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Financial Planning > Personal Financial Planning > Flashcards

Personal Financial Planning Flashcards

1
Q

(1) What aspects does financial planning encompass?

A

Taxation, insurance, superannuation, retirement planning, estate planning, investments, accounting, economics and finance.

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2
Q

(1) What aspects does a financial planner need to consider in preparing a financial plan?

A

Client’s age, disposable income, risk profile, level of debt, number of dependants, amount of assets available for investment and tax position

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3
Q

(1) Financial assets that are created and exchanged can be divided into what five broad types? Provide examples.

A
  • Debt instruments – require repayment plus interest (bank deposits & debentures)
  • Contractual – require payment at a set time or event (insurance & super)
  • Equity – involve ownership claim over profits or assets (shares)
  • Hybrid – securities with debt & equity (pref shares/conv. notes)
  • Derivatives – financial asset whose value is derived from another financial asset. (options & futures)
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4
Q

(1) What are the three broad classifications for financial markets

A
  • Primary and secondary markets
  • Money and capital markets
  • Retail and wholesale markets
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5
Q

(1) In 1997 what report was created and what did it identify? And recommend

A

Wallace Committee Report – aging population, changing work patterns, increased accumulation of asset/liability, increased awareness, and technology. It recommended regulation by function rather than institution type. RBA removed as regulator of banks, and AFIC and ISC became ASC (now ASIC)

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6
Q

(1) When were APRA and ASIC established? What are their roles?

A

1 July 1998, APRA supervises the banks, insurance co & super funds to ensure operation in line with law. ASIC is responsible for ensuring market integrity and consumer protection.

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7
Q

(1) Which report followed this one and why was it done?

A

The Ripoll Report 2009 prompted by the collapse of Storm Financial and Opes Prime.

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8
Q

(1) What legislation contains some of these changes and what are they?

A

FOFA – Future of Financial Advice, included:
• ban on conflicted remuneration structures
• statutory fiduciary duty to act in members best interests
• introduce flexible advice payment options inc opt-in

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9
Q

(1) Why are more people interested in the management of their finances

A
  • Ownership of superannuation – less reliance on pension
  • Successful government floats on share market
  • Increased choice & product availability
  • Choice of super fund (2005)
  • Technological advancement
  • Availability of financial information – better educated
  • Continuing volatility in stock markets
  • People living longer and aging population
  • Increased number of early retirements and retrenchments
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10
Q

(1) What are the six steps in creating a financial plan

A
  • Gather client data
  • Set goals and objectives
  • Analyse and evaluate financial stats and identify problems
  • Prepare and present written recommendations
  • Implement the financial planning recommendations
  • Review, revise and maintain the personal financial plan.
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11
Q

(1) A financial statement generally contains two parts, what are they?

A
  • A personal cash flow budget or statement – shows income and expenditure.
  • A personal balance sheet – shows assets and liabilities.
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12
Q

(1) Why are financial ratios important

A

Because they evaluate a person’s financial performance. Lenders also use these ratios to assess credit risk.

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13
Q

(1) What is excluded from the liquid assets?

A

Shares and managed funds that may be liquid but would result in a loss if sold.

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14
Q

(1) What factors affect financial planning

A

Economic, political and social.

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15
Q

(1) What is economics a study of?

A

How people and society choose to employ scarce productive resources to produce goods and services and distribute them amongst society.

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16
Q

(1) What is the definition of a recession

A

Two or more quarters of negative real GDP Growth.

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17
Q

(1) What Govt policies could affect financial planning?

A
  • Monetary policy – flow of funds & interest rates
  • fiscal policy – government spending & taxation
  • prices and income policy – wages & therefore production
  • external policy – strategies to stabilise exchange rates, exports, imports and capital flow.
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18
Q

(1) What legislation regulates advisers?

A

Part 7.6 Division 5 of the Corporations Act 2001

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19
Q

(1) What does this legislation require of licence applicants?

A
  • they are not insolvent
  • have adequate educational qualifications & experience
  • no reason to believe they are not of good fame & character
  • no reason to believe they will not perform their duties efficiently, honestly and fairly
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20
Q

(1) What is the other key piece of legislation affecting financial planning?

A

The Financial Services Reform Act 2001, it covers the specific details about training and management, and is incorporated as a new chapter (7) in the Corporations Act 2001.

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21
Q

(2) When investors invest they need to consider what?

A

The time period that funds are committed, effects of taxation & inflation & volatility of returns

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22
Q

(2) Investments have different characteristics, what are 5?

A
  • Liquidity and accessibility
  • Taxation treatment
  • Transaction costs
  • Return
  • Risk
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23
Q

(2) What is ‘the time value of money’

A

It is investing now for a period of time at a rate of return that is greater than inflation.

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24
Q

(2) What are the variables that determine present and future value of a debt instrument?

A
  • the face value of the investment
  • the term to maturity
  • the current market interest rate
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25
Q

(2) What is the effective rate?

A

Is the annualised rate of interest which includes the effect of compounding within the year.

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26
Q

(2) What are the three characteristics that must be present for it to be an annuity

A
  • have a fixed term to maturity
  • is a regular payment
  • is paid in arrears.
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27
Q

(2) What is return? And what are the risks?

A

The total of any income earned for the period together with capital gains. Uncertainty in level of income and volatility.

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28
Q

(2) What is investment risk?

A

The probability that the actual return on an investment will be different from the expected return.

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29
Q

(2) The level of risk a client will accept varies with their circumstances, what are some of these considerations

A
  • age
  • income-generating capacity
  • particular assets and asset classes already held
  • the level of debt
  • financial responsibilities
  • time frame
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30
Q

(2) What is expected return?

A

Is the weighted average of all possible returns from an investment with the weight being the probability of each return

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31
Q

(2) In analysing three investments with the same expected return, what is another thing to be considered?

A

The standard deviation – measure of how actual returns are likely to differ from expected returns. Higher = higher risk. Investments have 68% chance of falling within one deviation, 95% within two.

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32
Q

(2) What is a real return?

A

The return after the effects of tax and inflation

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33
Q

(2) What is NPV

A

The net present value and is the sum of the present value of cash inflows less cash outflows. When this is positive the investment is considered worth undertaking. Expected future cash inflows are adjusted for the time value of money by discounting those cash flows by a discount rate – this gives a present value

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34
Q

(2) What is IRR

A

Internal rate of return – which is the rate of return at which the present values of cash inflows and outflows are equal.

