Principles Of Retirement And Superannuation

Tax implications on lump-sum withdrawals

Principles of Retirement and Superannuation

Question-1

In case the age of person is 60 years or more, the entire lump-sum payment (including taxable component) received from the superannuation is tax free. Jane, who was bone in 1955, would have completed the age of 60 years by the end of 2016. However, the current problem is solved assuming that Jane has not attained the age of 60 years yet but has completed the preservation age. In that case, the tax would be levied on the lump-sum withdrawals (only taxable component) from the superannuation at the rate of 15% plus Medicare levy (Media Super, 2017). However, there is threshold exemption of $195,000. The computation of tax has been shown below:

	Amount Withdrawn
	Taxable Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Non Taxable
Superannuation benefit	650,000.00	150,000.00
Less: Threshold exemption	195,000.00
Taxable amount	455,000.00
Tax @17% (15%+2%)	77,350.00	–

Question-2

The tax free component of Total and Permanent Disability payment is decided with reference to the ratio of number of days from disability until person attains the age of 65 years and the number of days worked (Money Greek, 2017). In case of Rebecca, that ratio will be 156% (7300/4665) which means that the entire sum of Total and Permanent Disability payment would be added to the tax free component of Rebecca. The total tax free component of Rebecca’s super will be $546,000 ($64,000+350,000*156%). 

Question-3

Under the reversionary pension option, the nominated person automatically continues to receive the pension payments. The tax is levied at the concessional rate providing a tax offset of 15% on the marginal rate. However, if either, the deceased or the nominee is aged 60 years or above, the tax is not levied on the account based pension (PMD, 2016). In the current case, Lez is 55 years old and his wife (nominee) is 56 years old and hence neither of them is 60 years or more. Thus, the account based pension received by Lez’s wife would be taxed at the marginal tax rate after allowing a tax offset of 15%.     

Question-4

As per the government rules, gift of $10,000 or worth $10,000 in a year is allowed not to be called deprived asset. Further, there is cap of $30,000 accumulated for 5 years. This means that a person can give gift up to $10,000 in a year or $30,000 in five years without regarding that gift as deprived asset. If these limits exceeded, the excess will be regarded as deprived asset (Travismorien, 2017). In the current case of Jennifer, the portion regarded as gift will be of an amount $20,000 [($15,000+5,000+10,000+5,000+15,000-) $30,000]. The payment of an amount of $30,000 would only be regarded as gift.

Tax-free component of total and permanent disability payment

Question-5

In case of investment in cash management trust, the income earned by the investor would be computed based on the distributions made by the trust. However, where no income is distributed by the trust, the deeming provisions come into play and the income earned is computed with reference to deeming provisions. As per the deeming provisions, if the person receives income support payments and he/she is single, the income earned shall be deemed to be 1.75% on the first 49,200 investments. In respect of the rest of the investments, the income earned is to be deemed at the rate of 3.25%. Applying these rates, the income deemed to be earned in case of Betty, will be $887 (49200*1.75%+800*3.25%).       

Question-6

The total value of assessable assets for assets test purpose is $112,000 as computed below:

Assets	Amount
Principal home (excluded as per rules)	–
Motor Vehicles	53,000.00
Home Contents	23,000.00
Cash Management Trust	8,000.00
Australian Share Managed fund	24,000.00
Insurance bond	4,000.00
Total assessable assets	112,000.00

The value of assessable assets is lower than the full pension threshold of $375,000, which means that Blake (72) and Genine (71) would be eligible for maximum rate of age pension. Thus, the fortnightly payments received by them will be $1,322 (Ioof, 2017).

Principles of Investment Planning

Question-7

The investment products have been found out as under:

Investment Product	Link
Government Bond	https://www.moneysense.gov.sg/Understanding-Financial-Products/Investments/Types-of-Investments.aspx
Stock of Public Company

There are two types of risks associated with investment on bonds such as default risk and interest rate risk. The default risk implies the risk that issuer might not be able to pay the maturity value of the bond while the interest rate risk means risk of adverse changes in the market interest rates (Appel, 2010). However, the government bonds are guaranteed in regard to payment of interest and the maturity value by the government of the country and thus, the risk remains lower in investing in these bonds. On the other hand, the investment in stock is considered very risky. The returns in case of stocks are not guaranteed, thus, there may be fluctuations at the high rate in the return on stocks (Appel, 2010).

