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ECONOMICS, FINANCE and MARKETING BAFI 1014 – Personal Wealth Management Tutorial Questions Semester 1 2015 BAFI 1014 – Introduction to Financial Planning 2013 1

Topic 1 – Personal Financial Planning Environment Question 1 Discuss the different financial issues and priorities that are likely to exist between a couple in the mid-thirties with 3 children as compared to a couple in their fifties with no dependent children. Question 2 What impact does the performance of investment markets in the U.S., Europe and Asia have on the Australian financial market? Discuss. Question 3 (a) Explain the 4 phases of the business cycle and how the performance of investment products is likely to be affected by the 4 phases. (b) What phase of the business cycle do you believe we are in now? Explain. Question 4 Explain the major difference between the following:  A licenced Dealer  Authorised representative Question 5 Discuss how a client’s attitude towards risk may affect goal setting and recommendations. Question 6 Given the current state of the economy, and likely future directions, how would you respond to the following 3 situations: (a) Liz aged 32 and single, has just inherited $120,000. She is looking at investing all of the funds into the stockmarket into blue-chip companies but is concerned about the recent stockmarket losses. What would be your advice and what other factors would you need to consider? (b) John aged 42 and married with 3 children, has an investment property worth around $330,000 and a loan currently standing at $200,000. John is starting to become concerned with the prospect of falling property values and is seeking your advice about whether he should sell the property, pay off the loan and invest his money into a conservative managed fund. What factors would you need to consider in your advice to John? (c) Mary comes to you in a distressed state about the negative returns being experienced in her superannuation fund. She is looking to retire in 3 years time and says she cannot afford for her fund balance to deteriorate any further. Should Mary move her superannuation funds away from stocks and into more conservative investments? BAFI 1014 – Introduction to Financial Planning 2013 2

Question 7 Below are details of the Finn family: Assets: Liabilities: Family home $290,000 Credit card debt $2,000 Car 35,000 Mortgage 15,000 Contents 50,000 Bank deposits 45,000 Debentures 75,000 Managed funds - balanced 40,000 Superannuation funds 420,000 Income: Gross salaries of Mr. and Mrs. Finn $50,000 (tax of $14,000) and $20,700 (tax of $3,100) Expenditure: $30,000 per annum - including $10,000 per annum mortgage repayments, and a commitment to repay the credit card debt over the next twelve months. (a) Calculate the following ratios: debt service; savings; liquidity; and solvency. (b) Describe what stage of life you think the Finn family is at and why you think so. (a) Mr and Mrs Finn believe that their risk profile is balanced. Describe what investment characteristics you think a balanced investor may have. BAFI 1014 – Introduction to Financial Planning 2013 3

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Topic 2 – Analysing the risk and return from investments Question 1 Which statement is correct? (a) Present value is the amount that must be set aside today in order to have a specified amount in the future. (b) An ordinary annuity has identical payments or receipts each and every period for a specified time frame (c) The more frequently interest is compounded, the larger will be the future value of any deposit (d) All of the above Question 2 Margaret invests $40,000 into a share managed fund that has been paying a semi-annual compound return of 6% p.a. All returns are reinvested. If Margaret invests the funds on 1 July 2013, how much will she have accumulated in the fund by 1 July 2016? (a) $47,641 (b) $43,709 (c) $56,741 (d) $47,762 Question 3 On 31 March 2008, Pat invested $12,000 in a fund paying 8.5% compounded semi-annually. How much will be in the fund on 30 September 2013? How much interest was earned? (a) $18,967.8 & $6,967.8 (b) $18,967.8 & $7,704.2 (c) $16,794.2 & $6,967.8 (d) $19,954.5 & $7,014.8 Question 4 Harry wants to buy a unit in 3 years time and will require a deposit of $40,000. If he is able to earn 4% compounded quarterly, how much will he need to invest now? (a) $35,560 (b) $35,498 (c) $45,073 (d) $42,064 BAFI 1014 – Introduction to Financial Planning 2013 4

Question 5 Eileen, aged 42, has $120,000 invested in her superannuation account. If the overall return on her funds is 4% p.a. compounded semi-annually, how much will she have accumulated at age 56? a) $207,801 b) $158,337 c) $359,844 d) $208,923 Question 6 An executive will retire at age 65 and expects to live to age 75. Assuming a 10% p.a. rate of return, calculate the amount that he must have available at age 65 in order to receive $100,000 annually from retirement to death. (a) $640,950.61 (b) $614,456.71 (c) $635,119.20 (d) $639,446.23 Question 7 You hold an investment in Asset A and estimate the following returns are possible: a 10% chance of returning an 8% return, a 50% chance of returning a 10% return, and a 40% chance of returning a 15% return. Calculate the weighted average expected rate of return. Question 8 Investments with a high standard deviation represent high risk and therefore should be avoided. Discuss. BAFI 1014 – Introduction to Financial Planning 2013 5