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35
Q

(2) Which method should a financial planner use?

A

The NPV method because when there are multiple sign changes in cash inflows and outflows, this can result in multiple IRR values at which NPV=0 or no IRR value at all.

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36
Q

(2) When valuing fixed interest securities what doe the discount method refer to?

A

The rate of return required by the investor and is the rate at which future cash flows are discounted back to the present value.

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37
Q

(2) What are the benefits of producing a personal cash flow statement?

A

Estimating your cash position at a future point in time.

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38
Q

(2) What is a savings surplus?

A

In a personal cash flow statement, where income exceeds expenditure, this difference.

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39
Q

(2) When is the nominal rate of interest equal to the effective rate of interest?

A

When there is only one compounding period per annum.

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40
Q

(3) What three levels is tax levied at and who is responsible for the imposition of tax?

A

• Commonwealth – income tax, fringe benefit tax, GST etc
• States – stamp duty, payroll tax, land tax etc
• Local councils – council rates
The Commonwealth are responsible.

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41
Q

(3) Who administers income tax and who is applicable?

A

The ATO - all entities on a financial year basis on a PAYG basis.

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42
Q

(3) How is tax administered in Australia?

A

On a self-assessment basis by individuals. The ATO have audit and penalty powers

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43
Q

(3) Progressive tax system?

A

Those who earn more, pay more, Australia uses this.

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44
Q

(3) Difference - individual income tax and company?

A

Individuals are taxed in a progressive nature based on a scale of how much is earned, where as companies pay a flat 30%.

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45
Q

(3) What is the taxation formula?

A

Assessable income – allowable deductions

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46
Q

(3) Assessable income includes ordinary and statutory income including what?

A
  • wages, salary, director fees and service earnings
  • business income
  • investment income
  • compensation that replaces assessable income
  • periodic income
  • capital gains
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47
Q

(3) How does ITAA97 define ordinary income and what does this mean?

A

Income according to ordinary concepts. This would include tips, but not income received from hobbies.

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48
Q

(3) What are allowable deductions?

A

The discount on the assessable income. They may be general or specific.

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49
Q

(3) What are ‘general deductions’

A

Any loss or outgoing that is incurred in gaining or producing assessable income or is necessarily occurred in carrying on a business for income producing activities (as long as not of a capital, private or domestic nature)

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50
Q

(3) What are specific deductions

A

Repairs, depreciation, tax preparations, prior period losses and charitable donations. Entertaining expenses are NOT included.

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51
Q

(3) What is the general rule applied when claiming an allowable deduction

A

If the deduction is greater than $300 the claim must be substantiated with receipts and other evidence and retained for 5 years.

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52
Q

(3) Tax-free threshold?

A

The amount of money earned by an individual which is not taxable - $18,200

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53
Q

(3) Tax planning?

A

The legitimate organisation of an investors affairs in accordance with tax laws to minimise tax

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54
Q

(3) Tax evasion?

A

Involves criminal falsification or non-disclosure to reduce tax.

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55
Q

(3) Tax avoidance?

A

Is minimisation of tax through legal means, which are artificial, contrived and have no reason other than for a tax benefit.

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56
Q

(3) Difference between direct and indirect tax?

A

Direct tax is tax paid directly by the person or organisation, where as indirect tax is levied on expenditures (eg GST).

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57
Q

(3) After the taxable income has been determined, what is the tax formula?

A

Taxable income x tax rate = gross tax payable.

Gross tax payable – tax offsets/rebates + levies = net tax payable.

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58
Q

(3) How is income distributed to a minor from a testamentary trust treated?

A

A testamentary trust established under a deceased’s will are taxed using adult marginal rates

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59
Q

(3) What is the Medicare levy and how does it apply?

A

It is 1.5% and commences on income over a certain level. The level differs based on status of the individual and whether they have children, tax offsets cannot reduce the Medicare Levy.

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60
Q

(3) What is the Medicare Levy Surcharge?

A

Applicable if an individual does not have private health cover with an excess not greater than $500 (singles) and $1000 (other).

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61
Q

(3) The income used to assess the MLS is based on what income, and how does this differ when calculating the MLS?

A

• Taxable income
• Reportable fringe benefits
• Reportable superannuation contributions
• Total net investment losses
• Amount on which family trust distribution tax has been paid.
Reportable superannuation conts and total net investment losses are not included in the calculation.

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62
Q

(3) What are tax offsets and how are refundable tax offsets different?

A

Reduce tax payable. Only the private health insurance rebate, franking tax offset and education tax refund are refundable, which means they can be refunded or carried forward.

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63
Q

(3) Name some tax offsets?

A
  • Dependent spouse tax offset (DSTO)
  • Low income tax offset (LITO)
  • Net medical expenses tax offset (NMETO)
  • Private health insurance tax offset.
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64
Q

(3) How is interest income taxed?

A

Part of assessable income – joint assets are split equally.

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65
Q

(3) What is an interest-offset arrangement?

A

Where the interest earned is offset against the person’s mortgage, which reduces the income the investor earns.

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66
Q

(3) How is property income taxed

A

Rental income is part of assessable income but deductions are applicable for associated costs. CGT is payable on capital gain

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67
Q

(3) How is share investments taxed?

A

Dividends are included in assessable income, but tax depends on its franking status.

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68
Q

(3) What does franking do and how does it work?

A

It ensures that tax is only paid once on an amount. If the company has fully paid tax on the amount, the dividend will be said to be fully franked.

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69
Q

(3) How is the franking / imputation credit calculated

A

Dividend received x (company tax rate / 1- Company tax rate)

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70
Q

(3) What is a capital works deduction?

A

An allowable deduction against assessable income where construction on a residential building used for investment commenced after 1985 (4%) or 1987 (2.5%)

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71
Q

(3) What are two types of Employer Termination Payments (MTPS)?

A
  • Bona fide redundancy – no longer requires an employee to carry out a particular kind of work.
  • Approved early retirement schemes.
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72
Q

(3) What are the two main features of an MTP?

A
  • A tax free amount applies

* It cannot be rolled over to a superannuation fund

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73
Q

(3) How are payments over the tax free amount treated?

A

As a life benefit termination payment (LBTP). This means up to $160K is taxed at 15% (over preservation age) or 30% below preservation age) + any excess at the individual’s marginal rate.

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74
Q

(3) An MTP includes what payments?

