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Thomas & Jessica West

29 Esther Court,
Brickhill Vic 3999
22 February 2013

Dear Thomas and Jessica,


I would like to thank you for choosing Glover Capital as your financial advisor. As
your advisor, I will ensure that you are both provided with the most up to date
advice relating to your current financial position and advise you of the necessary
steps and changes that will be required to meet your desired retirement
outcomes.
You can be assured that when we forward any changes and recommendations
regarding your current financial pathway we have carefully considered all
possible outcomes regarding your:

Current assets and their relevance moving forward.


Wealth accumulation strategies.
Taxation implications and minimization strategies.
Current income and expenditure.
Liabilities and reduction strategies.
Superannuation.
Transition into retirement.

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

Current financial pathway will not fulfil your retirement


goals and expectations.
Altering your loan payment $824.00 paid weekly will mean
your loan will be repaid in four years time saving you
$11315.00 in interest.
Jessica to contribute her $100000.00 inheritance to her
superannuation as a non-concessional contribution.
Make alterations to your superannuation fund investment
strategy. Move from a moderate investment approach to a
growth strategy. This will need to be re-addressed closer
to retirement moving to a more defensive investment
strategy.
Jessica to renegotiate her salary and begin salary
sacrificing as of the 1st of March 2013 as per the schedule
provided.
Thomas is to begin a TRAP as of the 1st of March 2013.
This will ensure he contributes the maximum $25000.00
possible under the concessional cap and reduce his total
tax payable by salary sacrifice. The tax free pension of
$10000.00 will ensure his after tax income stays around
the same.
Excess after tax income of $30375.00 per year will be
contributed to Thomass superannuation as a nonconcessional contribution.
Combined predicted superannuation funds for Jessica and
Thomas will total $981272.46 providing an annual tax free
income of approximately $51512.00 to age 90 being
above their expected $48000.00 annual income.
Dispose of investment property and managed fund after
retirement reducing the total capital gain payable.

Use the proceeds of $257,802.00 to pay for the lump sums


required on retirement.
Look into renting out the holiday house when it is not
being used to cover its upkeep costs.
Retirement Goals and Expectations.
When considering retirement, it is important to note what your retirement goals
are and analyse how realistic they will be to achieve. From the information you
have provided, on retirement you have stated that you require the following:

Retirement is to commence on the 1st July 2017


All current mortgages to be paid off.
An annual income of $48000.00 without relying on government pensions.
$30000.00 for a new car.
$25000.00 for a holiday.
$40000.00 to be gifted to each of your children totalling $80000.00.
Current Financial View.

Making an assessment of your current financial position allows us to calculate


and look into the future to see if any changes need to be made to meet your
retirement goals. This assessment is made using the information that you have
supplied and will form the backbone of the financial plan that we will provide to
improve your financial transition into retirement.
If no changes were to be made to your current savings, superannuation
contributions, investment returns and overall net asset base you will not be able
to fulfil your goals at retirement in five years. Your income at retirement would be
as follows:
Superannuation income
$20830.00
Income from other investments $13000.00
Total retirement income $33830.00
The retirement income total is calculated by making the following assumptions:

Superannuation is currently invested moderately returning annual growth


of around 5.8%.
Fees associated with the superannuation account are set at a medium
level paying around 1.1% of the account total per year.
There would be no tax payable on earnings from investments on
retirement as the amounts would fall below the tax free threshold of
$18200.00. All other taxation within the superannuation account has been
allowed for.

$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

bringing forward the two following years contributions. Any non-concessional


contributions made in excess of the cap will be taxed at the highest marginal tax
rate.
Jessica West
The only concessional contribution made to Jessicas superannuation at the
moment is the 9% superannuation guarantee paid by her employer. This totals
$2700.00 per year. Under the concessional contribution rules this leaves an
additional $22300.00 that she can contribute as a concessional contribution.
Salary sacrificing is when an employee arranges to take part of their normal
salary as superannuation rather than cash. These contributions are paid into the
employees superannuation account before income tax is deducted. The
employer receives a tax deduction for the superannuation contribution and the
15% contribution tax applies. Salary sacrificed contributions count towards the
employees concessional contributions cap of $25000.00.
I recommend that Jessica renegotiates her salary with her employer to begin
salary sacrificing a portion of her wage where tax effective to increase her
concessional contributions. The following table illustrates the change in income
for Jessica as well as the increase in superannuation contributions and decrease
in income tax payable.

