Case study

Assume:

You are a financial adviser and approached by married couple Diane and Leo Alexander. They have limited financial knowledge and are seeking your advice about their current financial status. The following information is an extract of data you gathered as part of fact-finding during an initial client consultation for this couple:

• Leo and Diane have returned just before Covid-19 to Melbourne after living in New Zealand for the past 8 years. Both are 35 years old and have a 2-year-old son. They have used part of their savings to fund their living expenses whilst looking for work upon their return. Luckily, Leo who is an advanced practice registered nurse found work in a local hospital and Diane has since found part-time work as a teacher.
• The Alexander couple currently rents an apartment at Elizabeth Street in Melbourne. They intend to buy a house in the future. They are looking into saving money for margin money for a home loan.
• The couple has informed you of investing part of saving in the managed fund (equities) and Afterpay Ltd Share (ASX: APT) in the name of Leo. They intend to use this as margin money for the purchase of the house.
• The Alexander couple has informed you that "Savings from their family income" will be invested into the Leos' Managed Fund (equities) at the end of each financial year. Initially, Diane wanted to invest the savings directly into equities instead of a managed fund.
• The couple intends to pay back their credit card debt before the financial year ending June 30th, 2021. This debt they accrued during their search for a job.
• The family do not have any private health insurance.

Assume that both Leo and Diane have minimum employer superannuation contributions paid in addition to their salary and they do not salary sacrifice into their superannuation. Diane and Leo have limited financial knowledge and are seeking your advice about their current financial status.

Required:

A. Calculate Diane and Leo' annual after-tax income for the year ended 30th June 2021. Also, explain how Leo and Diane could reduce their tax liability by splitting their income. Show the effect this strategy would have had if they had split income for this current tax year. Please provide an explanation of splitting of income as an effective strategy for the couple. Please explain as much as you can.

B.i) Calculate the solvency ratio, liquidity ratio and savings ratio using the Alexander couple's financial information.

ii) Explain in everyday terms what these ratios mean, highlight any concerns you have and

iii) Suggest one improvement the Alexander couple could make

TAX RATES AND FORMULA SHEET (if needed for calculations)

Current valuation Liability (Ownership) Credit cards (Joint) Includes the annual interest cost $6,600 Cars loan (5-year term) (repayment $520 per month) Assets and Liabilities (as of 30th June 2021) Assets (Ownership) Current valuation Home Contents (Joint) $20,000 Car (Leo) $30,000 Current accounts (Joint) $5,000 Managed Fund- Equity (Leo) $19,000 Afterpay Ltd Share (Leo) 50,000 Superannuation -Leo $12,000 -Diane $7,000 Annual Budget for the year ended 30th June 2021 Income type (Inflow) Gross Salary- (Leo Alexander) Gross Salary- (Diane Alexander) Managed fund distribution - 4.00% (Leo) $29,400 Amount ($) 101,500 32,700 760 "Afterpay Ltd- Dividend (Leo) 2,400 Plus $1,028 Imputation Credit Expenses (outflow) Rent ($500 per week) Electricity, Water and Gas Telephone Pay television and the Internet Insurance - home and contents Daycare expenses (3 days a week at $48 each day) 27,040 1,312 2,160 744 1,200 7,488 Insurance - cars 2,520 Credit cards repayment ($550 a month for 12 months) Car loans repayment ($8000 a year for a 5-year term) Petrol and car maintenance Car registration each or total? Public transport 6,600 6,240 6,500 890 2,800 Other expenses Food Clothing, haircuts and personal grooming Medical and dental 14,500 5,000 2,500 12,000 $645.00 Entertainment Australian Nursing & Midwifery Federation Membership fees (Leo) Gifts - Birthdays and Christmas 5,000 TAXATION Income Tax Rates Individual Tax Rates (Adult Australian Residents) - 2020/2021 Taxable Income Marginal Tax Rate Tax Payable $0-$18,200 0% Nil $18,201 - $45,000 19% $0 + 19% on the excess over $18,200 $45,001 - $120,000 32.5% $5,092 + 32.5% on the excess over $45,000 $120,001 - $180,000 37% $29,467 + 37% on the excess over $120,000 $180,001 + 45% $51,667 + 45% on the excess over $180,000 The above rates do NOT include the Medicare levy of 2% Medicare Levy (for the year ended 30 June 2021)* Taxable income Thresholds(individual) Medicare Levy Rate Up to $22,801 Nil 22.801-$28,501 10% of taxable income between thresholds Above $28,501 2% of taxable income *The threshold rates for the year ended 30 June 2021 were not available as on January 1st 2021. The above rates will be used during the course for the year 2021. Please note that there are different income thresholds for families, seniors and pensioners. These are not required in this course. Medicare Levy Surcharge (for the year ended 30 June 2021)* The Medicare levy surcharge (MLS) below applies to singles and families that do not have private health insurance. Income Level Unchanged Tier 1 Tier 2 Tier 3 Singles $90,000 or less $90,001 - $105,000 $105,001 -$140,000 $140,001 or more Families $180,000 or less $180,001 - $210,000 $210,001 -$280,000 $280,001 or more Medicare Levy Surcharge (MLS) MLS Rate 0.0% 1.0% 1.25% 1.5% *The threshold rates for the year ended 30 June 2021 were not available as on January 1st 2021. The above rates will be used during the course for the year 2021. Unearned Income $0-$416 $417 - $1,307 Over $1,307 Tax Rates for Minors - 2020/2021 Tax Payable Nil $0 + 66% of the excess over $416 45% of the total amount of unearned income Complying superannuation fund Non-complying superannuation fund Other Tax Rates 15% 45% Tax Offsets/Rebates Low income tax offset (LITO): $700 max (2020/2021) Taxable income: LITO Offset: $37,500 or less 700 $37,501 -$45,000 $700 - [(Taxable income - $37,500) x 5% $45,001 - $66,667 $325 minus (Taxable income minus $45,000) x 1.5%) More than $66,667 Nil Low & Middle income tax offset (LMITO (2020/2021) Taxable income: LMITO Offset Up to $37,000 $255 $37,001 to $48,000 $255 plus 7.5% of income above $37,000 $48,001 to $90,000 $1,080 $90,001 to $1,080 less 3% of income above $90,000 $126,000 Private health insurance rebate (2020/2021) Private health insurance rebate is income- and age-tested. Income Level Base tier Tier 1 Tier 2 Tier 3 Singles $90,000 or less $90,001 - $105,000 $105,001 -$140,000 $140,001 or more Families $180,000 or less $180,001 -$210,000 $210,001 -$280,000 $280,001 or more Private Health Insurance Rebate Aged under 65 25.059% 16.706% 8.352% 0% Aged 65 - 69 29.236% 20.883% 12.529% 0% Ages 70 or 33.413% 25.059% 16.706% 0% Rebate can be claimed either as: (1) a reduction in premiums paid to the health insurer, or (2) a tax offset through tax assessment. Spouse super contributions tax offset: $540 max (2020/2021) Spouse's assessable income: Spouse super contributions tax offset: Up to $37,000 $540 max, based on 18% of a maximum contribution of $3,000 Lesser of: $37,001 - $40,000 (1) [$3,000 - (assessable income - $37,000)] x 18 %, or (2) 18% of contributions up to $3,000 $40,000 or more Nil Company Tax 30% Turnover > $50 Million 26.00 % Turnover $1.6 Million $ 100,000 $ 100,000 $100,000 $0 Ability to bring forward: Age $50 Million 26.00 % Turnover $1.6 Million $ 100,000 $ 100,000 $100,000 $0 Ability to bring forward: Age