Question 9 You are provided with the estimated returns and standard deviations for three companies Estimated return Standard deviation Financial 10% 15% Guinness 12% 7% Hattel 15% 13% Required (i) Calculate the range of returns for each of the 3 companies for both 1 and 2 standard deviations. (ii) Which investment would you recommend for a risk averse investor? Explain. Question 10 If we know that the standard deviation of Castle Ltd is 3% and the expected return is 8.5%, which of the following statements is true? a) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range 8.5% : 11.5% b) Approximately 1/3 of the time, the actual returns for Castle Ltd will lie in the range 5.5% : 11.5% c) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range - 5.5% : 11.5% d) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range 5.5% : 11.5% Question 11 Examine the following table of asset class performance: Asset class Return Risk Shares Property Cash Bonds Inter. Shares Inter. Bonds Shares 17.9% 21.4% 1 Property 14.0% 13.0% .7 1 Cash 11.9% 1.0% 0 0 1 Bonds 15.3% 5.5% .3 .4 0 1 Inter. Shares 19.2% 18.7% .8 .2 .1 0 1 Inter. Bonds 16.0% 14.0% -.4 -.1 0 .8 .1 1 (i) Explain the principle of correlation and how it can be used to select assets within a portfolio. (ii) Which 2 asset classes exhibit the highest correlation and lowest correlation? BAFI 1014 – Introduction to Financial Planning 2013 6

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Topic 3 – Investment principles / Direct investments Question 1 What is the relation between risk and return? Illustrate your answer with reference to a particular asset class. Question 2 Michelle and Fred own their own home worth $320,000 and have a mortgage of $110,000. Both Michelle and Fred are aged in their early 30’s, earn gross salaries of $40,000 and $44,000 respectively and do not plan to have children for another 5 years. The couple has around $30,000 invested in a cash management trust which they would like to use as a deposit on another property that they are looking at acquiring. Their plan is to borrow an additional $280,000 and use the new house as their main residence. The other house they intend to rent out to help pay off the mortgages. The couple is seeking your advice on the above proposal and the most tax effective way of setting up the arrangement. Required (i) What additional information concerning the couple’s circumstances would you need to know before providing a recommendation? (ii) How would you advise the couple on their proposal? Question 3 Jim comes to you for financial advice concerning his investment strategy. He supplies you with a summary of his investments: Item Amount ($) House and contents – house held for 6 years 300,000 Cash in savings account 10,000 Shares in technology companies – held for 4 years 80,000 International shares unit trust – held for 1 year 25,000 Car 70,000 Investment property – held for 2 years 290,000 Loan on investment property 200,000 Loan on unit trust 30,000 Jim’s objectives are as follows:  to retire within the next few years  to buy a new car in 1 years time (expected net cost of $30,000)  to go on a holiday in 18 months time expected to cost $15,000 BAFI 1014 – Introduction to Financial Planning 2013 7

Required (a) Provide a list of some of the questions you would ask Jim in order to determine his risk profile. (b) From the information provided, how would you categorise the risk profile of Jim? Discuss. (c) What are some of the issues and concerns that Jim needs to be aware of with his current investment strategy? (d) What other issues would you want to discuss with Jim before devising a financial plan? (e) On the basis of Jim wanting an asset allocation strategy that was “prudent”, devise an asset allocation model for Jim and discuss how you would amend his current portfolio. Question 4 How would you advise the following investor? I am 56 years of age and looking at retiring at age 60. I invested $180,000 into an equity fund 4 years ago but with the state of the stockmarket, the fund is now only worth $130,000. The funds will be required for my retirement and I am afraid that with the state of world stockmarkets, my funds may fall significantly prior to my retirement and I may not have enough to live on. Should I transfer my funds into an interest bearing fund where at least my funds will not disappear? Question 5 (a) Discuss the principle of dollar cost averaging. (b) Tony decides to invest $1,000 into purchasing some shares every month for the next 6 months. The share acquisition price of the stock for each of the months is as follows: Month 1 $1.00 Month 2 $2.00 Month 3 $1.00 Month 4 $4.00 Month 5 $3.50 Month 6 $2.50 Determine the average price of the stock and the number that he would own at the end of the period. What difference would it have made if had purchased $6,000 worth of shares at the end of the 6 months? BAFI 1014 – Introduction to Financial Planning 2013 8

Question 6 An investor is contemplating whether they should acquire a company’s ordinary shares as compared to its preference shares. Explain the difference in features between the two types of shares. Question 7 Explain the various factors that could cause volatility in bond prices. Question 8 John Barry has acquired some government bonds, as he is concerned about incurring a capital loss that can arise with investments in shares and property. John acquired $20,000 10 year government bond in 2007 with a coupon rate of 6%. John is now looking at selling the government bonds due to unforeseen financial circumstances. Prevailing interest rates are currently 8%. (a) Explain what the difference is between a bond’s coupon rate and its yield. (b) What are the risks of John cashing in the government bond at this point? Explain. Question 9 As a young couple earning two good incomes, you have saved around $50,000 and are thinking about purchasing your first home. However, you have heard from a financial planner speaking on a radio talk-back program, that investing in residential property may not be as beneficial as it has been in the past and that there may be better ‘investment alternatives.’ Explain why? Do you agree? BAFI 1014 – Introduction to Financial Planning 2013 9

