BondpricingReview

QuestionsQuestion1HomerSimpsonisananimated,single61yearoldandcomestoyouforadviceaboutatransitiontoretirement(TTR)pensionandsalarysacrificearrangementhehasheardabout.Heishopingthatusingthisstrategywillallowhimtoincreasehislongtermwealth.Question

1Homer’staxableeiscurrently$70,000andhewouldliketomaintainthesameneteasheiscurrentlyreceiving.Hecurrentlyhas$350,000insuperannuationHasprivatehealthinsurance,paying$2,700peryearinpremiums.Homer’semployerprovideshimwith17%superannuationcontributions.Question1AdviseHomeraboutthemostefficientstrategythathecouldundertakeandcompareittohisstatusquo.Remembertomakeuseofallapplicabletaxoffsets,giventheinformationprovidedabove.tax

rateprivate

health

insurance

offsetGrosssalary$70,000EmployerPayscurrentposition$$$$$$$$$350KSuper$350KSuperSG:$11900

*SGSuperiscompulsorysupercontributionsTax

(-)(37000-18200)*19%+(70000-37000)*32.5%=14297MedicareLevy

(-)70000*2%=1400PrivateHealthInsuranceOffsets

(+)2700*30%=810EmployerSuperContribution

(+)70000*17%=11900Contribution

Tax

(-)11900*15%=1785Whathereceived:70000-15697+810=55113Digression:SGFrom1July2014,theSuperannuationGuaranteerateincreasedto9.5%(fromthe9.25%thatappliesforthe2013/2014year).Basedonnewlaws,theSGratewillremainat9.5%for7years,increasingto10%fromJuly2021,andeventuallyto12%fromJuly2025

SalarySacrificeOneofthemorepopularTTRstrategiesis

to

salarysacrificeintoyoursuperfundup

to

yourconcessional(before-tax)contributionscapReplacethatewithtax-free(ifover60)pensionpayments,orconcessionallytaxedpensionpayments(ifunder60).(*ifunder60thereisarebate)Youcanwithdrawnomorethan10%ofyouraccountbalanceeachyear.Forexample,iftheaccountbalanceofyourTRRis$500,000on1July,thenyoucanwithdrawnomorethan$50,000fortheyear.Youmustalsoensurethatyouwithdrawaminimumpaymentfromanaccount-basedTRIPForanindividualagedfrom55

to

64,theminimumpaymentforaTRIPforthe

2013/2014year,is4%oftheaccountbalanceasat1July2013.SalarySacrificeThisstrategycanofferthefollowingadvantages:salarysacrificingreducesaperson’staxableewhilethesacrificedcontributionsresideinaconcessionallytaxedenvironment.SalarySacrificeearningsonpensionassetsaretax-freewithinthefund,andtheearningsoncontributionswillbesubject

to

up

to

15%taxcompared

to

aperson’smarginalrateoftaxoneoutsidethefund.pensionepaidfromaTTR

to

afundmemberistax-free(exemptedfrometax)forover-60s,whichmeanstaxispayableonlyonthereducedtaxableefromaperson’ssalary.Forunder-60s,pensionestillformspartofanindividual’sassessableeandtheindividualiseligiblefora15%pensionoffset/rebate.Note:

Theannualgeneralconcessionalcontributionscapis$25,000forthe2013/2014year.Thespecialconcessionalcapof$35,000forthe2013/2014yearapplies

to

anyoneaged59yearsoroveron30June2013.Thespecialconcessionalcapof$35,000forthe2014/2015yearapplies

to

anyoneaged49yearsoroveron30June2014.Excesscontributionaretaxedat31.5%,that’satotalof46.5%strategySowhatisthemosttaxeffectivestrategy?Contributeuptothecap:35000Asaresult,salarysacrifice:35000-11900=23100Newreducedsalary70000-23100=46900EmployerPaystransitiontoretirement:

salary

sacrifice

strategy$350KSuperSG+salarysacrifice11900=35000AllocatedPensione$35000*85%$$$$$$$$$350KA.P.Salarynowe70000-23100=46900Tax(-)&MedicareLevy(-)(37000-18200)*19%+(46900-37000)*32.5%*2%=7728PrivateHealthInsuranceOffsets(+)2700*30%=810What’snew:loweTaxOffsetsLoweTaxOffset445-(46900-37000)*1.5%=297Received:46900-7728(tax)+810+297=40279Howmuchtodrawfrompensioninordertomaintainthesamelivingstandard?55113-40279=14834Check:10%>14834/350,000=4.24%>4%SothisisOKWhatifyoufindthisnumberliesbelow4%?Thenyoushoulddrawmoreouttomeetthe4%.Contributiontopension(+)35000Contribution

Tax

(-)35000*15%=5250Changes

to

super

account:

afterimplementingthestrategySuper:350000Superreturn:350000*4%=14000Fees:35000*1.5%=5250(-)Putintosuper:35000SubtractTax:35000*15%=5250(-)Takeout:14834(-)350000=373666NetChange:373666-350000=23666IfHomerneeded25,000topurchaseacar,couldheincreasehisTTRannuityinthisfinancialyeartofundit?Alreadytakeout14834Theoreticalmaximumhecouldtakeout:10%or3500035000-14838=20166<25000(priceofcar)Hecouldn’tdothat.Question2Renis66yearsold,whilsthispartner,Stimpyis65yearsold.Theyarebothsemi-retired,andapproachyoutoseeiftheyareeligibletoreceiveanagepensionfromCentrelink.Question2Renisworkingcasually,earning$6,000peryearanddrawing$20,000peryearfromanaccount-basedpensionthathasabalanceof$200,000.Ren’slifeexpectancyis83.5years.Stimpydoesnotworkbutdraws$15,000perannumfromheraccountbasedpensionthathasabalanceof$170,000.Stimpy’slifeexpectancyis87years.Question2Theyhavealsogiven$70,000awaytotheirgrandchildrenoverthepast5years.Thetablebelowlistsalloftheirassets:1.

