Personal Financial Planning

The purpose of this report is to address the issues that Des and Joan has raised regarding their retirement. Part A A1 Employment termination payments fall under two categories: life benefit termination payment and death benefit termination payment. Under Dess circumstances, he has received a life benefit termination payment. Des has received $33,000 upon retirement, which is made up of $4,000 unused annual leave (accrued in the last 3 years), $12,000 unused long service leave (accrued in the last 15 years) and $17,000 as a golden handshake. These three components however, are taxed differently. The employment termination payment in this case, only compromises the golden handshake. The unused annual leave and long service leave fall under the category of other termination payments and are taxed differently. The relevant tax payable of each component is calculated as follows: Golden Handshake As Des was born in 1942 (currently 68) his preservation age is 55 (p347). Des is above the preservation and therefore payments up to $150,000 (cap for 2010) will be taxed at a concessional rate of 15%. Tax payable = $17,000 * 15% = $17,000 * 0.15 = $2,550 Unused Annual Leave Des accrued his annual leave beginning in 2007. Annual leave that is accrued post-17 August 1993 is taxed at marginal rates. In order to work out Dess marginal rate, the following calculation is necessary. All elements of his termination payment need to be added onto his salary. $85,000 + $17,000 + $4,000 + $12,000 = $118,000 $118,000 falls into the $80,001 - $180,000 bracket which is taxed at 38%. Therefore, the tax payable on the unused annual leave is: $4,000 * 0.38 = $1,520 Unused Long Service Leave

Similarly to the unused annual leave, Des accrued this entitlement for 15 years. As above, long service leave which has been accrued post-17 August 1993 is taxed at marginal rates. Tax payable = $12,000 * 0.38 = $4,560 A2 The net amount of the termination payment that Des has left to be put in his bank account is $24,370. Net amount of payment = termination payment total tax payable = $33,000 ($2,550 + $1,520 + $4,560) = $33,000 - $8,630 = $24,370 A3 The options that Des has with his superannuation now that he has retired are: (p591, 602) Superannuation lump sum benefit this is the amount of the members benefit Receiving income stream benefits such as pensions or annuities or Combination of lump sum benefit and income stream benefit B1 In order to calculate the total capital, it is essential to look at the life expectancy of Des and Joan. (p155) Age (years) Life Expectancy (years) Des 68 84 Joan 61 87 For the purposes of this calculation, the highest life expectancy figure will be used (Joan 87 years). As Joan is planning to retire at the age of 65 (in 4 years), the total number of $45,000 payments is 22 (life expectancy age retirement age). PV = PMT x
PMT = annual repayments; n = number of repayments; r = rate of return

PV = $45,000 x = $45,000 x 14.45 = $650,300.19 The total capital that Des and Joan will need to accumulate to receive annual repayments of $45,000/year when Joan retires is $650,300.19.

B2 The current value of Des and Joans assets available for investment to fund their retirement is: $443,370. $ Bank account 4000 Cash Management 100,000 Trust Dess Super 125,000 Joans Super 190,000 Joans shares are not added as she has no intentions of selling them. In addition, her superannuation can also be added for investment as she has a $10,000 unrestricted non-preserved amount which can count towards the emergency money. B3 - In order to increase Joans superannuation balance, she can make concessional contributions (salary sacrifice) which are additional contributions from her pre-tax salary. As she is over 50 years old, there is a transitional concessional contributions cap of $100,000 (taxed at 15%). She can also choose to make non-concessional contributions (contributions made from her after-tax income). However a $150,000 cap applies. In addition, Joan is also eligible for government co-contributions as she is earning less than $60,342 and is under 71. If a person is earning less than $30,342, the government will contribute $1,500 if a person contributes $1000. However, as Joans income is between $30,342 - $60,342, the upper limit of the contribution will reduce by 5c per dollar over $30,342. Therefore, Joan can receive Government co-contributions of $1,500 [($45,000 - $30,342) * 0.05] = $767.10. B4 Des can make a contribution to his superannuation in the 2010/11 financial year if he satisfies the following conditions: If he is between the age of 65-75 and has worked at least 40 hours in 30 consecutive days during the financial year C1 A transition to retirement pension enables a person who is reaching preservation age or who has not met the conditions of release to commence a pension prior retirement. The main restriction of this pension is that it must be paid as an account based pension or a term allocated pension. In addition, there are also restrictions placed on converting this

amount to a lump sum. The condition under which an account based pension can be converted is if the person has met a condition of release. On the other hand, if the pension is taken as a market linked income stream, a conversion to lump sum can only occur within the first six months of commencement. As a result, this type of income stream is a limited use as a transition to retirement pension. Another factor of the market linked income stream that needs to be into consideration is that after the first six months period, it can only be commuted to a lump sum if it is to commence another market linked income stream or on the death of the pensioner. D1 According to the calculations below, Des and Joan will be entitled to an Age Pension of $49.72 per fortnight (income test). Joan will not be entitled to an Age Pension as she has not reached the qualifying age of 65. Assets Test Assets