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Topic 4 – Indirect investments / investment analysis Question 1 Read the extract below and answer the following questions Some people don’t think that’s serious collecting,” says George Lowry, president of New York auction house Swan Galleries, “but Elvis Presley memorabilia rank among the most swiftly appreciating collectibles in the country. Elvis collecting is hot stuff”. These words are music to the ears of JoBeth Greenlee, because she has been a fan of the late singer since attending one of his last concerts in 1977. Greenlee has $150,000 to invest, part of her share of marital assets that were apportioned last year. She had considered investing in shares or mutual funds, but has turned to other alternatives following the 1987 stock market crash. After thorough analysis of several investment alternatives, she has chosen an unusual investment: collectibles. More specifically she has decided to concentrate her investments in Elvis Presley memorabilia. Some library research has taught her that 40 different Presley recordings are now worth a minimum of $1000 each. Moreover, an Elvis doll that sold for $3 in 1957 now sells for as much as $1800 in mint condition. In fact, Elvis trinkets, records and posters rank among the most swiftly appreciating type of collectible. Greenlee’s research also drove home an important point about collectibles: almost unnoticeable variations can have a major impact on the item’s market value. For example, a 45-rpm record of Presley’s 1962 record “Good Luck Charm” is worth about $15. A version that plays at 33 revolutions per minute is valued at $3000. (Source - Boone and Kurtz. Personal Financial Management) (a) What benefits do collectibles provide investors that are not present in other investment alternatives? (b) As a friend and investment adviser, what advice would you give her? Question 2 You have just accepted a position at your local newspaper as Mr Money, a financial advice columnist. The following letter arrives in your tray on the first day. Dear Mr Money, I have just inherited $100,000 and wish to invest the amount into managed funds. Although I require a little income from the funds, I am mainly interested in long term growth so have decided to invest in Australian domestic shares. I have no other shareholding in my investment portfolio. I would classify myself as a moderately aggressive investor. BAFI 1014 – Introduction to Financial Planning 2013 10

There are three funds that I am interested in investing into: Colonial First State which is an “active growth manager”, Maple-Brown Abbott which is an “active value manager” or Vanguard Australia which is a “passive fund manager”. Required Can you explain the difference in styles between the three different funds? Is it better to invest the $100,000 into one fund or across all three funds, and if so, in what proportions? Can you explain? Question 3 The following portfolios are provided for your analysis: Asset sector Portfolio 1 Portfolio 2 Strategic allocation Tactical allocation Strategic allocation Tactical allocation Domestic property 22 20-22 12 7-17 Domestic equities 15 12-18 40 30-50 Domestic bonds 25 22-28 10 4-16 Domestic cash 18 15-22 8 3-13 Overseas property 6 2-10 6 2-10 Overseas equity 5 3-7 20 11-30 Overseas bonds 9 7-11 4 0-10 Required: a) Explain what is meant by the terms “strategic allocation” and “tactical allocation”. b) Discuss the type of investor that the above two portfolios are likely to be suited to. c) Discuss the advantages and disadvantages in portfolio 2 having a wide tactical range. d) What does the wide strategy of portfolio 2 assume about the efficiency of the market? Question 4 Jane Lack is contemplating borrowing $30,000 in order to invest into a managed fund. (a) Explain the nature and benefits of a managed fund to Jane. (b) What are the benefits and drawbacks of Jane borrowing the funds to invest into the managed fund? Explain. BAFI 1014 – Introduction to Financial Planning 2013 11

(c) What sort of things should Jane look at when determining which managed fund she should invest in. (a) Jane has been advised to “blend managers”. Explain this concept and its benefits. Question 5 (a) Two of the main investment styles are value and growth. Which style relies more heavily on timing the market? Explain. (b) Two important ratios used for investment analysis are the dividend yield and the price earnings ratio. Discuss the differences in assessing these ratios between a value and growth manager in terms of signalling an entry point into a particular share. Question 6 Malcolm has shares totalling $25,000 and is seeking to borrow funds to acquire a $50,000 share portfolio. (i) Explain what margin lending is and how it works. (ii) What other gearing products could Malcolm use to acquire the shares Question 7 Details relating to a company for the current year are as follows: Total tangible assets $4,500,000 Total liabilities $2,200,000 Shareholders funds $2,500,000 Market price $5.60 Number of ordinary shares 1,200,000 Dividends paid $140,000 Earnings after tax $850,000 (i) Calculate the following ratios of the company and determine whether the company is a good buy: Earnings per share: Price earnings ratio: Dividend per share: Dividend yield Net asset backing (ii) Discuss the benefits and limitations of fundamental analysis (iii) Do you believe the above company to be a good buy? BAFI 1014 – Introduction to Financial Planning 2013 12