Question-7 (a)

In the part-b, the investment is sought to be made in hospitality industry in Japan. The investment products identified are government bond and stock of companies. An investor can make investment in hospitality sector in Japan by purchasing the stock of the company running a hotel or restaurant or by buying the bonds issued by it (Appel, 2010). However, the investment through bonds will not provide ownership. In order to get ownership of the hotel, the investor has to make investment in the common stock (equity shares) of the company. Thus, it could be inferred that the products identified for investment meet the established research specifications in part-b.    

Reversionary pension option

Question-7 (b)

If a person who is not resident of Japan desires to make investment in the hospitability industry in Japan, he/she will have to comply with the rules applicable to the nonresident investors. The purchase of ownership in a hotel in Japan for a foreign investor would not be as easy as it is for resident investor. For this purpose, the investor will have to take knowledge of foreign direct investment (FDI) norms of Japan. Further, the high level knowledge of taxation and company act provisions will also be required (Baker and Mckenzie, 2016).      

Question-8 (a)

Financial planning service industry is growing rapidly all around the world. The innovations in the technology have given a big push to the financial planning industry in the recent decade. The financial planning industry in Australia is growing at the annual rate of 1.70% with estimated per annum revenues of $5 billion (IBIS, 2017).     

Question-8 (b)

It is expected that the demand for financial planner will increase more in the upcoming years. The new taxation laws and other investment regulations are causing the people to seek investment and financial planning advice. Further, there is one more factor which is the age of the people in Australia. There has been predicted an increase in the people of age 60 years or more in the upcoming years. The people of 60 years age or over, seek more advice for their retirement planning and taxation issues (AFP, 2017). Thus, it could be inferred that the demand of financial planning industry will pick up in the upcoming years.

Question-9 (a)

Porter is currently working as sole trader and earning $180,000 per annum on an investment of $500,000 in total assets. Working as a sole trader is good when the scale of operations is not large. However, to be able to grow big and enlarge the scale of operations, it is crucial to enhance the capital base, which can be done by forming a company. The company provides a bigger platform to the business as compared to sole trading. The income level also tends to increase with the formation of company if the opportunities are exploited in a correct manner.  Further, the taxation structure also changes with the change in form of business from sole trader to company. The sole trader is taxed at the slab rates while the company is taxed at the rate of 30% (ATO, 2017). It is worthwhile to note that tax payable by an individual goes high with the increase income and the highest rate of tax for individual could be as high as 45%. Thus, it is advisable to Porter that if his income goes beyond $180,000 per annum, he should covert the form of business from sole trader to company.

Gift limits

Question-9 (b)

In order to assess the risk, the understanding of assets and liabilities structure of the firm is essential. The excessive liabilities indicate high risk profile of the business. Thus, in order to assess the risk of Porter’s business, the assessment criteria would include analysis of the liabilities viz a viz assets. In the current case, the porter’s business is paying an interest of $20,000 [($300,000-$250,000)*8%], which comprises 11.11% ($20,000/$180,000) of the salary of Porter. As per standards, if the interest payment (finance cost) is greater than 35% of the salary, the risk is considered to be high. In the case of Porter, the finance cost comprises of 11.11% of the salary which is less than the standard prescribed. This implies that the risk of Porter’s business is low. 

Question-9 (c)

The debt ratio and current ratio of Porter’s business is worked out to be as under:

Debt Ratio and Current Ratio of Porter’s Business
A. Total liabilities	300000
B. Total assets	500000
C. Current liabilities	50000
D. Current assets	40000
Debt Ratio (A/B)	0.60
Current Ratio (D/C)	0.80

The debt ratio of Porter’s business is 0.60 times which implies that 60% of the total assets are financed by debt. The standards prescribe that financing of assets up to 30% by debt is considered appropriate (Tracy, 2012). However, when the ratio goes beyond 30%, it indicates high gearing and increased risk. Thus, it could be inferred Porter’s business is highly geared. Further, the current ratio is 0.80 times, which implies that the current liabilities are greater than the current assets. The standards prescribe that business having current liabilities in excess of current assets is considered to be facing liquidity risk (Tracy, 2012). Thus, it could be articulated that Porter’s business is bearing high risk of liquidity also.  

Question-10 (b)

The accuracy of the Price Earnings Ratios on Mark Andersons file is varied as under:

	Qtr-1	Qtr-2	Qtr-3	Qtr-4
Price	4.00	3.00	4.50	3.50
Earning	0.20	0.35	0.25	0.50
PE ratio	20.00	8.57	18.00	7.00
PE reported by Mark Andersons	20.00	10.00	18.00	7.00

It could be observed that Mark Anderson made mistake in computing the PE ratio of Quarter-2. The PE ratio of quarter two should have been 8.57 times while it is shown 10 times in the Mark Anderson’s file. Except this inaccuracy, the computations in relation to other quarters are found to be correct.