Centrelink ($) Home 600,000 0 Car 35,000 35,000 Contents 30,000 10,000 Bank Accounts 28,370 (4000 + 28,370 23,370) Cash Management 100,000 100,000 Trust Des Super 125,000 125,000 Joan Super 190,000 0 Bank Shares 5,000 5,000 Telco Shares 12,000 12,000 Foodshop Shares 8,000 8,000 Total ($) 323,370 $ Current Assets Allowable Assets Excess (323,370 258,000) Reduction Factor Reduction (65,370/1000 * 1.50) 323,370 258,000 65,370 1.50 per 1000

Value ($)

Value

Maximum pension rate (incl. pension supplement) Less Reduction 98.06 Pension as couple 958.94 Pension assets test each 478.47 per (958.94 / 2) fortnight

98.06 per fortnight 1,057 per fortnight

 Income Test Assets

Centrelink ($) Bank Accounts 28,370 (4000 + 28,370 23,370) Cash Management 100,000 100,000 Trust Des Super 125,000 125,000 Joan Super 190,000 0 Bank Shares 5,000 5,000 Telco Shares 12,000 12,000 Foodshop Shares 8,000 8,000 Total ($) 278,370

Value ($)

Value

Deemed Assets First Balance Total deemed income Add Other income Total assessable income Income per fortnight Allowable threshold per fortnight Excess per fortnight Reduction rate Reduction Max pension allowed (incl. pension supplements) Less reduction Pension as couple per fortnight Pension income test each

$ 278,370 72,000 206,370

$ @3% (72,000 * 0.03) @4% (206,370 * 0.04) 2160 9286.65 11446.65 45,000 56,446.65 56,446.65 / 26 2,171.03 256.00 1,915.03 50% 1915.03 * 0.5 957.57 1057.00

1057 957.57 99.43/2

957.57 99.43 49.72

As Centrelink takes the lowest figure out of the two tests, they are therefore entitled to $49.72 per fortnight. D2 As they are entitled to receive an Age Pension payment, they are automatically entitled to a Pensioner Concession Card. The Pension Supplement has already been added into their regular fortnightly payment and this consists of the value of the telephone allowance, utility allowance, GST supplement and Pharmaceutical allowance. E1 Des Currently, Des has no nominated beneficiaries for his superannuation benefits. In the case where he passes away, and the superannuation is in the growth stage, the death benefit will be paid as a lump sum to tax dependants or non-tax dependants. Tax dependants are those who are the legal or de facto heterosexual current or former spouse, child (if under 18 years) and dependant as per the words usual meaning. While superannuation dependants include all of the tax dependants with the exception that the child can be of any age. Therefore, Des were to die in the accumulation phase, the benefit would be made to Joan, Ben and Stephen in a lump sum.

Joan As Joan as specifically made a binding nomination, if she dies in the accumulation phase, her superannuation death benefits will be made to Des, Ben and Stephen in equal shares in a lump sum. E2 Non-binding death benefit nomination A non-binding death benefit nomination is where the fund trustee is not bound to follow the nominations. The fund trustee may regard the nomination; however, it still retains discretion to decide how and to whom the death benefits are paid. The advantage of a non-binding benefit nomination is in the case where family circumstances change (such as re-marriage) the nomination does not have to be change as it is more flexible. This also leads to saving time as it is not a lengthy process to change the beneficiary. On the other hand, the disadvantage is that the person has no discretion over whom and how they will be paid. The fund trustee will only take their nomination into account.

 Binding death benefit nomination This is where the fund trustee is bound to follow the terms of the nomination. These nominations however, must be approved by the fund trust deed and must be properly prepared and executed. The benefits of a binding death benefit nomination are that the fund trustee is obligated to follow these nominations and have no power to change them. However, the disadvantage is if the binding death benefit nomination is changed, it could be a lengthy process as it must be approved by the fund trust deed and needs to be properly prepared and executed. E3 The tax treatment of the superannuation lump sum death benefits if Joan died is as follows: Des (68) the amount he receives will be tax free as he is the spouse of Joan Ben (42) as he is over 18 and not regarded as a dependant under taxation purposes, the amount that Ben receives will have a tax-free component and a taxable component of 15% plus Medicare Levy of 1.5% Stephen (36) as with Ben, Stephen will also have a tax-free component and a taxable component of 15% plus Medicare Levy.

