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Unformatted text preview: MONASH Elli/ins Semester One Examinations 2000 Faculty of Business and Economics EXAM CODES: AFC3440 AFC3444
TITLE OF PAPER: PENSION AND FINANCIAL PLANNING EXAM DURATION: 180 minutes writing time
READING TEVIE 10 minutes THIS PAPER IS FOR STUDENTS STUDYING AT:( oﬂ'lce use only  lick where applicable) Berwick El Clayton Peninsula El Distance Education L'l Open Learning El
Caulﬁeld El Gippsland El Sunway El Enhancement Studies El Other (specify) [:1 Candidates are reminded that they should have no material on their desks unless their use has been
speciﬁcally permitted by the following instructions. AUTHORISED MATERIALS CALCULATORS YES El N0 El OPEN BOOK YES [:1 N0 El SPECIFICALLY PERMITTED ITEMS YES El N0 E
A FORMULA SHEET IS ATTACHED TO THE PAPER Marks allotted to each question and each question part are shown. These total 150. Please take
account of these allotments when composing your answers. This paper represents either 80% of
your assessment or 100% depending on whether or not you chose to be assessed by optional
assignment. , Candidates ustclete is sn ifequiredso answer in this paper DESK NUMBER Oi HER NAMES (m full) ................................................................................................................................ .. Page 1 of 8 eats; (a) In 1992 the Keating Labor government introduced the superannuation guarantee scheme. . QUESTION 1 What did this enjoin upon employers? (b) What tax is paid on contributions into a complying superannuation fund (you should mention
the superannuation contributions surcharge)? I (c) What bodies regulate and administer superannuation funds?
(d) What lax is payable on (i) income earned
(ii) capital gains (in light of the Ralph report) in a complying superannuation fund? (o) How are pensions (paid out of a super fund) taxed?
(f) How are lump sums taxed (in general terms; no need for precise ﬁgures)? (g) Superannuation funds are established as trusts. What general obligation do trustees have
towards beneﬁciaries? (b) When can employees access their superannuation monies?
(i) What is the 'sole purpose test'?
(i) What body of legislation speciﬁcally regulates superannuation funds?
Marks (2+3+2+2+2+2+2+2+2+2=21) QUESTION 2 An investor accumulates funds for 30 years investing $3,000 pa. in arrears at an effective average
afterdtax rate of 8% pa. (i) Find the accumulation after 30 years.
(ii) The ﬁrst $100,000 of the lump sum is taxfree. The remainder is taxed at 15%.
What is the actual lump sum in the investor's hands? (iii) The investor in fact paid contribution tax of 15% on money going into the fund and an
average rate of 10% on combined earnings and capital gains in the fund. (a) How much p.a. was paid into the fund?
(b) What was the average annual pretax earning rate of the fund? 2.51832, Find the amount of the 30year accumulation of untaxed contributions into this fund if
earnings and capital gains were untaxed. By expressing the total taxed accumulation as a percentage of the total untaxed accumulation,
ﬁnd the effective rate of tax on super earnings under these circumstances. Find the altered rate if every dollar of contributions was taxed at 30% instead of 15%?
Marks (2+2+2+2+2+6=14) QUESTION 3 (i) List ﬁve advantages (as against direct investment) of using a fund manager for investing
superannuation assets within a DIY fund. (ii) List ﬁve disadvantages of using a fund manager for investment of superannuation assets
within a DIY fund . Marks (5+5=10)
QUESTION 4
(i) What are three requirements of Complying Superannuation Funds?
(ii) List ﬁve tax concessions available to complying funds. (iii) What are ‘Reasonable Beneﬁt Limits”? Mention both lump sum and pension RELs. What is
the tax treatment of excess beneﬁts? (iv) Regarding structure of the superannuation industry, list ﬁve different sorts of superannuation
entity which may enjoy concessional tax treatment. Marks (3+3+3+3=12)
QUESTION 5
(i) Find the fortnightly cash ﬂows deriving from a deferred life annuity purchased by (55) for
$50,000 deferred 10 years. The rate of interest offered is 8% pa.
Assume 155 = 31685, 155 = 27443, and a“ = 7.5000 (at 8%).
