fiona’s non-commutable account based pension? Tax rate imposed on Fiona’s non-commutable based pension is 15% as her earnings are below $300,000 Read More