Professional Documents
Culture Documents
29 Esther Court,
Brickhill Vic 3999
22 February 2013
Our goal is to assist you in making the right decisions free of emotion ensuring
your financial pathway leads you to your desired retirement outcome. Please feel
free to contact me should you require any further information and I will be only
too happy to assist.
Kind Regards,
David Glover.
Financial Planner.
Recommendations Overview
$100000.00 left to Jessica by her mother has not been allocated to any
expense or investment. This amount could be allocated toward some of
your retirement goals
Results are in todays dollars so the result has been adjusted for inflation
and a rise in the standard of living. The following increases have been
assumed 2.5% and 1.5% respectively.
Superannuation is set to run out at age 90. After age 90 you will be reliant
on the aged pension.
Taking no action presents a massive risk to your financial future
and retirement income.
Recommendations
Home Loan
As stated, one of your goals is to ensure that your mortgage is paid off at
retirement. Currently you are paying a total of $30504.00 per annum of which
you have stated will be fully paid off in approximately 6 years. Obviously to
achieve paying the mortgage off early your payments will need to increase. This
has a two prong effect whereby you will be mortgage free quicker and will reduce
the total amount of interest you would have otherwise paid.
From the information you have supplied, I have assumed that you pay your
mortgage monthly and have estimated the interest rate you are currently paying
to be 6.65% per annum. Assuming that you change your mortgage payments by
the 1st of March 2013, you have 4 Years and 4 months before retirement to pay
off your home loan.
As Thomas and Jessica already enjoy an unaccounted surplus of income after tax,
to ensure that the mortgage is paid off prior to retirement I recommend that the
mortgage repayments be changed from monthly to weekly and increased to
$824.00 per week. This will ensure that the mortgage is paid off in exactly four
years.
By implementing this recommendation, comparatively per year Thomas and
Jessica will need to pay an additional $12344.00 off the mortgage. By doing this
they will not only be mortgage free by retirement but will have saved $11315.00
in interest.
Inheritance
In regards to the $100000.00 inheritance Jessica is to receive from her mother, I
recommend that the money is used to make a non-concessional contribution into
Jessicas account to increase her superannuation from $100000.00 to
$200000.00. This will help maximise income generated by her superannuation
on retirement. I will discuss the impact this will have later.
Investor Profile
From the information you have provided regarding your understanding of
investing and the risks associated with investing, I believe your investor profile
lies somewhere between Balanced and Growth. In the lead up to retirement I
believe it is important to ensure that your money is working hard for you. I
therefore recommend in the lead up to retirement you implement a growth
strategy to maximise your returns.
5%
10%
Cash
Fixed interest
50%
Property
Shares
35%
The above pie graph indicates how the funds within your superannuation account
would be invested growth option strategy. Its important to note that a growth
strategy may not be suitable in retirement and your investment strategy would
need to be reconsidered.
Superannuation
Superannuation in Australia represents one of the most tax effective ways to
save for your retirement. Contributions to superannuation are made up of two
types being concessional and non-concessional.
Concessional contributions include superannuation guarantee contributions,
salary sacrifice contributions and personal concessional. Concessional
contributions are tax deductable and are taxed on entry at a flat rate of 15%.
From the 1st of July 2009 a cap of $25000.00 for concessional contributions was
introduced. Concessional contributions in excess of the cap attract an additional
31.5% tax in addition to the 15% tax.
Non-concessional contributions are those contributions made from your own
funds without claiming a tax deduction. These contributions could come from the
sale of assets, an inheritance or a lotto win. As with concessional contributions,
at the 1st of July 2007 a cap of $150000.00 was introduced for non-concessional
contributions. People under the age of 65 can contribute up to $450000.00 by
Jessica West
Pre-tax Income
Less Salary
Sacrifice
Taxable Salary
Less Tax
Net After-tax
Income
Before
Strategy
$39,000.00
After
Strategy
$39,000.00
$39,000.00
$4,222.00
$20,800.00
$18,200.00
$0.00
$34,778.00
$18,200.00
Medicare has not been taken into account when calculating the income tax
payable.