A
  • payment in lieu of notice
  • payment for unused sick leave
  • golden handshakes
  • severance or termination payments
  • redundancy payments in excess of the tax free amount
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75
Q

(3) What does in not include?

A

Payment for unused leave, including long service leave or compensation for personal injury.

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76
Q

(3) To be deductible, interest outgoings on borrowings require the expenditure to have what two features?

A
  • be used for income producing purposes and

* have been incurred.

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77
Q

(3) When is an individual not able to increase the capital gain cost base by CPI?

A

Where the asset was held for less than 12 months

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78
Q

(3) A capital loss can be carried forward for how many years?

A

Indefinitely

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79
Q

(3) The CGT discount rate of 50% is not generally available to?

A

Companies and superannuation funds. A super fund is generally able to obtain a discount rate of 30%

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80
Q

(3) The CGT discount rate of 50% is not generally available to?

A

Companies and superannuation funds. A super fund is generally able to obtain a discount rate of 30%

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81
Q

(3) Who pays fringe benefit tax?

A

The employer.

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82
Q

(3) Effective salary packaging requires salary sacrifice arrangements to be made by who and when?

A

By the employer to the employee prior to the earning of the relevant remuneration.

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83
Q

(3) What is the aim of tax planning?

A

To develop strategies that will legitimately and lawfully minimise the taxation liability of individual and company taxpayers.

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84
Q

(3) What are six tax effective strategies?

A
  • Income splitting – investments in the name of someone in a lower tax bracket to minimise tax.
  • Income timing – when best to receive income
  • Negative gearing – occurs when interest on borrowings exceeds income from the investment.
  • Salary packaging
  • Income verses capital growth
  • Business structures
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85
Q

(3) An investor who intends to engage in gearing should have what four attributes?

A
  • have a regular, secure income stream
  • be a medium to high income earner
  • have an adequate income protection insurance cover
  • be aware of the risk and the multiplication of the risk.
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86
Q

(3) What are the advantages of negative gearing

A
  • lowers income tax as losses are offset against other income for taxation purposes.
  • Increases wealth – in the long term
  • Allows purchases that could otherwise not be afforded
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87
Q

(3) What are the disadvantages of negative gearing

A
  • Loss of money if asset does not increase at a higher rate than the sum of cash losses made each year
  • You don’t own the money invested, if it fails you still need to pay back the borrowings
  • Only effective for ‘capital growth’ assets
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88
Q

(3) What is the purpose of margin lending?

A

Allows investors to borrow against the value of eligible securities.

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89
Q

(3) What is the margin lending loan gearing ratio

A

The percentage of the market value that the lender will loan against (generally 40-80% depending on risk).

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90
Q

(3) What is a margin call and when is it payable

A

Where the loan falls below the loan gearing ratio, the notice to restore the ratio. It is generally payable within 24 hours.

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91
Q

(3) What are some basic rules applicable to margin lending?

A
  • use a conservative approach and avoid over extending
  • take a long term view to investing
  • reinvest dividends to increase you equity over time.
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92
Q

(3) What is a safety margin?

A

The amount of security over and above the value of their loan. This is usually specified by the lender, but the investor can increase this to protect themselves from a margin call.

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93
Q

(3) How can margin calls be satisfied by the borrower?

A
  • contribute cash – reduce the balance of the loan
  • use existing assets as security
  • sell some assets pledged as security and use proceeds to reduce balance of the loan
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94
Q

(3) What are the benefits of margin lending?

A
  • Purchase assets at a higher value than they can afford
  • Ability to spread risk by diversifying
  • Shares are a liquid investment
  • Tax benefits through deductibility of interest on loan
  • Choice of investments
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95
Q

(3) What are the risks of margin lending?

A
  • Assets are secured to loan could be at risk
  • Risk of margin call at bad time
  • Serviceability risk – ability to meet interest payments
  • Tax risk – loss of income or tax rate changes could remove this benefit.
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96
Q

(3) What is salary packaging?

A

Taking some remuneration in the form of a concessionally taxed benefits which result in an overall reduction in tax, however these are then subject to fringe benefit tax (FBT).

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97
Q

(3) How are salary sacrificed superannuation contributions shown and taxed?

A

As Reportable Employer Super Contributions (RESC) and are taxed at 15% in the fund. These contributions are included in the income calculation for income testing purposes.

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98
Q

(3) How are salary sacrifice cars treated?

A

Subject to concessional FBT, which still makes this a good option

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99
Q

(3) What is exempt from FBT?

A

Salary taken as cash, super contributions and termination payments. Cars are concessionally taxed.

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100
Q

(3) What are the restrictions on getting the concessional FBT on a car?

A

It must have a carrying capacity of less than 1 tonne or lower than 9 occupants.

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101
Q

(3) What are the two methods of calculating FBT?

A

Statutory formula method and operating cost method

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102
Q

(3) What are the advantages of conducting business under a company structure?

A
  • superannuation contributions are deductible
  • allows income splitting by dividend payment to shareholders
  • family can be appointed as directors (paid reasonable directors fees)
  • income can be averaged over a number of years through a dividend regime
  • it is easier to claim expenses under a corporate structure
  • limited liability to value of shares if applicable.
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103
Q

(5) What does a buy and hold investor believe? What is the opposite?

A

That the market is efficient (prices reflect company value). The opposite investor believes the market is inefficient and so may utilise a ‘timing the market’ strategy.

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104
Q

(5) What is the efficient frontier

A

Graphical depiction of returns and risk. A portfolio that will give the greatest possible rate of return will lie on the efficient frontier.

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105
Q

(5) The behaviour of loss aversion occurs when?

A

Individuals place different values on gains and losses and discover that losses are considered far more undesirable

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106
Q

(5) What are the reasons people may not plan for their future?

A
  • lack of disposable income
  • government supporting people’s retirement
  • lack of goal setting
  • lack of financial education
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107
Q

(5) What are the four main classes of assets to invest in

A
  • Cash – low risk – manage cash flows
  • Fixed interest – low to medium risk – steady income
  • Property – medium to high risk – longer term investment
  • Shares – high risk
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108
Q

(5) What are the different forms of income?

A

Dividends, interest and rent

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109
Q

(5) What are dividends?

A

The distribution of company profits to shareholders done after all accounts finalised, considering the availability of cash, profit and any investment / development opportunities. Declared annually or biannually and based on the number of shares held at a certain point in time.

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110
Q

(5) What is ex-dividend?

