Term 2 Standard Examination 2018

Fundamentals of Personal Financial Planning FINC11001

Instructions Sheet

2. This examination comprises three parts. Parts A, B and C.

3. Part A is worth 10 marks. Answer four of the six short answer questions. These are of equal value - 2.5 marks each. If more than four questions are answered in Part A, only the first four will be marked.

4. Part B is worth 15 marks. Students are to answer all questions in Part B.

5. Part C is worth 15 marks. Students are to answer all questions in Part C

6. A formulae sheets is attached at the back of the examination paper for your use. (appendix with formulae and 2018/19 tax rates table).

PART A : 10 MARKS

Short Answer Questions

Answer four of the following six questions.

Each question is worth 2.5 marks (4 x 2.5 = 10 marks).

Question 1 (2.5 marks) :Mismatch, market and market-timing, liquidity and legislative risk are important considerations for personal financial planning. Describe each risk and the impact on personal financial planning.

Question 2 (2.5 marks) Understanding a person's risk tolerance and risk capacity is a fundamental requirement of the financial planning and advice process. Discuss the reasons underpinning this requirement?

Question 3 (2.5 marks) What are the general conditions that need to be satisfied for an expense to be considered an allowable deduction for tax purposes?

Question 4 (2.5 marks) Explain the purpose and advantages of a binding death benefit nomination in the context of personal financial planning.

Question 5 (2.5 marks) Discuss the main differences between a conservative, balanced and a highgrowth investor.

Question 6 (2.5 marks) What are the differences between an accumulation superannuation fund and a defined benefits superannuation fund?

PART B : 15 MARKS

Financial planning problem solving questions

Answer all questions from this part.

Each question is worth 7.5 marks ( 2 x 7.5=15 marks).

Question 1 (7.5 Marks)

Your new financial planning clients Dorothy and Peter, are both aged 30 and married. They have been renting a flat since they started work but have decided to buy a house. This decision has been made easier because Dorothy's parents have promised to give them $60,000 as a gift to help them. To prepare to approach a bank for a loan, they have asked you to:

(a) Make net worth statement based on their current situation and including the financial gift from Dorothy's parents. (1 mark)

(b) Make cashflow budget. Then ascertain their surplus or deficit position. (1.5 marks)

(c) Discuss the impact on their ability to repay a mortgage if Dorothy ceased working for a period of time to have children. (2.5 marks)

(d) Discuss the wisdom of maintaining the managed fund. (2.5 marks)

A review of their financial circumstances reveals the following detail:

Their salaries are $80,000 [Dorothy] and $85,000 [Peter].

Assets

Bank account* $45,000*

Furniture/personal effects $15,000

Managed investment fund $30,000

Cars $16,000

Superannuation Dorothy $52,000

Superannuation Peter $49,000

Liabilities

Credit cards $6,500

Car loans $5,000

* The bank account balance does not include the $60,000 from Dorothy's parents.

Other monthly repayments include:

rent $1,800

car loans $290

They estimate their other household expenses to be about $2,400 per month. They would prefer not to cash in their managed investment fund at present as the value has fallen by 8% over the last 2 months. Instead, their intention is to leave the investment to accumulate to meet the education expenses of the children they hope to have in the future.

They anticipate paying off their credit card debt in full next month and they would also have paid off the car loans in the next 12 months.

Question 2 (7.5) Marks

Trevor is 58 years old and has $500,000 in superannuation. The account balance is made up of tax free component of $150,000 and taxed superannuation money of $350,000. He is weighing up his options. For instance:

Scenario 1: His current salary is $120,000 pa with an SGC payment of 9.5%. His employer bases the SGC payment on base salary ie after adjustments, such as salary sacrifice.

(a) If he remains at work and makes a salary sacrifice contribution to superannuation, how much can he contribute without incurring excess contributions tax? (2 marks)

(b) How would the additional contribution impact on his take-home pay? (1.5 marks)

(c) Other than a potential increase to his superannuation balance, how are the components impacted? (1.5 marks)

(d) Scenario 2: He elects to take early retirement and as such satisfies a condition of release. Demonstrate your understanding of withdrawing funds from superannuation and show how much lump sum tax would be paid if he withdraws half of his current balance. (2.5 marks)

PART C 15 MARKS

Professional financial Planning Advice questions

Answer questions from this part.

Each question is worth 7.5 marks ( 2 x 7.5 = 15 marks).

Question 1 (7.5 Marks )

Wealth Protection Advice

Benjamin and Gemma Turner, aged 39 and 37 respectively, have four children aged 4, 6, 8 and 10. They own their home, which has a current market value of $500,000, and have a mortgage of $150,000.

Benjamin is a manager and employed by Woolworths. Benjamin's income is $80,000. Gemma works part-time as a teacher aide and earns $15,000 from the local school.

Both Benjamin and Gemma contribute to superannuation funds. Balance of Benjamin's fund is $250,000 and Gemma's has $100,500. Benjamin has life insurance cover on his life for $200, 000 with Gemma named as the beneficiary. Gemma does not have any life insurance cover.

Benjamin and Gemma have non-superannuation assets that have a total value of $150,000. The Turners have a car each. Benjamin's is a 2017 model and owes $30,000 on it at present. Gemma has an old van valued at $10,000 and is fully paid for. Personal loans, credit cards and other outstanding debts amount to $20,000.

The family's monthly expenses amount to $8,000. The Turners feel that all their children should receive a university education and expect them to be dependent until they turn 21 years of age. They expect to contribute a total of $200,000 to the cost of the children's university education. As each child ceases to be dependent, the monthly expenses will reduce by $1,000 a month. Benjamin's life expectancy is 82 and Gemma's is 86.

(a) Calculate the amount of cover required to provide for the family's future needs in the event of

i. Benjamin's death. (1.5 marks)

ii. Gemma's death. (1.5 marks)

In addition to life cover, you want to propose they consider total and permanent disablement cover [TPD] and income protection. Each type of cover has a purpose. Also, there are advantages and disadvantages of holding each of these insurances either inside or outside superannuation.

(b) Explain each type of cover and compare the advantages and disadvantages of life, TPD and Income Protection insurance inside and outside superannuation. (4.5 marks)

Question 2 (7.5 Marks)

Estate Planning Advice

(a) Why is it important to differentiate between estate assets from nonestate assets when drafting a will? (2 marks)

(b) What are some of the circumstances that might require a person to update their will? (1.5 marks)

(c) Other than a will, is there any additional key estate planning that may be required by a person dealing with the distribution of their assets to intended beneficiaries? (2 marks)

(d) Describe the difference in treatment of assets upon death of a person between those that are jointly owned compared with those held in a tenancy-in-common arrangement? (2 marks)

Appendix:

Income tax rates for 2018/2019 financial year

Income Marginal tax rate Tax payable

$0-$18,200 0% Nil

$18,201-$37,000 19% 19 cents for each 41 over $18,200

$37,001-$90,000 32.5% $3,572 plus 32.5 cents for each dollar over $37,000

$90,001-$180,000 37% $20,797 plus 37 cents for each dollar over $90,000

Formulas:

Future value

in year n =Present Annual Number of years(n)

Value (PV) (1+ Interest Rate (i))

(FVn)