As you can see Jessica will now be contributing an additional $20800.00 on top of
the $2700.00 that her employer already contributes as part of her
superannuation guarantee payments. This brings the total of her concessional
contributions to $23500.00. I do not recommend salary sacrificing any more than
$20800.00 as it is not tax effective. Jessicas marginal rate of tax above
$18200.00 is 19% for every dollar. Salary sacrificing more than $20800.00 would
bring her income below the tax free threshold of $18200.00 where no tax is
payable. If she was to do so, those additional contributions above $20800.00
would be subject to the 15 % contributions tax.
Its important to note that the $20800 would be subject to the 15% contributions
tax. This would total $3120.00 making a tax saving overall of $1102.00 per year
after implementing the salary sacrificing strategy. The salary sacrificing strategy
has also reduced her net after-tax income to $18200.00. This will need to be
taken into account when assessing how much money is available for Thomas to
make non-concessional payments.
Jessica West
1st July Fund
Balance
SGC 9%
Salary Sacrifice
contributions
Less 15%
Contributions Tax
Net After-tax total
Plus Nonconcessional Cont.
Fund Total at 30
June
Average 6% return
after tax
Total of fund
2012-2013
2013-2014
2014-2015
2015-2016
2016-2017
$100,000.00
$2,700.00
$220,679.66
$2,700.00
$255,093.94
$2,700.00
$291,573.08
$2,700.00
$330,240.96
$2,700.00
$6,933.33
$20,800.00
$20,800.00
$20,800.00
$20,800.00
$1,444.95
$108,188.38
$3,525.00
$240,654.66
$3,525.00
$275,068.94
$3,525.00
$311,548.08
$3,525.00
$350,215.96
$208,188.38
$240,654.66
$275,068.94
$311,548.08
$350,215.96
$12,491.28
$220,679.66
$14,439.28
$255,093.94
$16,504.13
$291,573.08
$18,692.88
$330,240.96
$21,012.96
$371,228.92
$100,000.00
Thomas West
Although Thomas has been contributing $10000.00 to his super every year, the
reality is that considering the salary he is earning it would not equal what the
superannuation guarantee contribution (SGC) would be if Thomas was employed
on a wage (Currently 9% of salary). Because of this I have investigated ways to
which Thomas can increase his contributions as well as reduce his income tax. As
stated above the maximum concessional contribution that can be made in any
Pre-tax Income
Less Salary
Sacrifice
Taxable Salary
Less Tax
Net After-tax
Income
TRAP Income
Total After tax
Income
Before
Strategy
$144,000.00
After
Strategy
$144,000.00
$10,000.00
$134,000.00
$37,527.00
$25,000.00
$119,000.00
$31,977.00
$96,473.00
NIL
$87,023.00
$10,000.00
$96,473.00
$97,023.00
Gross Salary
Investment Income
Less Salary Sacrifice
Taxable Salary
TRAP Income
Les Tax
Net Income
Thomas
$140,000.00
$4,000.00
$25,000.00
$119,000.00
$10,000.00
$31,977.00
$97,023.00
Jessica
$30,000.00
$9,000.00
$20,800.00
$18,200.00
$0.00
$0.00
$18,200.00
Combined
$170,000.00
$13,000.00
$45,800.00
$137,200.00
$10,000.00
$31,977.00
$115,223.00
Less expenses
Mortgage
Household
Total Expenditure
$21,424.00
$21,000.00
$42,424.00
$21,424.00
$21,000.00
$42,424.00
$42,848.00
$42,000.00
$84,848.00
Annual
Income/Deficit
$54,599.00
-$24,224.00
$30,375.00
As above we can now see that there is still an after tax surplus of $30375.00. I
recommend that Thomas uses these funds to contribute to his superannuation
fund as non-concessional contributions. Below I have prepared a contribution
table to outline the contributions Thomas will make leading up to retirement.
Thomas West
1st July Fund
Balance
Less TRAP 1 March
2013
Total after TRAP
SGC 9%
Salary Sacrifice
contributions
Less 15%
Contributions Tax
Net After-tax total
Plus Nonconcessional Cont.
Fund Total at 30
June
Average 6% return
after tax
Total of fund
2012-2013
2013-2014
2014-2015
2015-2016
2016-
$270,000.00
$330,322.50
$394,264.35
$462,042.71
$533,8
$10,000.00
$260,000.00
$0.00
$10,000.00
$320,322.50
$0.00
$10,000.00
$384,264.35
$0.00
$10,000.00
$452,042.71
$0.00
$10,0
$523,8
$0.
