Report on the Personal Financial Planning

Question: 1: When the investor invests in the property various acquisition expenses are incurred which the investor has to pay. The expenses which are incurred include corporate fees, conveyancing costs, bank fees, interest costs, mortgage insurance, stamp duty, and lots of other expenses. However, all these expenses do not make the pocket of the investor completely empty. If the investor has tax knowledge and if it takes advice from an expert then it can claim various expenses that are related to the purchase of the property. Claiming deductions and preparing tax returns is a complex task. The criteria for different expenses are not the same and there are no hard and fast rules that apply all the time.

According to the guidelines of the Australian Taxation Office (ATO), the tax expenses can be categories into two types which include the expenses which can be claimed and those expenses which cannot be claimed for deductions. The following are the expenses which cannot be claimed by the investors:

·         costs associated with disposal or acquisition of property

·         costs such as conveyancing costs, advertising of property and stamp duty which is related to acquisition and disposal are not deductible

·         If the costs such as water and electricity are incurred by tenants, not by the owner then such expenses are also not deductible.

·         Costs that are not associated with income generation of the property.

The costs which can be claimed by the investors according to the guidelines of the Australian Tax Office are mentioned as follows:

·         Interest on loan & bank charges

·         corporate fees

·         expenses related to advertisement for tenants

·         council rates

·         water, electricity and gas charges

·         pest control

·         repair and maintenance expenses

·         travel and car expenses

·         legal and lease expenses

The above-mentioned expenses can be claimed by the investors while filing their tax returns. If the case of Brain is analyzed critically than it can be said that there are some expenses that are tax-deductible whereas some expenses cannot be deducted. The expenses which cannot be deducted from tax include the purchase of property $450,000 and the related conveyancing cost of $2000. The costs which can be claimed by Brain include $3000 repair cost. The car expenses of $2000 are also deductible. However, if the water charges are not associated with tenants than these charges cannot be deductible from the tax. Overall it can be said brain can claim repair and travel expenses from the tax returns.

Question: 2

In accordance with the case scenario, Celine is currently a citizen of Australian and she receives an unemployment benefit of $9, 400 in wages. While income generated from other sources is more than 6000 in a 12-month duration.

Total Assessable Income: According to the case scenario, the assessable income of Celine is stated below:

Following the current laws and regulations for tax exemption, Celine income does not fall in the category of tax exemption. Thus, the total amount of 22043 will be considered as taxable income for Celine in the relevant year.

Nominal Tax Payable: Now we will calculate income tax for Celine while using the Australian income tax rates for residents. The following table represents the tax rates for 2019 (as question require tax rate for last year) (Superguide.com.au, 2019).

Now calculating income tax for Celine:

Considering the above calculation, the total nominal income tax payable (without any deduction) by the Celine for 2019 is $730.

Medicate levy:  According to the case scenario, Celine is a single person who has no family dependents. Thus, while calculating medicate levies we will consider this situation. Following Australian law, every citizen is required to pay to medicate levy at least 2%of their total taxable income as fund or cost for public health system organized by the Australian government. While considering the policies of 2016-2017 the total payable rate is around 10%.

Somehow, medicare levy surcharge varies (e.g. 1%, 1.5% and 1.25%) in accordance with the income threshold rates set out for the relevant year. The following table represents the medicare levy surcharge for Australian citizen.

According to this table, the taxable income of Celine (22043)  is below the minimum required limit of $90,000, therefore, Celine has an exemption from Medicare levy surcharge (MLS) (Ato.gov.au, 2019).

Low-Income Tax Offset:  Although, Celine entitled for the low-income tax offset as total income is below the threshold of $37,000. Following the tax policy of the Australian Tax Office (ATO), low-income tax offset amount is $445 for every person whose income is less than $37,000 (Ato.gov.au, 2020).

Total Tax Payable/Refundable: Based on the above calculation and results here total tax payable/refundable is calculated for Celine:

Based on all calculation it can be said that total income tax is limited to 730 and the total refund amount will be -19.

Question: 3

According to the case scenario, Shane wants to enjoy tax-free pension after his retirement. Currently, Shane around one year in retirement. Shane is expected to get retirement on 30 June 2020 while his current balance in superannuation is $1.4 million. Following the rule of the Australian government, a retired person with a superannuation balance of  $1.4 million will have to pay at least a 15% tax rate on each drawing from the super amount. However, a retired person like Shane can enjoy tax free pension if the balance of their superannuation is at least above the minimum limit of $1.6 million. Considering this tax exemption policy, Shane will have to increase his superannuation balance to at least $1.6 million (the limit for tax-exemption).

Now calculating his remaining balance or required contribution to reach the minimum limit of $1.6 million before retirement.