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Topic 5 -Taxation Planning 1 Question 1 Mary is employed as a teacher and earns a salary of $40,000 p.a. She lives on 20 acres of land and runs ten head of cattle on the property. She derives income of $12,000 from the sale of calves and agistment and incurs expenses of $18,000 for feed, mending of fences and other costs relating to the hobby farm. Will Mary be able to claim a loss from the business to use for offsetting against the salary income? Explain. Question 2 Pam is 17 years old and receives income during the year of $22,000. Discuss the possible tax implications of this income to Pam. Question 3 Mrs X earns $50,000 salary. Mr X is not employed and has no salary. The couple has 1 dependant child. (a) How much tax does Mrs X have to pay? Mrs X’s mother died and left her $80,000 which she intends to place in the bank for 12 months @ 6.25% p.a. (b) Calculate the tax payable if she invests in her own name. (c) Calculate the tax payable if she invests in joint names. (d) Suggest how the X’s could minimise the tax payable. Question 4 Mr. J has a gross salary of $45,000, interest income of $250 and cash dividends of $5,000 (franking credits amount to $2,143). Deductions consist of the following: subscriptions to professional journals $250, travelling to and from work $450, entertainment expenses $120, home office expenses $85 and tax preparation expenses of $500. PAYG withholding tax of Mr J. amounted to $12,000. Mr J has a dependant spouse (separate net income of $2,000) and 2 dependant children. The family pay $2,600 p.a. for private health insurance and has elected to claim the tax rebate against their tax payable. Calculate the tax payable for Mr J using provided tax rate threshold. BAFI 1014 – Introduction to Financial Planning 2013 13

Question 5 Mark and Monica Jones are partners in the Ace Printing Works with a 40% and 60% interest respectively. The partnership has the following information: Income from Business $105,000, business deductions $30,000, dividends received $9,000 (imputation credits $5,064), interest received $2,000. (i) Explain how Mark and Monica would be taxed on the net income from the partnership. (ii) The Jones’ are looking at acquiring some further shares and are wondering in whose name the shares should be acquired in: the partnership, in joint names, in their individual names or in the name of a family company. What is your recommendation. Question 6 Jane is retiring from her job at age 57 on 31 December 2014 and has plans to withdraw $400,000 of her $650,000 superannuation fund in the form of a lump sum. The details of the superannuation payout will be as follows: Superannuation payout ........................................................... $400,000 Components: Tax free …………………………20% Taxable ……………………….. 80% Wage and salary income ............................................................ $91,000 Interest received ........................................................................... $5,000 Required (i) Calculate the after tax income for Jane on the basis of her withdrawing the superannuation payout. Assume that Jane has a private health insurance. (ii) Discuss the alternatives available to Jane to withdrawing the superannuation payout in the form of a lump sum. (iii) Jane has been advised to make a Non-Concessional Contribution (formerly known as an undeducted contribution) of $50,000 (proceeds from a term deposit) to the fund prior to her retiring on 31 December 2014. Do you agree with this strategy? Calculate the after tax income based on the $50,000 Non-Concessional Contribution. She will still withdraw the $400,000 after making the $50,000 Non Concessional contribution. BAFI 1014 – Introduction to Financial Planning 2013 14

Topic 6 – Taxation Planning 2 Question 1 In July 2014, Deidre sells a parcel of shares in Coles Myer for $22,000. The shares had been purchased in June 1996 for $16,000. Brokerage and other costs of sale and purchase total $400. The indexation number was 119.8 for the June 1996 quarter and the frozen index number at September 1999 was 123.4. Required a) Calculate the capital gain / loss on the disposal of the shares by Deidre so as to minimise any tax payable. b) Calculate the capital gain / loss on the sale if the shares were sold for $15,500 c) What would have been the tax implications if the shares had been acquired in December 2013? Question 2 For the year ended 30 June 2014, Tracey incurred the following capital transactions: Sold a unit for $150,000 on 1 April 2014 that she had purchased for $180,000 on 20 September 2007. Sold some shares for $85,000 on 24 February 2014 that she had acquired for $45,000 on 25 June 1994 Calculate the net capital gain forming part of Tracey’s assessable income for the year ended 30 June 2014. Question 3 Discuss some of the benefits and limitations of setting up a family company for the purposes of holding investments. Question 4 Edward would like your advice on the tax implications of borrowing funds and investing in the stock market. Edward is an aggressive investor and is looking at using his savings and borrowing further funds to acquire stocks in the technology sector. Edward earns $40,000 p.a. and maintains a dependent wife and 3 children. Edward is looking at borrowing $50,000 and investing $100,000 into the stock market (b) Discuss the benefits and disadvantages of Edward undertaking negative gearing including margin lending. Do you believe borrowing is appropriate for Edward? Discuss. BAFI 1014 – Introduction to Financial Planning 2013 15