$25,000.00
$25,000.00
$25,000.00
$25,000.00
$25,0
$3,750.00
$281,250.00
$3,750.00
$341,572.50
$3,750.00
$405,514.35
$3,750.00
$473,292.71
$3,75
$545,1
$30,375.00
$30,375.00
$30,375.00
$30,375.00
$30,3
$311,625.00
$371,947.50
$435,889.35
$503,667.71
$575,5
$18,697.50
$330,322.50
$22,316.85
$394,264.35
$26,153.36
$462,042.71
$30,220.06
$533,887.77
$34,5
$610,0
commenced and both Thomas and Jessica have ceased working. As the capital
gains will be taxable, it is preferred that these will be realised after both Thomas
and Jessica have ceased working as any capital gain will count towards both
Thomas and Jessicas assessable income. By waiting until after retirement to
dispose of these assets, advantages such as tax free thresholds and marginal
rates of tax can be taken into account.
As only limited information has been given regarding the capital growth of the
investment property and the managed fund. It is only possible to make some
assumptions as to the value of them at the time of disposal.
Investment property
Simple calculations show that the investment property has increased at an
average rate of 2.37% per year. I have calculated this as follows:
$220000.00/$300000.00= .733
1 - .733 = .267
.2677 x 100 = 26.7%
This means that the house has grown by 26.7% since it was bought
approximately 11.25 years ago giving it an average growth of 2.373%.
Allowing it a little time to sell after retirement I am estimating the investment
property to be worth about $337000.00 in 5 years time after.
Managed Funds
The managed fund has only depreciated from its original purchase price. Using
the same formula to estimate the disposal price of the managed fund that I used
with the rental property would mean that the managed fund would be worth
even less in 5 years then it is now. Although that may be the case it is probably
unlikely. The managed fund has probably had some bad years since it was
purchased and will more than likely make its way back up around the
$100000.00 mark when it is time to dispose of it in 5 years time. I will be using
$100000.00 to calculate the total capital gains.
Capital Gains
Purchase Price
Sale price
Capital Gain
Managed Fund
$100,000.00
$100,000.00
$0.00
Investment
Property
$220,000.00
$337,000.00
$117,000.00
Total
$320,000.00
$437,000.00
$117,000.00
The above table outlines the estimated sale price and corresponding capital gain.
There is no capital gain with the managed fund and all other earnings have
already been taxed and accounted for up to retirement. The investment property
will make a capital gain of $117000.00. Because the investment property has
been owned for more than one year, Thomas and Jessica are entitled to a 50%
reduction when calculating their capital gains tax. Because the residential
property was jointly owned between Thomas and Jessica the reportable capital
gain will be split between them and added to their taxable income.
The capital gain will be treated as follows:
$117000.00 x 50% = $58500.00
$58500.00 / 2 = $29250.00
Jessica West
Pre-tax Income
Less Tax
Net After-tax
Income
Jessica West
$29,250.00
$2,099.00
Thomas West
$29,250.00
$2,099.00
$27,151.00
$27,151.00
The above table indicates the tax that Thomas and Jessica will have to pay on
disposal of the two investments.
The table below indicates the total proceeds from the sale of both assets after
capital gains tax and liabilities are paid.
Sale price
Less investment
loan
Less Capital Gain
tax
Tax free proceeds
Managed Fund
$100,000.00
Investment
Property
$337,000.00
Total
$437,000.00
$0.00
$175,000.00
$175,000.00
$0.00
$100,000.00
$4,198.00
$157,802.00
$4,198.00
$257,802.00
The estimated proceeds from the sale of both investment assets total
$257802.00. I recommend that the after tax proceeds of these investments be
used to fund the first year lump sum requirements of $55000.00 for the new car
and holiday and the $80000.00 gifts to the children. After paying out these lump
sum payments Thomas and Jessica will be left with $122802.00 which I
recommend the contribute as a non-concessional contribution to either account
to ensure any future earning the money might make become tax free.
Holiday House
I recommend that Thomas and Jessica make enquiries into renting their holiday
house out when they are not using it. They might find they can make some
income from it offsetting its associated costs.