A beneﬁciary (45) is bequeathed a life interest in an estate of $1m. of ﬁnancial assets which
earn 6% p.a. The residual interest goes to X (or X's estate). Find the value of the residual
interest. The relevant experience at 6% pa determines that A45 = 0.20311, a45 z 13.078. Marks (6+6=12) Page 3 of 8 asltsa QUESTION 6 (a) You can provide yourself with a complying (life) annuity by ﬁnancing it through your own 0
DIY fund. List four beneﬁts of doing so. What compliance costs will be involved? (b) Comp are the cash ﬂows (calendar monthly in arrears) available under the following
investments of $100,000 at 8% pa. to (55): (i) Living off the capital alone (assume the interest payment of $8,000 is available at the
start of each year; thus $8,000 represents the present value of the monthly annuity
payable for one year). (ii) How is your answer to (i) altered if the $8,000 interest is only available at the end of
each year? (iii) The $100,000 is invested in an annuity certain for 25 years, payable monthly in arrears (iv) The $100,000 is invested in a life annuity (assume an experience is consulted for which
:155 = 9.6000 at 8%) Marks (5+4t2t4+4=19) QUESTION 7 (a) A client comes to you for advice regarding financial planning. Outline six steps in the
ﬁnancial planning process. (b) This client already has diversiﬁed assets and some available disposable cash ﬂow. The client is interested in taking out a margin loan for $100,000 with a bank to buy equities or some
alternative investment. List some 'pros and consr of margin loans. What further information would you elicit from the
client? Suggest three alternative investments, which prima facie might suit this investor. Marks (6+4+2+3 =15)
QUESTION 3 Gretel Johnson (née Waldheim) was born in Vienna, Austria on 3 September 1937. She migrated
to Australia with her parents in the early 19505 and became an Australian citizen in 1960. She married Alan Johnson in 1962 and they had three children. For most of his life Alan worked as an
electrician. Alan passed away in 1988 at the age of 56. Fortunately, Alan and Gretel had paid off the mortgage on their home not long before Alan’s death. In his will Alan left everything to Gretel except for a donation of $5000 to the Royal Melbourne '
Hospital. Following Alan’s death, Gretel set up a small business working as a dressmaker. The income from dressmaking enabled her to live reasonably well, particularly after the children had left home. Indeed, things have gone sufﬁciently well that last year Gretel was able to give each of the
children $7000. Page 4 of 8 2d ((5'). Gretel has allowed her business to run down quite a lot in recent years and she is now (May 2000) .onsidering the possibility of retirement. Last month she discussed this possibility with her friend
Ruth, who advised her to purchase a life expectancy annuity. Gretel took Ruth’s advice and
purchased a life expectancy annuity of ﬁfteen years’ duration. The annuity cost $36 000 and will
pay her $4000 each year. Gretel has prepared a table listing her real assets: Insured for : Value if sol
Ave, R arsh, Vic)  ; 5 Gretel also has an ANZ Bank fixed deposit of $10 000, paying interest of 4.5% pa, and 20 000
shares in Montgomery Mining. The shares were bought several years ago on the recommendation
of her son Peter, who is a consulting geologist. The shares cost 30 cents each and their current
market price is 95 cents. Montgomery Mining is exploring for diamonds in Tasmania and has
never paid a dividend. (a) What are life expectancy annuities? What do you consider to be their major advantages and disadvantages from the viewpoint of a retired person? Explain. (b) According to the rules currently in force, will Gretel qualify for the Commonwealth age
pension? If so, how much will she receive? Show any calculations and explain your
reasoning. How much will Gretel’s beforetax annual cash inﬂow be after she retires? Show any
calculations. Marks (12+19+ 6:37)
QUESTION 9
(i) What are insurance bonds?
(ii) Describe the tax treatment of insurance bonds. Include in your discussion, amounts by which additions to the original investment amount may be made without changing the essential
nature of the tax treatment. Marks (3+7 = 10) Page 5 of 8 Formula sheet and tables .ﬂnuity formulae Present value of an ordinary annuity: am; = (1—V“)/i = v+v2+ . . . v“ Present values of related annuities
Annuuity due Kiwi: (i/d)x am, Annuity payable ptth a(*"’=(i/i®)>< an, [email protected]=p{<1+i)“P1} n21
Annuity payable ptth in advance 5(3) = (Vd@))x and, d3”) = vlfpiq’) fiJ
Annuity payable continuously Em, = (il5)>< am Life contingencies D x+n Pure endowment or discount factor with survival Ax; =
'fl (m)=ax+ m—l Present value of a life annuity payable mthly a x 2
m Life annuitylife assurance relation: 1— diix = Ax Pension Valuation Factors (PVFs) for Allocated Pensions i
2 PVF __ P
i

'
.' 16 2 .
i —7.9 
i Life Expectancies 24.22”
= 23.36
i 25 86 ‘mi 18.46 = 17.70
ma
; 19. V
~: 18.25 mu.
“2 Return of Capital Components Category 2 income stream: Purchase Pr ice — RCV
Term RofC = Category 3 income stream: Purchase Price
Term RofC : Income Stream Asset Value Asset Value: = Pp _ (pp _ RCV)[M] Original Term Deductible amount Undeducted PurchasePrice — RCV
Tenn Deductible Amount = Page 7 of 8 Basic (full) Commonwealth age pension per fortnight as at May 2000
. Single: $377.40
Couple: $313.20 Commonwealth Age Pension Assets Test and Income Test as at May 2000 Sinle: hmeow '7; 27 750 _ _ $25 750 ' $31$1000
 Si 1e: nhomeowner $219 250 _ $345 50* _ $3l$1000
Coule: homeowners . $181 500 _ _ $390 500 $3l$1000 Coule: nonhoowners $273 000 ' $820* $301000 Income Test .. _ __ .
. Sinle _ 7 $12 $856.80 $05051
3 $180 _ $412.30 $0.5/$ __ *higher if rent assistance is received Deeming Rates as at May 2000 Single: 3.5% on ﬁrst $30 800; 5.5% thereafter
Couple: (joint accounts) 3.5% on ﬁrst $51 200; 5.5% thereafter Couple (separate accounts) 3.5% on ﬁrst $25 600; 5.5% thereafter Pensioner Bonus Scheme Bonus = 0.094x RPFx 26x Y2 M Page 8 of 8 ...
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This note was uploaded on 08/25/2008 for the course AFF 3111 taught by Professor Smith during the Three '08 term at Monash.
 Three '08
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