Thus minimum required contribution is $200000 in one year duration. Following the superannuation policy of Australian Government, a person can contribute in his/her superannuation by two methods (concessional contribution method and non-concessional contribution method) to maximize his/her superannuation balance in a year for tax exemption benefits. However, there are some limitations to the contribution amounts regarding both of these methods.

Concessional Contribution: The concessional contribution is a legally allowed contribution in the superannuation if it does not exceed the total maximum allowed contribution in a 12-month duration. Following current policy for maximizing the concessional contribution, a person can invest the presented below amounts in the relevant years in his superannuation:

According to this, Shane can invest at $45,000 in two-year duration ($15,000 during the remaining month of 2019 and $30,000 in 2020).

However, if he exceeds this maximum allowed limit of contribution then the government will consider this amount as the excessive concessional contribution which is wrong under the laws and policies of the Australian Government. In such a situation, the government take action and sent you to notice for correction if the excess contribution was made mistakenly.

Somehow, the concessional contribution is not exempted from taxes. The individual carry forwarding the concessional contribution in superannuation funds is required to pay tax on the invested amount (Centrepointalliance.com.au, 2017). Considering this, Shane would have the following tax payable amount for his concessional contribution:

Non-concessional Contribution: The second method for maximizing the superannuation contribution balance is to invest by non-concessional contribution. In this method, Shane will not be required to pay tax to the government. Instead, Shane will have an exemption from taxes liabilities. However, some limitations regarding investment sources apply to this method. Following the non-concessional contribution policy of the Australian government, Shane can invest only $200, 000 in one year duration (Centrepointalliance.com.au, 2017). Currently, superannuation balance is at the minimum limit (of $1.4 - < $1.6 M threshold) therefore available contribution and bring forward amount allowed for Shane is $100000 + 1 year bring forward (Amp.com.au, 2020).

Suggested Superannuation contribution strategy:

Based on the above information, it is clear that Shane still has the opportunity to maximize his superannuation by $245,000 to reach the required limit of $1.6 million for tax free pension benefit. Shane is eligible to contribute $200000 in non-concessional contribution (NCC) which is beneficial than concessional contribution (CC) method as it saves Shane from taxes. Thus, the suggested superannuation contribution strategy for Shane is to maximize his superannuation fund balance by $200, 000 contribution in non-concessional contribution option in 2019 and 2020 before his retirement. However, if he is unable to arrange this amount in one year duration then he should invest $15,000 as a concessional contribution with tax expense in 2018-2019. Then, he can make arrangement of remaining $185000 to maximize his contribution by non-concessional contribution method during 2019-2020.

Thus, Shane would have to pay a tax of $2250 in 2019. Somehow, some possible options for investment in non-concessional contribution without excess and legally allowed by the Australian Government are stated below:

1)      Sale of Assets (contribution in NCC before 90 days).

2)      Spouse contribution if proper merit is met (superannuation savings between spouse suggested by the Australian government)

3)      Loan amounts

4)      Gift or rewarded money

Note for Next Writer: Question 2 and 3 are complete. Remaining questions: 1, 4, 5, 6, and 7. Questions are in PDF file.

Question: 4

Question: 5

Income protection insurance is important for individuals for many reasons. The individuals should consider income protection insurance if they are:

·         Self-employed or running a small business. such individual does not get annual leave due to accident, injury or illness

·         the family members rely on the income that the individuals earn

·         The person has taken some kind of loan such as mortgage. Whether the person is working or not it would have to make payment.

What benefit level would you suggest Mason take?

There are different insurance organizations that provide different income protection insurance policies. It is up to Mason to decide which policy will be best for him. The income protection insurance provide benefits which include unemployment insurance, sickness and accident etc. it is suggested to Mason to take such income protection insurance policy that covers unemployment and personal accident and sickness. Because Mason has taken the mortgage of $80,000 if Mason due to any accident unable to do its work than this policy will help him to make the mortgage payment. As he is getting older the chances of getting sick are also higher. Therefore choosing the above-mentioned policy would be better for him.

What benefit period would you suggest be taken?

The benefit period is the time regarding how long the monthly payments will last. The insurance policies related to income protection provides a 2 to 5 years benefit period. It can be said that the policies which have a longer benefit period are considered more expensive whereas the policies which have a shorter benefit period are less expensive. It is suggested to Mason to take 5 year benefit period policy or policy which lasts up to the age of 65.

What waiting period would you suggest?

The waiting period is the time which the individual will have to wait before the payment begins. Different income protection policies have different waiting periods. Usually, most of the income protection insurance policies have a waiting period that is between 14 days to 2 years. The polices which have longer waiting periods are considered cheaper whereas the polices which have shorter waiting periods are considered expensive. It is suggested to Mason to take a policy that has a shorter waiting period. it will provide more benefits to Mason and meets its requirements.