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(c) In whose name should the acquisition of a negatively geared investment be generally held within the family? Would it make a difference if the investment were positively geared? (c) Would negative gearing be a suitable strategy for the purchase of debentures or other fixed interest investments? Discuss. (d) Edward also seeks your advice on behalf of his brother. His brother is looking at investing $200,000 into either shares or a debenture for a period of 5 years. Based on the following assumptions, which would you advise: Shares: -dividend of 3% paid annually which is reinvested -annual capital growth of 2% Debentures: -interest of 5% paid annually Question 5 Discuss the circumstances under which a liability to Fringe Benefits Tax will arise. Question 6 James Blogg is provided with a car fringe benefit from his employer. The fringe benefits taxable value is $12,000. Required a) Who is liable for the FBT payable? b) Discuss some of the factors that James’s employer would take into account in deciding which method they would adopt in determining the taxable value of the car fringe benefit c) Discuss whether superannuation is an effective salary sacrifice option for all employees. Question 7 You are provided with a car from your employer. The following details are available: Purchase price of car (owned by employer) $30,000 Total kilometres expected to be travelled during year 22,000 km Car will be made available for the full year Contribution by you to the provision of the vehicle $1,000 Cash operating costs of car $9,500 Business kilometres expected to be travelled during the year 17,600 km Calculate the taxable value of the car benefit so as to minimise the fringe benefits that you will incur. BAFI 1014 – Introduction to Financial Planning 2013 16

Topic 7 - Social Security Question 1 Access the centrelink site ( http://www.centrelink.gov.au ) Rates used will be for period ending September 2014- Refer to additional centrelink rate document on DLS i. What are the conditions that must be satisfied in order to get the Newstart Allowance? ii. Who is entitled to claim the Youth Allowance? iii. What benefits do pensioners get (pensioner concession cards)? iv. Find out about the Seniors Health Card What is it? Who gets it? What benefits are provided? Question 2 (a) Suppose that Mr and Ms Moon own their own home and have $500,500 in other assets. What pension entitlement would they receive? (b) Mr Travis lives on his own in a rented flat. He has other assets of $150,000. What pension entitlement would he receive? (c) Ms Cooney owns her own home and has other assets of $250,000. By how much will the full pension be reduced? Question 3 Who of the following persons are eligible to receive the Age Pension? a) Annabelle single aged 63 years, income $1,200 per fortnight, home owner, assets $200,000 b) George single aged 63 years, income $106 per fortnight, home owner, assets $120,000 c) Stanley married aged 66 years, income combined $170 per fortnight, non-home owner, assets $420,000. Has been an Australian resident for 8 years d) Shirley married aged 67 years, income combined $1,400 per fortnight, home owner, assets $400,000 BAFI 1014 – Introduction to Financial Planning 2013 17

Question 4 Ms Green has the following financial investments: Credit union term deposit account – $25,000 earning 4% Bank account – $30,000 earning 1.5% Shares – $10,000 earning 15%. 1. Calculate how much income she will be deemed to have earned for income test purposes. 2. Calculate how much income she would have actually earned. Question 5 Mr. and Ms. Pims, who are both aged 65, supply the following information in relation to determining their eligibility for the age pension. Their assets include the following: $ Family home 220,000 Cars 40,000 House contents 65,000 Shares in Telstra 15,000 Term deposit 20,000 Rental property 140,000 Managed investments 50,000 Income sources include the following: Dividends 700 Interest 200 Rental income 4,000 Managed investments distribution 2,000 Salary from part-time employment 10,000 Required a) Explain how the age pension incomes test will apply to each of the above assets of Mr. and Ms. Pims. (b) Calculate how much income the Pims’ will be deemed to have earned for income test purposes. BAFI 1014 – Introduction to Financial Planning 2013 18

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(c) Assess the Pims’ eligibility for an age pension under both the income and assets test. Calculate the amount of pension they will receive. Question 6 Peter and Jill are 65 and 64 respectively and are looking forward to retirement. They are homeowners and own the following assets jointly: $ Savings account 100,000 Share portfolio 102,000 Term deposit 60,000 Car 22,000 Contents 28,000 Managed fund 103,000 Total $415,000 Required (a) What will be the entitlement of Peter and Jill under the Age Pension? (b) What difference would it make to their entitlement if Jill was only 60 years of age? Question 7 Discuss possible strategies that may be available to people approaching age pensionable age to increase their pension entitlement. BAFI 1014 – Introduction to Financial Planning 2013 19