Reflection Piece
The trouble is you think you have time Buddha
When I reflect back upon this assignment the above quote comes to mind. The
trouble was I thought I had time. When I first looked at the assignment I thought
to myself this is going to be straight forward and I was looking forward to getting
started. Then my business started getting extraordinarily busier than normal
taking up a lot of my time and when I wasnt at work I was trying to spend what
time I had left with my family and pretty soon I was looking at the due date
freaking out. I applied for an extension and was lucky enough to be granted one.
So I got down to work and while busily assessing Thomas and Jessicas situation I
was thinking to myself I bet they wish they had looked into getting some
financial advice ten years or more before they decided to as it would have had a
dramatic affect to their retirement. I think that the trouble is most people think
they have time. The only extension that might be available to most people when
considering retirement is an extension to work longer. Not as appealing as the
extension I received.
I think that I approached the assignment pretty well. I read the information a
number of times to try and get my head around which information was important
to the assignment. The biggest problem was knowing where to start. Because
there were so many different recommendations that could be implemented that
may affect another process of the financial plan I found myself going back and
forth a bit which I assume is what most financial planners do.
The first issue I had was dealing with the 100k inheritance Jessica received from
her mother. I wasnt sure if I should use it to pay down the mortgage on the
house or make a non-concessional payment into Jessicas superannuation
account. I decided on the latter because although there would have been a
savings in the interest that would have been saved, my goal was to try and
maximise the amount of money both Thomas and Jessica would have in a tax
free environment on retirement.
In regards to the mortgage I used the online calculators to work out the interest
rate they were paying using the annual repayment and the information supplied
stating that the loan at current repayments would be paid out in 6 years. I found
that when dealing with the information supplied you need to make a lot of
assumptions. I assumed that they would not be making on annual payment off
their mortgage but were paying it monthly. From there I recommended that they
change their repayments to weekly and increase them so that the mortgage was
paid out in exactly four years.
I investigated making additional contributions to Jessicas superannuation finding
that salary sacrifice was probably the best way about going about it. Both
Thomas and Jessica had a lot of excess money to spend each year so I wasnt
concerned with starting a TRAP for her. I knew they would be able to cope with
the loss of after tax income incurred after salary sacrifice. I did the calculations
so that she was contributing the most amount possible as a concessional
contribution paying the least amount of tax possible. Her income tax was nil and
she only paid the 15% contributions tax.
For Thomas the first thing I noticed was that he had been contributing far less
then to his superannuation then would have been contributed to his super had
he been employed by someone else. As Thomas has reached his preservation
age and because of the potential tax savings I decided to start a TRAP for him so
I could maximise his tax savings as well as increase his concessional
contributions to the 25k maximum cap. After starting the TRAP Thomas enjoy an
overall tax saving, maximised his concessional contributions and very slightly
increased his after tax income.
I then did a reassessment of the after tax income that was available after
implementing my previous recommendations to find out what was left in the
kitty to make non concessional contributions. As I said earlier on my goal was to
maximise the amount of money Thomas and Jessica had in their superannuation
aiming for as high as possible tax free income after retirement. To keep things
simple I had the entire excess income paid into Thomass superannuation as nonconcessional contribution because at the end of the day there was no advantage
to splitting it up between them.
To help reduce capital gains tax I decided to wait to leave it till after they had
both retired completely from work. I had to make a few assumptions from the
information given about the future value of each asset when outlining the
possible outcome of disposing of these assets in five years time. As no returns on
investments can be guaranteed, I believe most financial advisors would make
assumptions as well. I think the important part was outlining what the potential
tax savings would be given there was a reportable capital gain.
I used the sale of these assets to fund the lump sums required in the first year of
retirement as there was already enough equity within both investments to fund
these requirements now so I assumed there would be even more once they were
sold in five years. I think this worked out well.
Presenting to the financial planner was a bit stressful. But once I got going I think
it flowed pretty well. He suggested I should have transferred all of the money
Thomas had in his super into the TRAP because all the earnings would be tax
free. When I set up the Trap for Thomas I was just trying to match his after tax
income with what it was before commencing a TRAP.
I enjoyed this assignment. I found it challenging. There seems to be an endless
amount of ways to go about getting a good result. Im happy with what I came up
with. I tried to keep it as simple as possible and not overcomplicate it. I think that
it worked and Thomas and Jessica would be happy had they chosen me as their
financial advisor.