Advise Mason of the advantages and disadvantages of level and stepped premiums

Stepped premiums are reevaluated after each policy renewal and increase each year on the basis of chances of claims because as the person gets old the chances of claims increases as a result. The level premiums on the other hand charge a high premium at the beginning of the policy. However, the changes do not depend on age. It means that changes occur quite slowly in level premiums as compared to stepped premiums.

Question No. 6

The estate plan provides information about what the person wants to do with the assets after his/her death. The estate plan include documents such as:

·         Superannuation binding nominations

·         will of the person

·         the testamentary trust

·         healthcare directives

Overall the estate plan help the individual to distribute the property or assets that it possess to the people to whom he/she wants to distribute. In the Case of Sam there is will in which he has mentioned that the assets should be distributed between his daughter and his son. However several issues will arise because the will does not include the information regarding his new house. Sam after separating from Emilia sell the Holiday house in Bryon Bay which has a value of $600,000. Sam purchased the new house in Sydney which he decided to use as its principal residence.

Sam created his will when he separated from Emilia. The will was updated when Sam has not purchased his new property and not sell his house in Bryon Bay yet. His will also does not include the residuary clause. As the will does not include the residuary clause now the property and assets of Sam will be distributed according to the intestacy law of New South Wales. In Australia, intestacy occurs when:

·         when the person dies without leaving a will

·         when the person leaves a will but does not include information about all the estate

As Sam’s will does not include information regarding the new property which it purchases before its death. The property will be distributed according to intestacy laws. According to the intestacy law, the first priority to distribute the property is the spouse and issue of the diseased person. As Emilia has separated from Sam the property will be given to Lisa which is the Daughter of Sam. along with the house the shares of Sam worth $200,000 will also be inherited by Lisa because his brother Peter has passed away in an accident prior to the death of Sam. so according to intestacy laws Lisa will inherit the new house and the shares of Sam.

Question No. 7

During estate planning, it is important to discuss the guardianship of the children. It is important to protect the children who are minor by identifying the person who will become the guardian of the children. According to law, the other parent is served as a guardian of the children.  It means that the guardian of Peter and Mary children would either be peter or Mary. Peter’s two children who live with their mother should also be considered in this situation. Peter can become the guardian of his two children who live with her mother.

Overall the estate plan helps the individual to distribute the property or assets that it possess to the people to whom he/she wants to distribute. In the case of Peter, there is a need for a will in which he can mention that the assets should be distributed between his daughters and his sons. However several issues will arise because the will does not include the information regarding his new properties. If peter will do not include information regarding the new property which it purchases before its death. The property will be distributed according to intestacy laws. According to the intestacy law, the first priority to distribute the property is the spouse and issue of the diseased person

There are different insurance organizations that provide different income protection insurance policies. It is up to Peter to decide which policy will be best for him. The income protection insurance provides benefits which include unemployment insurance, sickness, and accident, etc. it is suggested to Peter to take such an income protection insurance policy that covers unemployment and personal accident and sickness. it is important for peter to consider the protection of its income as well along with guardianship while he is performing estate planning.

References of  Personal Financial Planning

Amp.com.au. (2020). Tax on superannuation. Retrieved from www.amp.com.au: https://www.amp.com.au/superannuation/super-basics/tax-on-super

Ato.gov.au. (2019). Income thresholds and rates for the Medicare levy surcharge. Retrieved from www.ato.gov.au: https://www.ato.gov.au/Individuals/Medicare-levy/Medicare-levy-surcharge/Income-thresholds-and-rates-for-the-Medicare-levy-surcharge/

Ato.gov.au. (2020). Low and middle income earners. Retrieved from www.ato.gov.au: https://www.ato.gov.au/Individuals/Income-and-deductions/Offsets-and-rebates/Low-and-middle-income-earners/

Centrepointalliance.com.au. (2017). MAXIMISING CONCESSIONAL CONTRIBUTIONS. Retrieved from www.centrepointalliance.com.au: https://www.centrepointalliance.com.au/assets/pdf/Tech-Update-Maximising-Concessional-Contributions-Final.pdf

Centrepointalliance.com.au. (2017). MAXIMISING NON-CONCESSIONAL CONTRIBUTIONS. Retrieved from www.centrepointalliance.com.au: https://www.centrepointalliance.com.au/assets/pdf/Tech-Update-Non-concessional-Contribution-Opportunity-13022017-AO-v2.pdf

Chandra, P. (2011). Financial Management. Tata McGraw-Hill Education.

Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide . John Wiley & Sons.

Marson, J., & Ferris, K. (2015). Business Law. Oxford University Press.

Pandey, I. (2015). Financial Management. Vikas Publishing House.

Sheth, T. (2011). Business Law. Pearson Education India.

Superguide.com.au. (2019). Income tax: Australian tax brackets and rates (2019/20 and 2018/19). Retrieved from www.superguide.com.au: https://www.superguide.com.au/boost-your-superannuation/income-tax-rates#Australian_income_tax_rates_for_201819_and_201920_residents