Topic 8- Superannuation Question 1 Discuss the various tax advantages that apply to superannuation as an investment vehicle from the point of view of: -an employer -an employee -a self-employed person Question 2 Sue is a self employed hairdresser aged 34. This financial year she expects to earn $95,000 and wants to maximise her contributions to superannuation. (a) What is the maximum tax deduction that Sue can claim for the year 2014/2015? (b) How much can she contribute as a non-concessional contribution? Question 3 Jason and Ingrid have little knowledge or interest in their superannuation and are not convinced about the benefits of contributing. They have contributed a small amount this year on the advice of a family member. Jason has received the following statement from his superannuation fund and asks if you could explain some aspects of it: ABC Master Superannuation Fund $ Member balance at 1 July 2013 10,000 Employer contributions - Member contributions 4,000 Tax on contributions (600) Administration costs (100) Earnings of fund 1,700 Member balance at 30 June 2014 15,000 Death and permanent disability benefit 120,000 Preserved benefit 15,000 From the above statement, you are required to answer the following: (a) Explain to Jason whether he is able to access any of his superannuation funds at the present time and indicate when he becomes entitled to withdraw the total fund balance. BAFI 1014 – Introduction to Financial Planning 2013 20

(b) Jason was advised by his accountant a few years ago to contribute superannuation into a Master superannuation fund structure. However, Jason was never explained the reasons for this. Briefly describe to Jason the benefits of contributing superannuation into a Master superannuation fund structure as compared to a retail managed superannuation fund structure. (c) Jason is querying the item shown in his statement entitled “tax on contributions”. Explain the nature of this tax and how it is calculated. (d) How should Jason determine what asset allocation his superannuation should be invested in? Question 4 Your employer is offering you the option of transferring your funds from the defined benefit superannuation fund to an accumulation superannuation fund. (a) Explain the difference between a defined benefit fund and an accumulation fund. (b) What factors would influence your choice to switch funds? Question 5 Janet has been working for the past 15 years and has accumulated balances in four superannuation funds totalling all up $220,000. All funds are invested in conservative asset classes earning relatively low returns. Janet is 52 now and is looking at retiring at age 60. Her plans at age 60 are to withdraw all funds, and purchase an expensive new car, go on an extended overseas holiday and then apply for the old age pension. Her other assets consist of $20,000 held in a cash management trust and $50,000 held in debentures. Janet has a well paying job but also has been living an expensive lifestyle. What would your advice be to Janet in respect of her superannuation and plans for the future? Question 6 Peter has the following superannuation benefits in his employer’s superannuation fund (which are all preserved):- Tax free 5,000 Taxable 35,000 Total 40,000 a) If Peter is aged 54 and retired, can he withdraw from his fund? b) Assuming Peter can access all his funds, how much tax would he pay if he withdraws this on 4 th July 2014? c) What advice might you give to Peter about withdrawal of his funds? BAFI 1014 – Introduction to Financial Planning 2013 21

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Question 7 – (a) Paul, aged 22 is a rising football star. He has negotiated a new contract and is expecting a rapid increase in his pay from a base of $70,000 to $270,000 for each of the next three years. Paul wants to know how much he could ask his employer to put into superannuation on his behalf and how much tax would be payable. (b) Peter then questions whether he should put as much as he can into superannuation. What do you think? (c) Peter asks whether superannuation is really so tax effective as an investment. He recalls a conversation with a manager at work, which indicated that negatively gearing into property was a better form of investment. What do you think? BAFI 1014 – Introduction to Financial Planning 2013 22

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Topic 9 Planning to retire and Retirement Incomes Question 1 Discuss some of the issues that a client is likely to be concerned with when planning to retire. Question 2 Kim is 56 years old and about to retire from her job. Details are as follows: Retirement date 1 st December 2014 Commencement of employment 1 July 1969 Superannuation balance $420,000 Tax free 30% Taxable 70% Marginal tax rate 30% Salary for year will be $45,000 Required (a) Determine the total tax payable on the payment if Kim retires on 1 December 2014. Assume that she withdraws $300,000 for both parts (a) and (b) and leaves $120,000 in her accumulation account. (b) What is Kim’s taxation liability on the payment if she makes a $50,000 non- concessional contribution to her superannuation fund before cashing out? Question 3 (a) Explain the main differences between an annuity and a pension. (b) What are the main types of pensions and annuities? (c) Are there any restrictions on the ability to acquire a pension or annuity? Question 4 Liam and Lucy have decided to retire. At this stage, they are both 62 years of age. Liam’s accumulated balance in the fund is $320,000 (tax free 40%; taxable 60%) and Lucy’s is $240,000 (tax free 30%: taxable 70%). Required (a) Discuss the main retirement issues that Liam and Lucy will need to consider. (b) What income stream products are available to Liam and Lucy? What issues need to be considered in determining which particular income stream product is suitable? (c) Explain their rights to withdraw some capital at any stage from the income stream products. BAFI 1014 – Introduction to Financial Planning 2013 23

