FInancial Planning Notes - Weeks 6 to 12 PDF

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Summary

A 19-page long summary on the lecture slides from weeks 6 (Accumulating Superannuation) to week 12 (SMSF's) on the unit FINA2209 (Semester 1 2019). ...

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FP#Summary#Notes#–#Weeks#6#-#12# Week#6#–#Accumulating#Superannuation# ● ● ● ● ● ● ● ● ● ● ● ●

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3"Pillars"of"Support"–"Government#Pension,#Voluntary#Savings#(separate#to#your#super#fund/managed#fund# or#alternative#investments#–#taxable),#and#Compulsory#Savings# Compulsory#Savings#–#Superannuation#Guarantee#Scheme#(SGS)#and#MySuper# Fourth#Pillar#–#Home"ownership#–#important#component#of#standard#of#living#in#retirement.#Role#of#each# source#is#dynamic#e.g.#more#people#become#eligible#for#Age#Pension#as#they#use#their#savings# Superannuation"–"tax#effective#structure#established#to#allow#for#a#person#to#save#and#invest#during#a# working#life#to#accumulate#funds#for#retirement#(held#until#retirement)# Regulated#by#government#but#funds#largely#held#within#private#superannuation#funds# Australia’s#compulsory#superannuation#–#aims#to#ensure#more#people#have#a#comfortable#retirement#and#as# population#ages#take#pressure#off#government#funded#age#pension#(fend#for#themselves)## Great#number#of#choice#–#which#super#fund#to#invest#into#and#type#of#investments#–#Mandatory#SGS# Superannuation"Guarantee"Scheme"(SGS)#–#currently#at#9.5%#-#increases#slightly#(economic#recessions,# inflation,#aging#population#–#more#retiring#and#not#enough#money#to#account)# Award#Contributions#–#University#pays#14%#employer#super#and#3%#award#contribution#(different#industries# different#bargaining#powers#and#unions)## Company#Specific#Policy#(rare)#–#12%#in#parental#leave#and#5#years#of#part-time#upon#return#(gender#gap)# Current"System#–#Complex#and#average#person#has#little#understanding/engagement;#Complex#Rules#and# Products,#Lack#of#financial#literacy#by#members,#Wide#choice# Cooper#Review#(2010)#–#number#of#concerns#and#found#administrative/regulatory#infrastructure#required#to# provide#choice#added#considerably#to#cost#and#concerns#that#system#moving#to#greater#complexity#and# higher#costs#at#time#when#funds#ought#to#be#benefiting#from#economies#of#scale#from#increasing#size.# Expected"Accumulated"Value"(EAV)#–#ballpark#figure# with#certain#assumptions# Example#–#Consider#a#new#employee#with#salary#of# 55,000.#Under#9.5%#SGS,#quarterly#into#super#fund.#Long# term#average#compound#rate#(8%).#Tax#on#contributions# is#levied#at#15%.#Average#salary#growth#is#4%#and#find# expected#accumulation#over#35#years:# SS#=#55,000,#CP#=#0.095,#p#=#4,#r#=#0.08,#g#=#0.04,#n#=#35,#tc# =#0.15,#EAV"="1,239,022.## Step"1:"Know"superannuation#–#Super#is#money#saved#for#you#to#use#when#you#retire,#everyone#in#Australia# needs#–#employer#pays#you#and#super#fund#to#support#lifestyle#options#–#super#fund#manages#investment#for# you#and#not#able#to#get#until#60#(retirement#income).#Many#won’t#be#able#to#save#enough#for#themselves# Basics#–#No#SGS#payable#when#(Earnings#are#less#than#450/month)#and#part-time#employers#under#18#years# (working#less#than#30#hours/week)# Also#called#–#US#(401k#plans),#India,#Singapore,#Malaysia#(Employee’s#Provident#Funds),#GRV#in#Germany,#NZ# (KiwiSaver),#UK#(NEST),#China#(National#Social#Security#Fund)#–#variation#in#style#but#lot#have#compulsory# “Concessional”#means#favorable#tax#treatment#(15%#contributions#and#earnings#tax#and#10%#capital#gains)# Employers#can#claim#a#tax#deduction#for#superannuation#contributions#made#for#employees#as#they#are# deferred#income#payments# Regulators#–#APRA,#ATO,#ASIC#and#Legislation#(Superannuation#industry#Supervision#Act#(SISA),#Tax/Corp#Acts# Preservation#–#Every#fund#must#have#a#trust#deed#–#trustees#have#fiduciary#responsibilities#to#meet#sole# purpose#test#(if#met#–#favorable#tax#treatment#for#funds/employers/individuals)#–#contribution#preserved# until#condition"of"release"(money#is#frozen#for#a#reason)#is#met#(retired)#–#rules#can#be#changed#(costly)# Exceptions#–#permanent#incapacity,#permanent#departure#from#Aust,#severe#financial#hardship#e.g.#received# income#support#continuously#26#weeks,#unable#to#meet#reasonable#family#expenses,#max#10,000.# Compassionate#grounds#e.g.#life-threatening#illness#and#preserving#foreclosure.## Step"2:"Choose"Fund"Types"–"Australia#superannuation#industry#(2#trillion),#institutional#funds#(APRA# regulated#–#242#funds)#e.g.#SMSFs,#Industry,#Retail#and#Public#Sectors"