A

This means that any new shareholders after this date are not entitled to the dividend that has been declared

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111
Q

(5) What is a capital gain?

A

Increased value of the shares compared to the purchase price

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112
Q

(5) What is a paper profit?

A

A profit from shares that have not been sold but increased in value.

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113
Q

(5) When does capital growth occur?

A

When the investment value exceeds what was paid for the investment.

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114
Q

(5) How are income and growth assets generally seen with regards to risk?

A

Income assets are considered low risk and growth assets as high risk

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115
Q

(5) What is risk?

A

The probability that the actual return will differ from the expected return.

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116
Q

(5) What factors affect an individuals risk tolerance (8)?

A
  • time frame
  • personality
  • concerns re inflation
  • current market conditions
  • Desire for flexibility
  • age
  • liquidity requirements
  • desire for income verses capital growth.
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117
Q

(5) What is systemic risk

A

Refers to the portion of investment return variability that is caused by factors affecting the value of all comparable investments. Economic, political and sociological changes etc.

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118
Q

(5) Why won’t diversification reduce systemic risk.

A

All investments are affected.

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119
Q

(5) What is unsystemic risk and what four categories can it be broken into?

A

Portion of risk unique to the investment, including:
• business risk – continued profitability
• financial risk – level of debt carried
• default risk – ability to meet obligations
• liquidity risk – ability to convert assets to cash

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120
Q

(5) Give 4 ways diversification can be achieved?

A
  • Across companies
  • Across asset classes
  • Across countries
  • Across fund managers.
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121
Q

(5) What is correlation?

A

Looking at combinations of assets to cancel out each other’s riskiness. Correlation looks at these risk patterns.

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122
Q

(5) Assets moving together are described as what?

A

Positively correlated

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123
Q

(5) What do you look for in a balanced portfolio?

A

Less correlated = lower portfolio risk.

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124
Q

(5) What is the correlation band?

A

-1 strong negative correlation (move opposite) to +1 strong correlation (move together)

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125
Q

(5) What is the principle behind modern portfolio theory?

A

Correct combination of assets can achieve a high return associated with more risky investments but reducing the level of risk associated.

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126
Q

(5) Effective diversification reduces risk at each level to best suit the investor. How are these risks categorised?

A
  • firm risk
  • Industry risk
  • Asset class risk
  • Economic risk
  • International risk
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127
Q

(5) Asset allocation is crucial and involves what two main decisions?

A
  1. what asset classes will be included

2. how will the asset classes be weighted

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128
Q

(5) What are the two main approaches to asset allocation?

A
  • Strategic – focus on long term performance objectives to establish the asset mix – eg a % to each asset class is determined and when unbalanced it is reweighted
  • Tactical – changes the asset mix based on market performance expectations, including timing the market and sector rotation.
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129
Q

(5) How do fund managers employ both approaches?

A

By using bands for their strategic allocation, which allow some tactical allocations to be made within the allowable ranges.

130
Q

(5) What are three approaches to investment an investor may take?
(5) What are the benefits to dollar cost averaging?

A
  • buy and hold
  • timing the market
  • dollar cost averaging
  • Encourages regular investment habits
  • Encourages long term investment
  • Average price over term of acquisition
131
Q

(5) When does dollar cost averaging work best?

A

It is a long term strategy that works best in a declining market and is not great in a stable market

132
Q

(5) Which legislation requires planners to ‘know their client’ and how is this done?

A

945A of the Corporations Act 2001, and is done in a client fact finder.

133
Q

(5) What financial concerns may an investor have?

A

Inflation, tax, security, liquidity, income needs, ease of management, estate management, protection of assets, social security.

134
Q

(5) In what ways is an investor categorised?

A
  • Conservative
  • Moderate conservative
  • Moderate
  • Moderate aggressive
  • Aggressive
135
Q

(5) When the fact finder is complete, what occurs

A

Recommendations can be made and the plan implemented when the client understands and accepts the recommendations. The plan should be reviewed at least annually to assess the performance and review changes to the client’s facts.

136
Q

(6) What does ownership of a share entitle that owner to?

A
  • Vote on matters related to the corporate governance and other shareholder matters
  • A share of the income and assets of the company.
137
Q

(6) Who determines the dividend payable?

A

The board of directors (who are appointed by the shareholders).

138
Q

(6) What requirements must a company that wishes to list on the ASX meet?

A
  • Minimum amount of capital
  • Minimum number of shareholders
  • Attaining a certain level of profitability and asset base
  • Preparation of a constitution
  • Details of company directors
  • Details of company’s operations
  • Preparation of a prospectus
  • Details of reasons for listing
139
Q

(6) What are the two main markets for shares?

A
  • The primary market – IPOs

* The secondary market – the ASX

140
Q

(6) Role of a stockbroker?

A

Act as intermediary to arrange the transaction on the ASX.

141
Q

(6) What must a listed company provide to shareholders?

A

An annual report detailing the financial affairs of the company and notices of any upcoming votes.

142
Q

(6) Why were stock exchanges created?

A

To house the trading of shares to ensure fair and equitable dealing practices.

143
Q

(6) ASX created when? & which country has largest exchange

A

1987 and the US does – Dow Jones Industrial Average (the Dow)

144
Q

(6) What are the risks in trading shares for individual investors? A lack of

A
  • Experience
  • Knowledge about how the share markets operate
  • Knowledge about the company and its operations
  • Understanding about business cycles
  • Knowledge about how to measure risks
145
Q

(6) How do analysts calculate the expected return from an equity investment?

A
  • Calculate the price earnings ratio
  • Estimate future dividends using dividend growth models
  • Estimating future returns based on historical returns
146
Q

(6) What is the share fee called?

A

Brokerage and is generally a dollar or %.

147
Q

(6) How does the All Ords work and why is this different to some other markets?

A

Measures weighted market capitalisation of all shares listed (# shares x share price). The Dow and other countries treat all shares equally. So large companies impact the index in Aust.

148
Q

(6) What is the All Ordinaries Accumulation Index?

A

A similar index but works on the basis that all dividends are reinvested, so returns are compounded

149
Q

(6) What is the share market influenced by?

A

Performance of the company, Australian dollar, other markets, economic position and customer sentiment

150
Q

(6) What are ordinary shares?

A

Ownership – and a share in profit, loss and dividend

151
Q

(6) What are contribution shares

A

Not completely paid when purchased but will turn into ordinary shares when fully purchased

152
Q

(6) What are preference shares?