F1 With regards to Des and Joans current estate planning, there are many issues that need to be discussed. Powers of Attorney Currently, Des and Joan do not have powers of attorney. It is essential that Des and Joan understand these powers. Powers of attorney are important as they ensure that decisions can be made in times where the person granting the power is unable to make decisions. There are many types of powers of attorney available. However, it is crucial that Des and Joan immediately grant this power to someone who is trusted such as each other or their children. This will ensure that in the case where sudden problems arise (such as health), there is a recognised legal representative available to make decisions in the best interest of the grantor. This will also allow Des and Joan to manage each others affairs in the future if the other partner is unable to do so.
Superannuation beneficiaries

Another concerning factor is that Des has not nominated anyone as his superannuation beneficiary. In the case where Des passes away (and he is not in the growth phase), the superannuation death benefits pension will only be paid to a tax dependent. Therefore, his superannuation death benefits will only be given to Joan as she is his legal spouse. However, this does not meet their objectives this is not assisting their family from an estate planning perspective. Ben and Stephen will not be entitled to Dess superannuation death benefits as they are not under 18 and they are not relying on the couple for financial support to maintain a standard living.
Age Pension

As Joan reaches 65, she will be eligible to receive the Age Pension entitlement. Therefore, upon reaching this age, Joan should also apply for the Age Pension to potentially receive the full pension benefits. G1 Principal residence As Des and Joan are joint tenants of the house that is their main residence, upon the death of Joan, the interest of Joan in the property passes to Des. Des would have acquired Joans interest in the property at her cost base. As their home has been their main residence for the entire time they owned it, no capital gains tax applies as they are entitled to the main residence exemption. Home contents Home contents are considered as a personal asset. The home contents in this case are owned by Des and Joan jointly. For CGT purposes, this will be regarded as tenants in common not as joint tenants. Therefore, the portion of Joans home contents will be passed to her estate. It is assumed that the contents of the home will also be given to Ben and Stephen as Des and Joan would like to leave their home for them. Ben and Stephen will receive 25% each of Joans interest in the asset. If assets were purchased before 21 September 1985 then any capital gains are exempt. However, if the assets are purchased after that date then a tax liability arises. If Ben or Stephen decides to sell the assets and the cost of those assets were less than $10,000 any capital gains are exempt. Any capital gains thereafter are fully assessable. Where they have held it for over 12 months, a 50% reduction applies. Bank Account

The bank account will go towards Joans estate. As it is not specified who will be entitled to her portion of the bank account, the taxation for each party is different. If the will specifies who is entitled to the bank account and they are presently entitled, then they will need to pay the tax required. However, if the beneficiary is not presently entitled then the trustee will be liable to pay any tax payable. Joans shares Joan wants to distribute her shares among her grandchildren. If she were to die unexpectedly, her two current children will be the beneficiaries of the shares. As they are teenage girls, it is assumed that they are under the legal age of 18. Therefore, they have a legal disability and are not entitled to the shares. As a result, the trustee will bear the burden of the tax liability applicable to their income. Joans Superannuation The tax treatment of the superannuation lump sum death benefits if Joan died is as follows (as per E3): Des (68) the amount he receives will be tax free as he is the spouse of Joan (p598) Ben (42) as he is over 18 and not regarded as a dependant under taxation purposes, the amount that Ben receives will have a tax-free component and a taxable component of 15% plus Medicare Levy of 1.5% Stephen (36) as with Ben, Stephen will also have a tax-free component and a taxable component of 15% plus Medicare Levy.

Reference List
Australian Government Centrelink. 2010. A Guide to Australian Government Payments. http://blackboard.qut.edu.au/webapps/portal/frameset.jsp? tab_tab_group_id=_2_1&url=%2Fwebapps%2Fblackboard%2Fexecute %2Flauncher%3Ftype%3DCourse%26id%3D_63181_1%26url%3D (accessed October 10, 2010) Australian Taxation Office. 2010. Managing the Tax Affairs of Someone Who Has Died. http://www.ato.gov.au/individuals/content.asp? doc=/content/31669.htm&page=3&H3 (accessed October 12, 2010) Australian Taxation Office. 2010. Key Superannuation Rates and Thresholds. http://www.ato.gov.au/superfunds/content.asp? doc=/content/60489.htm&page=14&H14 (accessed October 11, 2010) Australian Taxation Office. 2010. Lump Sum Payments. http://www.ato.gov.au/individuals/content.asp?doc=/content/20800.htm (accessed October 11, 2010)
Taylor, S, Juchau, R, Houterrnan, B, McDonald, T 2008, Financial Planning in Australia, 3rd ed, LexisNexis, Sydney.