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Retail#Superannuation#Funds#(AXA#or#AMP)#–#anyone#can#be#a#member#of#(public#offer)#–#shareholders#vs.# members#of#the#fund#conflict#of#interest#–#for#profit#basis" Industry#Super#–#membership#traditionally#restricted#to#employees#who#are#in#a#certain#industry#(HESTA,# CARE)#but#most#are#public#offer#(non-profit)" Corporate#Super#–#membership#restricted#to#employees#of#a#particular#employee#(BHP,#ANZ)#and#spouses# (non-public#offer)" Public#Sector#Funds#–#membership#restricted#to#public#servants#(non-public#offer)" How"do"funds"differ?"–"Performance#(asset#allocation#differences/liquidity#of#funds#–#older#membership# base#need#to#go#into#more#liquid#assets),#Fees#(commissions)#and#Governance#Structures" Step"3:"Choose"Plan"Type"–#matters#because#it#is#how#your#end#benefit#or#retirement#income#is#calculated" Defined"Benefit"Plan#–#not#common:#At#retirement,#get#a#payout#depends#on#period#contributed#to#pension# fund#and#terminating#income,#if#you#die#reduced#pension#transferred#to#partner#–#company#funds#it" Smooth#income#stream#over#your#entire#life#-#point#where#you#earn#most#is#near#retirement#–#Final#average# salary#and#years#of#service#to#company#(longer=better)" Defined"Contribution"Plan"–"contributor#takes#on#investment#risk#and#choice#of#investment#asset#allocation,#" Wavy#income#stream#–#payout#depends#on#levels#of#contribution,#duration#and#performance#of#funds,#less# any#fees/taxes.#No#guaranteed#series#of#pension#payments#on#retirement,#more#control/decisions#(member)" Step"4:"Choose"investment"option"–"Based#on#risk#tolerance#(conservative,#balanced,#growth,#high#growth)" Cooper#Review"–#recommended#that#superannuation#should#be#a#lot#simpler#and#cheaper#for#member" My#Super#–"strict#rules#on#profile,#fees#for#it#in#every#fund#and#standardized,"predicated#on#providing# members#with#simple,#cost-effective#and#diversified#super#product#(default#product#=#stable#system)" Majority#of#Australian#workers#have#no#engagement#with#super#and#don’t#need#expensive#choices:" Leave#it#up#to#their#employer#to#select#a#super#fund#and#investment#option#on#their#behalf" Requirement#to#have#one#page#dashboard#–#PDS#of#product#–#5"elements;#average#return,#target,# comparison#over#few#years,#measure#of#risk#tolerance#and#statement#of#fees" Risk#–#negative#years#in#a#20#year,#more#negative#years#the#riskier#–#5#years" Choice#of#Fund#(Advisers#Duty)#–#RG84#Super#switching#(when#switching#there#may#be#charges#incurred#by# client),#following#must#be#made#clear#(SOA):#-#Any#&#all#pecuniary#benefits#the#client#will#lose#and#any#other# likely#significant#consequences#for#client#if#they#follow#your#advice#e.g.