A

May be ordinary, cumulative, participating or redeemable, but have preference over other shareholders with respect to profits, dividends and firm assets if wound up.

153
Q

(6) What are four types of preference shares?

A
  • Ordinary – claim on profits for a particular year
  • Cumulative – priority over profits until all outstanding dividends are paid
  • Participating – priority for dividends and access to additional dividends after ordinary shareholders have been paid
  • Redeemable – can have their share bought back at their face value at the company’s discretion.
154
Q

(6) What are deferred dividend shares?

A

Shares issued on the understanding that a dividend will not be payable until a future date when a particular project becomes profitable.

155
Q

(6) Share market participants are often grouped into what three categories?

A
  • Hedgers – offset or eliminate one risk but purchasing a negatively correlated asset
  • Speculators – look for profit, buy now sell soon for more
  • Arbitrageurs – buy and sell similar assets in different markets to profit from unequal prices
156
Q

(6) What is looked at in the process of analysing a share?

A
  • Liquidity
  • Capital structure (borrowing)
  • Profitability – ratio – after tax earnings to shareholder funds
  • Market valuation - # of ordinary shares multiplied by market price to assess investor opinion.
  • Risk analysis – role the share plays in the portfolio due to the level of systemic and unsystemic risk
157
Q

(6) What is a derivative?

A

A financial product that has no inherent value, its value is derived from some other asset.

158
Q

(6) What types of derivatives are there?

A
  • Contract for difference
  • Futures contracts
  • Options
  • Warrants
159
Q

(6) Property can be divided into what categories?

A
  • Residential
  • Commercial
  • Retail
  • Industrial
  • Tourism
  • Rural
160
Q

(6) What are the features of property investment (5)?

A
  • Land – value depends on natural attributes and whether it is freehold or leasehold
  • Building – depends on physical attributes
  • Heterogeneity – each property is different
  • Indivisibility – they are difficult to divide
  • Inelasticity of supply – supply is limited
161
Q

(6) What is the expected type of return on property?

A

Steady income through rental payments and hopefully longer term capital gain. Property is seen as a hedge on inflation.

162
Q

(6) How can a property investment be more liquid?

A

Invest in listed property trusts

163
Q

(6) Successful property investment requires what?

A
  • Buying at a low point and selling at a high point
  • Good tenants for good long periods
  • A good location
164
Q

(6) What are the advantages of property investment?

A
  • Traditionally seen as a safe investment (tangible)
  • Provides regular income and potential capital gain
  • Average long term property return is 3-5% above inflation
  • Effective means of wealth creation through cap gain
  • Provides diversification from other assets
  • Volatility in returns are not as high as shares
  • Effective investment vehicle for negative gearing
165
Q

(6) What investment specific factors affect property prices?

A
  • Location
  • Physical attributes
  • Legal issues
  • Rental prospects
166
Q

(6) What market-specific factors affect property prices?

A
  • Underlying state of the economy
  • Consumer preferences
  • Surrounding developments
  • Political and legal issues
  • Interest rates
  • Demographics
167
Q

6) When considering tax and housing what needs to be considered?

A
  • Impact of GST – payable on new homes after 1 July 2000
  • Renting part of the home – may lead to CGT
  • Office as part of home – tax deduction available for some expenses, but also CGT on sale
  • Selling a home – Stamp duty payable by buyer.
  • Death of a homeowner – how asset held and when sold
  • Family breakdown – CGT rollover relief may apply
168
Q

(6) What are some of the reasons that young people may not own their own home?

A
  • Less affordable
  • Greater changes
  • Less job security
  • Greater calls on mobility
  • Less social security
169
Q

(6) What are the advantages of home ownership?

A
  • Locational and financial stability
  • A form of disciplined saving
  • A useful asset base
  • Personal freedom regarding living conditions
  • Taxation concessions and advantages
170
Q

(6) What are the disadvantages of home ownership?

A
  • Requires medium to long term horizon
  • Not very liquid
  • Lack of diversification (requires a substantial amount)
  • Opportunity cost with wealth tied up in home
171
Q

(6) What are interest bearing securities?

A

Term deposits, debentures and bonds

172
Q

(6) What are debt instruments?

A

They represent a claim on a borrower or organisation to make interest payments at regular intervals over a defined period and to repay the principal at the end of the period.

173
Q

(6) What are the two levels of debt markets?

A
  • Wholesale – professional – over $1M

* Retail – banking and deposits

174
Q

(6) What are the features of debt securities?

A
  • Investors have priority over shareholders if company is wound up
  • They may be secured or unsecured
  • They may be traded on the money market or fixed interest market
  • They are segregated based on short term (less than 1 yr), medium term (up to 5 years) and long term (5+ years)
175
Q

(6) What are the advantages of fixed interest?

A
  • Income may be higher than other investments
  • Income is generally assured so allows planning
  • Regarded as a stable capital value
176
Q

(6) What are the disadvantages of fixed interest?

A
  • Unlikely to be a capital gain
  • No ongoing participation (set and forget)
  • Some have limited marketability and are traded infrequently.
177
Q

(6) What are bonds?

A

Loans from the borrower of funds to the issuer or seller (usually the government, but also banks and companies).

178
Q

(6) Explain the components of a bond?

A
  • The face value – purchase price of the bond
  • The coupon – the interest paid on the bond
  • Maturity – when the life of the bond concludes.
179
Q

(6) When are bonds most valuable

A

In a time of falling interest rates (they move in the opposite direction).

180
Q

(6) Interest rates on bonds are set at the time of issue and reflect the risk of the debt security including what?

A
  • Creditworthiness of the borrower
  • Term to maturity (preferred habitat)
  • Marketability/ saleability of the bond
  • Liquidity – conversion to cash without penalty
181
Q

(6) What are discount securities?

A

Bonds that do not pay a coupon or interest payment. They are fixed interest securities priced to include interest, which is not paid in separate payments.

182
Q

(6) What are coupon securities?

A

Bonds that pay interest at set periods of time during the life of the contract.

183
Q

(6) Why is cash an important part of a portfolio?

A
  • Allows an emergency fund

* To take advantage of investment opportunities

184
Q

(6) Why do investors vary the % cash?

A
  • Seasonal and daily cash requirements

* Asset purchases and asset sales

185
Q

(6) What are the two markets for investing in cash?

A
  • 11am market – invested for 24 hours and if not renegotiated stays invested at that rate.
  • 24 hour or 7 day market – invested for 7 days but can be called back with 24 hours notice.
186
Q

(6) What are the other features of cash?