Question-10 (c)

Part-A: Introduction

The report presented here covers the analysis of financial performance of BHP for four quarters of 2014. Further, the report also highlights the emerging trend in terms of financial performance and market price performance. Moreover, the risk analysis of the company has also been given coverage in this report.

Part-B: BHP Performance over the Period

Income calculation for cash management trust

The analysis of earnings per share of BHP shows a fluctuating trend over the period as depicted in the chart give below:

It could be observed from the chart shown above that the earnings per share of BHP were $0.20 in the first quarter of 2014, which went up in the second quarter to $0.35. Further, in the next quarter, the earnings per share slopped downward to $0.25. However, earnings again jumped up in the last quarter to $0.50 depicting a sound improvement. Overall, it could be inferred that the financial performance of the company improved by the year end as compared to the position at the beginning of the year.   

Part-C: Emerging Trends

It could be observed from the chart shown above that the price is indicating a fluctuating trend over the four quarters. In the first quarter the stock was trading at $4 and then slopped downward to $3 in the second quarter. The downfall in the price in second quarter could be due to reduction in the earnings of the first quarter. However, the earnings of the company improved in the second quarter and same affected the price positively in the third quarter. The price in the third quarter went up to $4.50. Afterwards, in the last quarter, the price again fell down due to decrease in the earnings in third quarter.

Part-D: Risk Analysis of BHP

The PE ratio of BHP has been found to be 20, 8.57, 18, and 7 times for the quarter 1, 2, 3, and 4 respectively. It could be observed that PE ratio of the company is failing down. The high PE ratio indicates that the stock may be overvalued in the market. When the stock is highly overvalued, the risk of decrease in the price in future arises. Further, the standard deviation of the quarterly returns on the stock has also been computed as shown below:

Price	Qtr returns
0.20
0.35	75%
0.25	-29%
0.50	100%
Standard deviation	68.17%

The standard deviation of the stock’s quarterly returns is 68.17% which is can be considered to be very high. The high standard deviation is indicative of high risk. Thus, it could be inferred that investing in the stock of BHP is highly risky.

Part-E: Currency of the Information

The currency used in this report is denominated in the US$.

Question-10 (e)

The analysis in relation to the stock’s price and PE ratio should be based on the current data. However, the data used in the analysis of BHP is of 2014 which might be irrelevant for taking investment decision in 2017. In that case, it is advisable to Mark to prepare the analysis reports based on the recent past financial year and even consider the future forecasted information.

Question-4 (a)

The fortnightly repayments of the car loan of $80,000 for 7 years at the interest rate of 9% per annum are $593.20.

Question-4 (b)

The monthly repayment of the car loan of $80,000 for 7 years at the interest rate of 9% per annum is $1287.13.

Question-4 (c)

The loan rate is given as 6.99% and the comparison rate is not visible. The date of accessing the website is February 10, 2017.    

Question-4 (d)

Year	Opening balance	Interest @5%	Closing balance
1	1,000.00	50.05	1,051.05
2	1,051.05	52.55	1,105.60
3	1,105.60	55.28	1,163.88
4	1,163.88	58.19	1,226.08

Question-4 (e)

Amount deposited	1,000.00
Rate p.a.	10%
Period (Years)	4
Future Value	$1,464.10

Question-4 (f)

The amount to be deposited today to get $10,000 after 4 years at the interest rate of 10% per annum will be $6,209.21 as computed below:

Ending balance	10,000.00
Rate p.a.	10%
Period (Years)	5
Future Value	6,209.21

Multiple Choice Questions

Question-(i): Answer is C-$1,200 [($2800/70%)-2800)]

Question-(ii): Answer is D-18.50% [(0.48+1)/2=0.74/4=0.185]

Question-3 (iii) Answer is A- discount rate and the estimated growth rate of dividends

Question-3

The company is offering right shares at $1 whereas the market price of the shares is $10. Thus, the right shares are available too cheaply to the investors. Further, the right issues is in the ratio of 1:5, which means that holder of 5 shares would get 1 share in the right issue. Ben Sheehy, who holds 1000,000, shares in the company, would be eligible to get 200,000 shares under the right issues. Ben Sheehy can get 200,000 shares by paying $200,000 to the company. On the other hand, if he buys the 200,000 shares from market, he will have to pay $2,000,000 which is too high. Therefore, it is recommended to Ben Sheehy to apply for right issue and get 200,000 shares in the company.