#will#they#lose#insurance#coverage?" Show#pros#and#cons#–#usually#better#performing#funds#or#options#–#usually#lose#insurance/pay#more# Step"5:"Know"how"to"contribute/how"you’ll"be"taxed#" 1.#Concessional"Contribution"Types"(Before"Tax)"–"Under"50#-#contribution#limit#is#25,000#p.a## 50"or"older#-#25,000.#July#2018#–#fail#to#use#your#annual#concessional#cap#of#25,000#–can#carry#forward# unused#portion#up#to#5#years#–if#total#super#balance#is#less#than#500,000# o Compulsory"Employer"under"SGS"(9.5%)#-#Taxed#at#15%#(once#in#your#fund)#and#CGT#(10%)#out# Tax-effective#if#paying#more#than#15%#on#personal#income#-#minimum#MTR#is#19%"plus"Medicare"levy# (everyone#pays)#and#surcharge#(if#no#private)# Income#of#less#than#250,000"pay"15%#-those#with#more#pay#Division"293"tax#–#more#beneficial#to#contribute# to#super#and#bigger#tax#efficiency#–#reduces#tax#concession#for#contributions#of#high#earners.## Purpose:#Average#income#earners#marginal#income#tax#is#32.5%,#superannuation#tax#15%,#effectively#17.5%# tax#concession,#very#high#income#earners#pay#45%#on#income#over#180,000#(effectively#30%).## Division"293"Tax"–#additional#15%#on#concessional#contributions#“double-contributions”# Paid#out#of#pocket#or#from#super#fund#–#payable#on#lesser#of#excess#over#threshold#(250,000)#or#concessional# contributions#e.g.#Income#(240,000),#concessional# contributions#(15,000)#and#total#is#255,000#–#1.#15%#of# 15,000#=#2250#and#2.#15%#on#5000#=#750.#Payable#of#750# Excess"Contributions"Tax#–#No#limit#to#amount#of# concessional#contributions#–#consequences:# Taxed#at:#your#marginal#tax#rate#+#shortfall#interest#charge# (90#day#bank#accepted#bill#+#3%)# If#you’re#on#top#marginal#tax#rate#(interest#charge#only),## Excess#contributions#are#eligible#for#15%#tax#offset#to#allow# for#15%#contributions#tax#already#paid#

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Can#be#refunded#up#to#85%#(takes#CC#into#account)#or#leave#in#fund#and# pay#extra#tax#out#of#pocket#–#if#left#inside#–#excess#count#towards#nonconcessional#cap#(100,000)#–#not#good.# o Voluntary"Employer"(Salary"Sacrifice)#–#(employer#to#super)# ##Subject#to#tax#of#15%#-#payments#made#by#arrangement#between# employee#and#employer#but#doesn’t#have#to#agree#to#make#salary#sacrifice# payments.#e.g.#income#tax#saving#from#salary#sacrifice#of#10,000#at#MRT’s:# Pay#less#on#marginal#income#tax#and#have#more#super#payments#–#not#good#for#young#people/low#income# 2."Non-Concessional"Contributions"(voluntary"and"after"tax"into"super)"# o After#Tax#contributions#–#money#in#bank#account#(paid#tax)#and#transfer#it#to#super#environment# Not#subject#to#contributions#tax#(if#provide#TFN)#since#after#tax#dollars#–#Cap#is#100,000#or#300,000#over#3# years#“bring#forward#rule”#If#...