A
  • Do not realise capital gains or losses
  • Face value of investment does not change
  • Easily accessible through general products
187
Q

(6) What cash investment options are there?

A
  • Standard bank account
  • Cash management trust
  • Money market accounts
188
Q

(6) What are collectibles and give examples?

A

Items that are of interest or inherent worth that may increase in value over time and include: antiques, artworks, coins, stamps,

189
Q

(6) What are the advantages of collectables?

A
  • Provide emotional / psychological satisfaction

* Benefits such as meetings or clubs

190
Q

(6) Disadvantages of collectables (4)

A
  • Market can be ‘thin’
  • High level of expertise is required
  • Emotional attachment can make it hard to sell
  • Some collectibles are subject to fashions
191
Q

(6) What is ethical investment

A

The consideration of the environment and other social factors in investment, eg, sustainable land use, forest logging, reef forestation, efficient energy, repressive regimes, unfair work practices etc.

192
Q

(7) What is diversification

A

Spreading the investment dollar across a number of different investments (classes, sectors and countries)

193
Q

(7) What is a managed fund?

A

Purpose built investment tool, where rules & regulations for operation are specified within the trust deed. Investors can pool funds, which are invested by an investment manager.

194
Q

(7) What is a trust deed?

A

A legal document used to establish and regulate the operation of a trust.

195
Q

(7) What are the types of managed funds?

A
  • Life insurance corporations
  • Superannuation (pension) funds
  • Public offer (retail) unit trusts
  • Friendly societies
  • Common funds
  • Cash management trusts
196
Q

(7) Managed funds include what type of trusts?

A
  • Cash management trusts
  • Bond trusts
  • Property trusts
  • Share (equity) trusts
197
Q

(7) What are the factors to consider in comparing a cash management trust?

A
  • The net return
  • Average maturity
  • Types of investments the fund manager chooses
  • Establishment date and performance since
  • Auto payment facilities
  • Fees, expenses and services to investors
  • The size of the trust and market share
  • Minimum deposits and transactions and
  • Income distribution and interest accrual periods
198
Q

(7) What is a bond trust?

A

Invest in international and national government securities, short term money market securities and bank deposits.

199
Q

(7) What are the features of a bond trust?

A
  • Fees are low
  • Investment is relatively secure
  • Investment is relatively liquid
  • Is best for an investment horizon of 1-3 years
200
Q

(7) What must an investor consider before investing in a property trust

A
  • The level of gearing
  • Assess the liquidity
  • Assess the capitalisation (amount of money invested)
201
Q

(7) What is an A-REIT

A

It is a property fund listed on the ASX. An unlisted property trust is called a UPT

202
Q

(7) What is a disadvantage with a UPT over an A-REIT

A

UPTs can have restricted redemption windows.

203
Q

(7) What is the difference between a property syndicate and an UPT?

A

Property syndicates have a shorter life than a UPT (5-7 years), they also are smaller (less investors) and each investor must agree to the set time period for the investment.

204
Q

(7) What other options for investing in property are there?

A

• Property security funds – hold portfolio A-REIT & other property
• Mortgage funds – hold mortgages over property
• Mezzanine funds – lend to developers at a higher rate
Hybrid funds – contain A-REIT, UPTs and property syndicates

205
Q

(7) What are share equity trusts?

A

They specify a region or category of shares, they have high volatility but generally provide higher returns over the long term.

206
Q

(7) What factors should be considered when investing in share equity trusts?

A
  • Performance will depend on the underlying assets
  • New funds and small funds will show better results in a bull market than established funds
  • Strategies in place for dealing with the unexpected
  • The experience of the manager and investment team
  • That units are limited in liability
  • The size of the trust and length of operation
  • When distributions are made and how units are valued
  • Liquidity, charges and switching options
207
Q

(7) What is a counter-cyclical strategy

A

Where a manager does the opposite of what other investment managers are doing.

208
Q

(7) What is a diversified fund or trust?

A

A fund / trust that invests across a range of asset classes

209
Q

(7) What is a capital stable, balanced or growth fund?

A

A trust that invests across asset classes but targets a particular risk/return goal

210
Q

(7) What are the advantages of a managed fund?

A
  • Allow small investors to get a diversified portfolio
  • Access to markets not open to small investors
  • Ability to make regular contributions to the funds
  • Alleviation of burden of deciding which assets to buy
211
Q

(7) What are the disadvantages of a managed fund?

A
  • Fund managers charge for their services
  • Exit fees may be charged
  • Possibility of losing money
  • Fraud by the manager
212
Q

(7) What is a master trust?

A

It is trust, which provides the investor with access to a range of different fund managers through one investment vehicle. This provides consolidated reporting and access to wholesale rates.

213
Q

(7) What is a disadvantage of a master trust?

A

Costs may be higher as there is an additional layer of administration.

214
Q

(7) What is style analysis used for?

A
  • Understand a fund manager’s investment process
  • Verify claimed style is supported by actual holdings
  • Assess complementarily of managers within a portfolio, a range of different styles to reduce risk
215
Q

(7) How may investment styles be categorised?

A
  • Value
  • Growth
  • Thematic – relies on top down macroeconomic perspective to select future growth themes
  • GARP – growth at a reasonable price
  • Business cycle – relies on top down macroeconomic perspective based on current and expected stage of business cycle
  • Style neutral – no overriding bias to value or growth stock
216
Q

(7) What will growth managers tend to invest in?

A

Telecom, info technology, health care, financial services and industrial stocks

217
Q

(7) What will value managers tend to invest in?

A

Consumer discretionary sectors, consumer staples, utilities and materials.

218
Q

(8) When seeking advice from a planner the investor should review the written plan to ensure what?

A
  • It is clearly and professionally written
  • It is adequately communicated and fully explained
  • It satisfies his or her goals, needs and expectations, and
  • The basis behind the advice is clearly explained
219
Q

(8) Other than a planner, investment advice and analysis is also available from whom?

A
  • Stockbroking firms – company and market performance
  • Research houses – research on stocks, MFs and market
  • Financial press – newspaper, magazines and television
  • Company information – annual report and statements
  • Internet – varies in quality and range.
220
Q

(8) Research into an investment should consider what?

A
  • The economy
  • The industry
  • The institution/company
  • Prices and quotations
221
Q

(8) What are the two main categories of investment management style?