True or False

Question-(i): Fasle, Hedgers can take both, long as well as short position. Thus, the fact that Hedgers can only assume a long position is not correct.

Question-(ii): False: An European style options can only be exercised at expiration date.

Question-(iii): True: As the Australian importer would want to buy US$ to make payment for supplies. Therefore, selling AUS $ futures is correct strategies.   

Question-(iv): True: Yes, there is range of strategies such as bear call spread, bear put spread, butterfly spread etc.

Question-5

Calculation of tax for Jacinta is given as under:

Gross dividend [$2,100,000/(100%-30%)]	3,000,000.00
Tax on marginal rate 45%	1,350,000.00
Less: Franking credit ($3,000,000-2,100,000)	900,000.00
Tax payable	450,000.00

Question 1 and 2 to be completed below and under these questions is info provided by the course marker in order to get the answer correct

Question-1

In case of call option, the holder of option will not exercise until the market price of the underlying is equal to or greater than the exercise price plus premium paid. In case of call option, the payoff is computed by formula: Market price-(Exercise Price+Premium). The payoffs at the price range of $31 to $38 are given as under:

Market Price	Exercise price	Premium	Exercise or not	Payoff
31	32	3	No	-3
32	32	3	No	-3
33	32	3	No	-2
34	32	3	No	-1
35	32	3	At par	0
36	32	3	Yes	1
37	32	3	Yes	2
38	32	3	Yes	3

In this case $35 is the breakeven price because at this price the holder of call option will be at no profit and no loss.

Question-2

In case of put option, the holder of option will not exercise until the market price of the underlying is less than or equal to the exercise price less premium paid. In case of put option, the payoff is computed by formula: (Exercise Price- Premium)-Market Price. The payoffs at the price range of $25 to $32 are given as under:

Market Price	Exercise price	Premium	Exercise or not	Payoff
25	29	1	Yes	3
26	29	1	Yes	2
27	29	1	Yes	1
28	29	1	At par	0
29	29	1	No	-1
30	29	1	No	-1
31	29	1	No	-1
32	29	1	No	-1

In this case $28 is the breakeven price because at this price the holder of call option will be at no profit and no loss.

References

AFP. 2017. Growth in the Australian Financial Planning Industry. [Online]. Available at: https://www.afpbb.com.au/Resources/TheFinancialPlanningIndustry.aspx [Accessed on: 09 February 2017].

Appel, M. 2010. Higher Returns from Safe Investments: Using Bonds, Stocks, and Options to Generate Lifetime Income. FT Press.

ATO. 2017. Company tax rate. [Online]. Available at: https://www.ato.gov.au/Rates/Company-tax/ [Accessed on: 09 February 2017].

Baker and Mckenzie. 2016. Japan Hotel Investments Guide. [Online]. Available at: https://www.theinvestor.jll/wp-content/uploads/Japan-Hotel-Investment-Guide-Oct2016-1.pdf [Accessed on: 09 February 2017].

CCH. 2012. Australian Master Tax Guide 2012. CCH Australia Limited.

IBIS. 2017. Financial Planning and Investment Advice in Australia: Market Research Report. [Online]. Available at: https://www.ibisworld.com.au/industry/financial-planning-and-investment-advice.html [Accessed on: 09 February 2017].

Ioof. 2017. Centrelink and DVA Service Pension. [Online]. Available at: https://www.ioof.com.au/_pdf-flyer/wm/education_flyers/retirement/centrelink_and_dva_service_pension [Accessed on: 09 February 2017].

Media Super. 2017. Tax on lump sum withdrawals. [Online]. Available at: https://www.mediasuper.com.au/retirement-how-pensions-are-taxed/tax-lump-sum-withdrawals [Accessed on: 09 February 2017].

Money Greek. 2017. TPD Insurance in Superannuation: TPD Claims and Tax. https://moneygeek.com.au/superannuation/insurance-superannuation-tpd-claim-tax/

PMD. 2016. Account-based pensions. [Online]. Available at:  https://www.pmdadvice.com.au/uploads/files/Account%20based%20pensions%20June%202016.pdf [Accessed on: 09 February 2017].

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.

Travismorien. 2017. Gift of money or Asset. [Online]. Available at:   https://www.travismorien.com/FAQ/fp/fpdeprivation.htm [Accessed on: 09 February 2017].