CalculateapotentialagepensiontobereceivedbyRenandStimpyMaximumpensionrates

Single:$842.80perfortnightMarriedcouple:$635.30eacheTestThresholdSingle$160Partnered$284eoverthefullpensionthresholdreducestherateofpensionby50%inthedollarforsingles,25%foreachpersonwithinacouple(i.e.50%intotal).Assets

Test

Limits

HomeOwnersSingle$202,000-$764,000Couple$286,500-$1,134,000Non-homeOwnersSingle$348,500-$910,500Couple$433,000-$1,280,500Pensionof$1.50islostforevery$1,000overthelowerlimit.Assessableaccount-basedpensione

Actualamountdrawnfrompension–(Balance/lifeexpectancy)etesteasye

Ren’s

earning:6000Ren’s

Pensiondraw:

20000-200000/17.5=7273Stimpy’s

pension

draw:15000-170000/22=8571Rent

from

beach

bathing

box:

170000*5%=8500FinancialInvestmentsSubjectto

DeemingRatescash,accountswithbanks,creditunionsandbuildingsocieties–includingtermdepositsloansdebenturesbondsincludinginvestmentandfriendlysocietymanagedfundssharespreciousmetalsrolloverfundsandfundsinsuperannuationheldafterAgePensionageFinancialInvestmentsSubjectto

DeemingRatesGiftingAnnual$10klimitamountoverisadeprivedassetfor5yearsfromthedateofthegiftamountisassessedasanassetandsubjecttodeeming$30koverarolling5yearsifgiftmorethan$30koverarolling5yearperiodthentheexcessistreatedasadeprivedassetanddeemedfor5yearsfromdateofgiftSo,

70000-30000=40000

of

the

gifts

will

be

deemed.DeemedeOtherdeemedassets:Propertyinvestmenttrust:30000GoldBullion:40000Termdeposit:50000Total:40000=160000AssessableeAsaresult,deemede:79600*2%+(160000-79600)*3.5%=4406Assessablee:30344=34750perannualThatis34750/26=1337perfortnightetestresult1337>284(thresholdforpartner)Theexcesspartwillbereducedby50%etestresult635.3*2-(1337-284)*0.5=744.1Or372.05foreachpersonassettestExemptAssetsfamilyhomeaidsforpeoplewithdisabilitiessuchaswheelchairsprepaidfuneralexpensesfuneralbonds:upto$11,750interestinanestatewhichhasnotbeenreceivedcomplyinglifetimeannuityorpensionsuperannuationandrolloversumswherepersonisbelowAgePensionAgegiftsupto$10,000AssetTestExempted:residentialhome,fixturefurnitureandprepaidfuneralexpenses(70000-30000)+(22000-11750)=769250Answerassettestresultis635.3*2-(769250-286500)*1.5/1000=546.6Or273.3p.f.foreachpersonLowerthantheresultobtainedfrometest.Sothisistheanswer2.IfRen’saccount-basedpensionisreversionarytoStimpyupondeath,whatwouldthedifferenceinagedpensionamountto?Insteadof20000-200000/17.5,Ren’sassessablepensioneis20000-200000/22Usethistodotheetestinstead,whichwouldresultinalowerlevelofpension.TypesofCreditHomeloansCreditcardsPersonalloanslinesofcreditaccountLeasingfinanceBridgingloansHomeloan10-30yearsofrepaymentDepositaround20percentUsuallyavariableinterestrateischargedWhileinsomecases,fixedratepayment,orcombination,alsoexistLine

of

credit

accountGives

a

revolving

line

of

credit

secured

by

the

value

of

the

homeEstablish

amortgageaccountthathasadebtlimitMonthlyinterestchargesarecalculatedonthedrawndebitbalanceandnoprincipalpaymentsarerequired.Canalsobeusedforotherpurposessuchasbuyingstock,cars…Leasingfinance:eg.acarLenderretainstitleontheleaseditemPaymentaremadeupofinterestandpartialprincipalAballoonpaymentofaround20percentattheendoftheleaseButmanypeoplesimplyturnintheircarattheendofthelease,andthenleaseanewcarBridgingloansBridgingloansareusedtofundthepurchaseofoneasset，whileanotherassetisbeingsoldFor

example,

apersonmayfindahomethattheywishtopurchaseButtosecureit，theymustcommittobuyitbeforeitispossibletoselltheirexistinghomeBridgingfinanceisusedtofundthepurchaseofthenewhomeuntilthesaleoftheexistinghomeiscompleted(nolongerthan6month)

MainRegulatoryAuthoritiesinclude:ReserveBankofAustralia(RBA)-Stabilityoffinancialinstitutionsandintegrityofindustry-ImplementsMonetarypolicyAustralianPrudentialRegulatoryAuthority(APRA) -Supervisionofdeposittakingentities,-General/lifeinsuranceandsuperanuationRegulation

AustralianSecurities&InvestmentCommission(ASIC)ASICisAustralia’scorporate,marketsandfinancialservicesregulator.contributetoAust