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Question 5 Pam is aged 58 and has just retired with a superannuation balance of $320,000, which includes tax free component of $60,000. Pam decides to acquire an allocated pension with the funds. Required (a) Determine the minimum income payments that Pam is able to withdraw? (b) Calculate the taxable and deductible amount of the income payment. Note: Assume that her income stream commenced pre 1 July 2007. (c) Pam has heard that a tax rebate may also apply to the income payment. Is Pam correct? Discuss. Question 6 John is 56 and will retire on 1 st September 2014 with a superannuation balance comprising the following amounts: Tax free 190,000 Taxable 180,000 Total 370,000 John considers acquiring an allocated pension with the funds. Assume he has other taxable income of $15,000. Required (a) If John elects to take out the minimum income payment, calculate the taxable income of John and the total tax payable that he could expect to pay for the year ended 2014/2015. Assume current tax rates. (b) However, John decides to undertake some planning for his finances. Assume that on 1 st August 2014, and before John commences his allocated pension, John decides to withdraw $120,000 from his super fund and to re-contribute this amount back into the superannuation fund balance as a non-concessional contribution before acquiring an allocated pension. Calculate the amount that John would withdraw from each component and indicate any taxes that he would have to pay. (c) Assume John does as he plans by withdrawing and re-contributing. On the basis that John then withdraws the minimum income payment from the allocated pension, calculate the taxable income and tax payable for the 2014/15 year of income. BAFI 1014 – Introduction to Financial Planning 2013 24

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Topic 10- Insurance Question 1 Nicole and Sam seek your advice concerning their insurance requirements. From a client fact finder you determine: Nicole is aged 29 and Sam is aged 31. Nicole works as a computer operator and earns $30,000 p.a. and Sam runs his own architecture business from a city office, which produces an average net profit of $85,000 before tax. They have one child aged 5. They own their own apartment worth $330,000, which is subject to a mortgage of $220,000. Both Nicole and Sam own their own cars. Required (a) List the potential risks faced by the couple in terms of their assets and income. (b) What type of life insurance policy would you recommend for Nicole and Sam? Explain. (c) You have advised the couple to take out a life policy for $500,000 each. However, the couple is surprised to think that they would need so much coverage and are not happy to pay out the required premiums. What steps could you undertake to protect yourself against future litigation if the couple decide not to take up your recommendation? Question 2 John recently acquired a new plane. He plans to use it mainly for personal purposes, but will also use it for charter trips in order to raise money to help him make payments on the loan and for maintenance costs. (i) Advise John on the risks he faces in owning the plane, whether the risks are speculative or pure, and how best he might handle each of those risks. (ii) To save some money, John decides to insure the plane for less than what it is worth. How is an insurance company likely to deal with this position in the event of a claim? Question 3 Helen and Jim are in their 60’s and have run their own business from home for the past 15 years. They are looking at retiring in three years time. Apart from normal domestic insurances, they have not taken out any other type of insurance. They are now wondering whether they should take out life insurance and income protection insurance. Explain the advice you would provide. BAFI 1014 – Introduction to Financial Planning 2013 25

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Question 4 For the following situations, describe the type of life insurance that you would recommend: (i) James aged 31, is married and has just taken out a $100,000 home mortgage. He is a reasonably aggressive investor and is looking at being debt free by the time he is aged 45. (ii) Julie, aged 32, is looking at establishing an education fund for her 3 children who she hopes will be going on to tertiary studies within the next 10-15 years. Julie is a reasonably conservative investor, has $60,000 of debts and is looking at taking out some life insurance. (iii) Fred aged 38 is a conservative investor, has $120,000 in debts, a spouse and 3 dependent children. He is after a long term life policy. (iv) Stuart is aged 55 has $20,000 worth of debts. He is looking at retiring within the next 2 years. He has a spouse and 1 dependant child who will be finishing university within 2 years. Question 5 For each of the following situations, describe the insurance policy(s) you believe were most appropriate: (i) Nina runs a coffee shop and slips on a step at home one day and suffers a back injury. As a result she is unable to work for 3 months and incurs significant medical costs. (b) Steven, an employee, suffers from stress and is required to rest at home for 2 weeks (c) Alfred is knocked down by a fork lift at work and is hospitalised for 3 weeks (d) Linda, an employee is diagnosed with cancer incurs a significant amount of medical costs. She dies within 6 months of the diagnoses. (e) Peter was a self-employed plumber. Due to an accident at a construction site one day, he suffers an accident and is unable to work again as a plumber. Question 6 Identify the types of financial losses likely to be incurred by each of the following parties. (a) A person who negligently injures another motorist in a car accident. (b) A restaurant that is shutdown for 6 months because of a cyclone. (c) A family whose ‘breadwinner’ dies prematurely. (d) A student who is permanently disabled. (e) A tenant whose flat burns down. BAFI 1014 – Introduction to Financial Planning 2013 26