A
  • Active – vary strategy based on current and envisaged market conditions
  • Passive – seeks to equal performance of a market indicator or index
222
Q

(8) What are the five types of active management styles?

A
  • Fundamental – evaluates stocks to determine misprised good value stocks
  • Technical – study of price and volume data to predict future
  • Contrarian – bet against popular investment trends (buy on fall, sell on rise)
  • Quantitative – mathematical trends and stats are used
  • Tactical (not covered)
223
Q

(8) There are two types of fundamental management, what are they?

A
  • Value – buy assets when underpriced and take profit when fully priced
  • Growth – choose stock primarily on expected earning growth (income streams are not important).
224
Q

(8) Fundamental management has two types - value and growth, these can be viewed in two ways, what are they?

A
  • Top down – looking first at the economy, then industry and then the company
  • Bottom up – looking at the share price first and working out to the economy.
225
Q

(8) What is micro thematic analysis?

A

It recognises a good idea and looks to let that idea influence their investment decision eg. Aging populations so invest in bio medical.

226
Q

(8) What are the key tools of technical analysis?

A
  • Charts of historical stock prices and volume – patterns are formed and used to predict future performance
  • Technical indicators – use of numerical indicators to determine trading signals in the market, such as moving averages, relative strength indicator (RSI), etc
227
Q

(8) How is fundamental analysis used to identify undervalued shares? By studying what?

A
  • Firm specific factors – what is known about the company
  • Industry wide factors – quotas, tariffs, future growth prospects
  • Economy wide factors – government policy, GDP etc
228
Q

(8) How do fundamental analysts classify a stock?

A

Buy, Hold or Sell.

229
Q

(8) Bottom up analysis also uses what ratios to interpret company balance sheets, P&L accounts and cash flow statements?

A
  • Earnings per share
  • Price earnings ratio
  • Divided per share
  • Dividend yield
  • Net tangible asset backing
230
Q

(9) Risk is?

A

Uncertainty concerning the occurrence of a loss

231
Q

(9) Peril is?

A

The cause of loss

232
Q

(9) Hazard is?

A

A condition that creates or increases the chance of loss

233
Q

(9) What are three major types of hazard?

A
  • Physical hazard – condition increasing chance of loss
  • Moral hazard – dishonesty /fraud
  • Morale hazard – carelessness or indifference to loss
234
Q

(9) What are the four classifications of insurance risk

A
  • Pure risk – loss or no loss eg. Premature death
  • Speculative risk – either profit / loss poss, win/lose etc
  • Fundamental risk –affects large parts of economy (war)
  • Particular risk – affects only individuals (car theft)
235
Q

(9) Why is it important to distinguish between pure & speculative risk?

A
  • Insurers generally only insure pure risks
  • Low of large numbers applied more easily to pure risks (allows predictions)
  • Society will not generally profit from pure risk
236
Q

(9) Why distinguish between fundamental & particular?

A

• Because government assistance may be necessary to ensure fundamental risk

237
Q

(9) What is risk management?

A

A systematic process for the identification and evaluation of pure loss exposures faced by an organisation or individual, and for the selection and implementation of the most appropriate techniques for treating such exposures.

238
Q

(9) What are 5 major methods of handling risk?

A
  • avoidance – don’t do it
  • retention – app for high frequency low severity risk
  • non-insurance transfers
  • loss control – reduce severity and frequency of loss
  • insurance
239
Q

(9) What are the two objectives of loss control

A
  • loss prevention – reduce probability of loss occurring

* loss reduction – reduce severity of loss

240
Q

(9) What are the 6 steps to risk management?

A
  1. Determine objectives
  2. Identification of risks
  3. Evaluate risks
  4. Select most appropriate technique
  5. Implement the plan
  6. Periodic review and evaluation
241
Q

(9) Three types of insurer operating in the market?

A

Life insurers, general insurers and health insurers.

242
Q

(9) What is an intermediary?

A

Those who arrange insurance for a client. Includes the agent (working for insurer) and broker (client rep)

243
Q

(9) The Insurance Contract Act 1984 requires what?

A

Both parties act in utmost good faith and disclose all material facts.

244
Q

(9) What are the basic characteristics of insurance

A
  • Pooling of losses – across a pool
  • Payment of fortuitous losses inc unforseen, accident & unforseen
  • Risk transfer – pure risk transferred to insurer
  • Indemnification – restored to position before loss.
245
Q

(9) What three classes can insurance be divided?

A

Insurance of person, insurance of property and insurance of liability

246
Q

(9) In providing for dependants what two approaches?

A
  • Multiple approach (human life value) – aims to replace insured’s income by a similar amount when invested
  • Needs approach – looks at dependents, costs and debts to determine insurance
  • Capital retention approach – amount necessary to generate income to support surviving dependants.
247
Q

(9) What is the most thorough and how is it determined

A

• Needs approach – estimate capital to pay debts, to product family income and all expenses. Minus off savings and balance represents insurance amount.

248
Q

(9) Two broad approaches to financing personal loss?

A
  • Retention – meet loss from own resources

* Transfer – pay a premium for an insurer to cover loss

249
Q

(9) Life insurance covers what three risks?

A

Premature death, disability and illness/sickness

250
Q

(9) Define term life cover and the three options?

A

Fixed period with no cash value at end, three options are: level term, decreasing terms and increasing term. These may be renewable or convertible (into a perm policy)

251
Q

(9) What permanent life cover options are there?

A
  • Whole of life – protects indefinitely
  • Endowment life - term pre-determined, payable at end
  • Annuities – regular income till death
  • Term life
252
Q

(9) What are additional optional benefits of a term life policy

A
  • Indexed sum insured
  • Special sum insured increase on birth of child/marriage
  • Guaranteed renewal – policy remains in force even if insured develops an adverse condition
  • Multiple lives – discounts for more insured
  • Optional benefits such as TPD, trauma
  • Future insurability
253
Q

(9) Premiums may be established in what two ways

A
  • Stepped – rise annually in accordance with death risk

* Level – averaged over all years

254
Q

(9) Name general policy exclusions

A
  • Suicide within 13 months
  • Terminal illness due to self harm
  • War
  • Pre-existing conditions
255
Q

(9) What are the three types of disability insurance

A

TPD, Critical illness (Trauma) and Income protection.

256
Q

(9) What is included in general insurance

A

Motor vehicle, home owners insurance, content insurance and travel insurance

257
Q

(9) Liability insurance includes what?