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.

Below is a contributions schedule set to illustrate how the increase in


superannuation contributions will affect Jessicas total fund amount on
retirement. I have calculated the 2012-2013 salary sacrifice amount as that
portion of the year that Jessica would be able to increase her salary sacrificed
concessional contributions starting from March 1st 2013. By factoring an average
return of 6% on the June 30 balance from investments within the fund, over the
five financial years to retirement Jessicas fund will have increased to
$371228.92.

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

financial year is $25000.00. I plan to increase Thomass concessional


contributions to this amount.
As Thomas has reached his prescribed preservation age of 55, he is now entitled
commence what is known as a transition to retirement account based pension or
TRAP. TRAPs can be used to create a tax free income after age 60 while a person
continues to work fulltime. By commencing a TRAP, Thomas will be able to salary
sacrifice any excess income into super. It is important to understand that on
commencement of a TRAP No lump sums can be taken and the maximum
pension that can be taken is 10% of the capital base. As well as these conditions,
as Thomas is aged between 60 and 65 for the 2012-2013 financial year the
minimum payment for that year is calculated at 3% of the account balance as at
July 1st. For the 2013-2014 and the financial years that follow the minimum
payment that Thomas can receive is calculated at 4% of the account balance as
at July 1st.
I recommend that Thomas transfers $50000.00 into a TRAP to gain the maximum
possible benefit available to him. This will leave $220000.00 in an accumulation
fund to which Thomas will continue to contribute to. To understand the benefits
of a TRAP I will first demonstrate the taxation impact from Thomass current
scenario of salary sacrificing $10000.00 into super to then implementing a TRAP
whilst increasing his concessional contributions to the maximum of $25000.00
per year. Thomas will draw $10000.00 from his TRAP to offset his now lower after
tax income.

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

Points to note from the comparison outlined in the table above:

Income tax calculations do not include Medicare.


An additional $15000.00 concessional contribution was made to Thomass
accumulation fund.
After the strategy was implemented, income tax was reduced by
$5550.00. Its important to remember that this does not reflect the true

applicable tax saving. The additional $15000.00 paid as a concessional


contribution attracts a 15% contributions tax totalling $2250.00 reducing
the overall tax saving to $3300.00.
Because Thomas is aged 60 the income derived from the TRAP is tax free.
After the strategy was implemented Thomas was $550.00 better off in his
total after tax income.
After the strategy was implemented Thomas is now making the maximum
allowed concessional contribution of $25000.00 per year.
After the strategy is implemented Thomass superannuation will have a
net increase of $5000.00 per year before contributions tax is accounted
for.

As Thomas is now contributing $25000.00 as a concessional contribution which is


the most allowed, any further contributions to his superannuation will need to be
in the form of non-concessional payments. As stated above, non-concessional
contributions are those made from after tax earnings that have had no tax
deduction claimed. The maximum amount allowed to be contributed is
$150000.00 per annum.
To calculate how much Thomas will be able to contribute we will need to revisit
how much after tax dollars Thomas and Jessica will have spare after
implementing the TRAP, salary sacrifice and increasing their Mortgage
repayments. The table below outlines the new outcomes after implementing the
recommendations above.

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

The above table outlines the concessional and non-concessional contributions


that Thomas will make on his lead up to retirement. Factoring a modest after tax
return on investments within the fund, Thomas will retire with a fund total of
around $610043.54. Please note that returns within the fund are set as a guide
only.
Jessica and Thomas
After implementing my recommendations I estimate upon retirement you will
have approximately $981272.46 as a combined total within your superannuation
funds. This will provide you and Jessica with an estimated annual income of
$51512.00. Please note I have not included drawing down the lump sums stated
as required in the first year of retirement from your super funds. Prior to
retirement I recommend a reassessment of your financial situation.
Investments outside of Superannuation
Regarding the investment property and managed funds held outside the
superannuation fund I recommend that they be held onto until retirement has

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.