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Question 7 Mr and Mrs Client approach you to assess their financial position with a view to obtaining advice on the best means of securing their assets and future income. The Clients have provided the following account of their particulars: Employment : Mr Client is a financial planner who works from home and has set aside a separate part of his home for this purpose. His taxable income is around $130,000 p.a. Mrs Client does not anticipating returning to the workforce. Family assets and liabilities: $ Assets Bank 40,000 Cars 50,000 Home content 40,000 Equipment for practice 18,000 Home 400,000 Managed fund 150,000 Investment property 290,000 Superannuation – Mr Client 250,000 Liabilities Mortgage on home 200,000 Credit card 3,000 Loan on investment property 240,000 Personal loan 20,000 Required (a) Identify the risks to the assets and income of the Client’s. (b) Provide recommendations to the Clients on their risk management on the basis that Mr and Mrs Client are in their mid - forties and have 3 small children. (c) Determine how much life insurance Mr Client should have based on the following assumptions:  Funeral and medical expenses $4,000  Total education costs of children $60,000  Annual living expenses (including holidays) $50,000  Annual care of the children $12,000  The couple estimate they have 20 years before they are able to retire  Upon the premature death of either partner, they wish to be debt free  The assumed rate of return on investment is 8% BAFI 1014 – Introduction to Financial Planning 2013 27

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Topic 11 - Estate Planning Question 1 (a) What is a will and what does it do? (b) Outline the rules of intestacy in Victoria. If Jan dies intestate leaving assets of $300,000, and has a surviving husband and two children, how will Jan’s assets be distributed? Would it make any difference if Jan were separated from her husband? (c) Who needs a will and when should it be changed? (d) What effect does divorce, remarriage and separation have on a will? (e) Outline the role of a professional trustee company. Question 2 (a) Detail some of the assets that can and cannot be distributed as part of a Will. (b) Outline the different ways in which a house owned by the deceased may be distributed to his spouse, based on the following situations:  the deceased owned the house outright; and  the deceased had a share in the ownership of the house with their spouse. Question 3 A mother dies leaving her husband and four minor children. Under the following scenarios, what would the tax free threshold be for the family? (a) A testamentary discretionary trust was established. (b) A testamentary discretionary trust was NOT established. Question 4 Kevin’s father dies and leaves an Estate valued at $420,000 to be split equally between his three sons. Kevin’s share of $130,000 can be assumed to be returning 8%. What are the benefits in the father establishing a discretionary testamentary trust in his Will based on the following situations: (a) Kevin is 45 and has two minor children; and (b) Kevin is 65 and is in receipt of an Age Pension (c) Kevin runs a business and is facing bankruptcy. BAFI 1014 – Introduction to Financial Planning 2013 28

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Question 5 Fred is looking at drawing up his Will and is looking at how best to distribute his Estate equally between his three children. His assets consist of the following: $ Principal residence 320,000 Shares 140,000 Investment property 185,000 Bank account 60,000 Managed fund 190,000 Term deposit (held jointly with the eldest son) 100,000 Total 925,000 Fred is proposing allocating his assets as follows:  the principal residence to his eldest son  the investment property and the shares to his second child  the managed fund, bank account and his half of the term deposit to his youngest child Comment on some of the issues that need to be considered in Fred’s proposals. Question 6 You have just accepted a position at your local newspaper as Mr Money, a financial advice columnist. The following letter arrives in your tray on the first day. You are required to provide a detailed response. I am 61 years of age with three grown up children and have recently remarried. My husband has two children from his first marriage. I am not in the best of health and want to ensure that my estate is left appropriately to my children upon my death. I own a house worth $240,000, a share portfolio worth $52,000 and some managed funds worth approximately $60,000. I have a will that was drawn up whilst my first husband was still alive and this provided for the appointment of an executor and a general Power of Attorney. The terms of the Will stated that all of my assets were to be distributed equally between my three children. However, I have had a number of arguments with my youngest daughter over the past 2 years and have provided her with a significant amount of money on the basis that she will not receive any inheritance from my estate. I would like to make the distribution from my estate as fair and as equitable as possible and plan to leave my house to my eldest son and the shares and managed fund to my eldest daughter. Both children are married with their own families and earn good incomes. BAFI 1014 – Introduction to Financial Planning 2013 29

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Required Can you advise whether my estate planning is appropriate to meet my needs? Is there anything else that I should be doing to ensure that my 2 children receive the maximum benefit from my estate? Can you also advise whether I can simply amend my existing Will to delete my youngest daughter from receiving any inheritance? Question 7 Betty Smith died on 31 July 2002. She left her estate to her sister Mary, son John, daughter Jane and two grandchildren who are both under 18. Her estate consisted of:  shares in BHP which were originally purchased in 1984,  shares in NAB which were purchased in 1987;  a home unit purchased in 1983 for $95,000 (current market value $175,000);  an investment property purchased in 1988 for $120,000 (current market value $195,000);  cash in a bank account of $5,000;  a half share in the family home, which she jointly owned and resided in with her sister Mary. The terms of the Will stated: 1 That all the shares were to be transferred to her daughter, Jane. 2 That the home unit was to be transferred to her son, John. 3 Her share in the family home to be transferred to her sister, Mary. 4 The investment property to be sold and the monies held in trust for the two grandchildren until they reach age 25. NOTE: John Smith was declared bankrupt on 10 September 2002. Required What are the taxation consequences, if any, for the estate and each beneficiary? BAFI 1014 – Introduction to Financial Planning 2013 30

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