A

Public liability, product liability and professional liability

258
Q

(9) Medical health insurance includes what two types?

A

Medicare (Government) and Private insurance

259
Q

(10) What are the three tiers of policy?

A

Tier 1 – Age Pension
Tier 2 – Voluntary saving
Tier 3 – Compulsory saving

260
Q

(10) What are the types of super fund?

A
  • Corporate superannuation funds
  • Industry Funds
  • Public Sector funds
  • Retail funds
  • Small Funds (SMSFs)
261
Q

(10) What are the two types of contributions and the limits

A
  • Concessional – employer entitled to a tax deduction - $25,000 with a transitional rule of $50,000
  • Non-concessional – contributed by member and not entitled or doesn’t claim a tax deduction. $150,000
262
Q

(10) What is the bring forward rule

A

• Members under 65 can bring forward two years of non-concessional contributions ($450,000) to contribute in one year.

263
Q

(10) Penalty for breaching the caps?

A

Concessional conts over are taxed at 31.5% and non-concessional the tax over the cap is 46.5%.

264
Q

(10) What are the exemptions for an employer to not pay SG?

A
  • member under 18 and working less than 30hpw
  • over age 70 (soon to be abolished)
  • receive salary / wages less than $450 p/m
  • employed less than 30 hpw doing domestic work
  • are non-residents paid for work done outside Australia
  • are an Aust resident paid by non- resident eer for work done overseas
  • are a foreign executive holding a certain visa
  • are temporarily working in Australia for an overseas eer
265
Q

(10) What is the work test?

A

Members between age 65-75 can still make non-concessional contributions only if they work 40 hours in a consecutive 30 day period and are paid for that work.

266
Q

(10) When can contributions no longer be made to super?

A

Over 75 unless they are mandated contribution

267
Q

(10) Super co-cont eligibility requires within an income yr?

A
  • a personal non-concessional cont to be made to a complying super fund
  • total income less than the upper threshold
  • not hold an eligible temporary resident visa
  • be less than 71 years old at the end of the year
  • lodge a tax return for the year
  • earn 10% or more of total income from employment/business
268
Q

(10) What is a SAF

A

Small APRA Fund – regulated by APRA with an APRA approved Trustee and has less than five members

269
Q

(10) What does retirement planning involve?

A
  • Setting retirement goals
  • Determine expected retirement age
  • Determine expected size of retirement nest egg
  • How to fund any shortfall in projectected income
  • Determine estate to leave to family
  • Address insurance and health issues
270
Q

(10) What are two types of retirement income stream?

A
  • Pension – paid from a super fund – including account based income streams (allocated pensions and TAPs)
  • Annuity – paid from a life insurance company – including term certain and lifetime income streams
271
Q

(11) The Social Security Act 1991 defines the conditions for receiving support under what headings?

A

Qualification for payment, Amount and calculation of payment and termination of payment

272
Q

(11) When is a pension payable?

A

Age pension, disability support pension and carer payment

273
Q

(11) What is an allowance and what are five?

A

Short term in nature and includes: sickness allowance, youth allowance, new start allowance, partner allowance, widow allowance and austudy

274
Q

(11) Pensioners are also entitled to a concession card, provides?

A

Discounted rail travel, telephone allowance and prescription drugs under PBS.

275
Q

(11) Eligibility to social security benefits requires what?

A

Reach pension age (65-67 depending on when born), be in Aust at application along with having been a resident for at least 10 years (5 yrs continuous) and satisfy means tests.

276
Q

(11) How does the government reduce reliance on Social Security Pensions?

A
  • requires compulsory super conts
  • tax concessions to encourage saving to super
  • encourage voluntary saving
  • Co-cont and low income earner contribution
  • Allow contribution splitting
  • Tax concessions to encourage pensions
  • Tight preservation rules
277
Q

11) What is not assessable in the assets test?

A
  • Home up to 2 hectares
  • Disability aids
  • Superannuation if under pension age
  • Prepaid funeral expenses
  • Money from home disposal if used to purchase another within 12 months
  • Interest in an unfinalised estate
  • Asset value of TAPS (100% pre 20 Sep 2004 and 50% pre 20 Sep 2007)
278
Q

(11) Which test is used? the asset or income?

A

Whichever is lower

279
Q

(11) What is included in assessable income for the income test?

A
  • Employment earnings
  • fringe benefits
  • reportable super conts
  • income from borders / rent
  • net losses from rental property
  • income from a deceased estate
  • deemed income from investments
  • income from pensions
  • dividends and interest
280
Q

(11) What is deemed income?

A

All investments except real estate, partnership and trusts, super pensions & annuities. Interest is calculated based on a ‘deemed’ rate rather than actual returns.

281
Q

(11) What is not included in assessable income for the income test?

A
  • Government rent subsidy
  • most Centrelink payments
  • medical benefits
  • insurance benefits for building or personal effect loss
  • payments in respect of a dependent child
  • super income if under pension age
282
Q

(11) Why does the work bonus encourage staying in the workforce?

A
  • First $250 p/f is excluded from the income test
  • Starts from $0 in July 2011 and unused amount is added to the work bonus balance
  • balance offsets future employment income earned in a single fortnight above $250
  • work bonus can be deferred allowing eligible pensions up to $6,500 of employment income offset each year.
283
Q

(11) What is the pension supplement?

A

It is the combination of the pharmaceutical allowance, utilities allowance, GST supplement and telephone allowance paid in an additional fortnightly amount.

284
Q

(11) The pension account balance is generally fully included in the asset test, what is the exception?

A

Term allocated pensions purchased prior to 20 Sep 2004 (100% exempt) and those purchased between 2004 and 20 Sep 2007 (50% exempt).

285
Q

(11) What is the purpose of the gifting provisions?

A

Designed to prevent pensioners giving away large sums of money or assets to qualify for the age pension. Anything disposed for less than fair market value will invoke the deprivation provisions.

286
Q

(11) what are the gifting rules?

A

A maximum of $10K gifted each financial year up to $30K over 5 years.

287
Q

(11) What are the penalties for breaching the gifting rules?

A

The excess amount gifted is included in the pensioners assessable asset base for 5 years from the date of the gift and the excess amount is treated as assessable for tax and classed as a financial asset (so deeming applies).

288
Q

(12) What is estate planning?

A

The conserving and distribution of a person’s wealth.

289
Q

(12) What are the aims of estate planning?

A
  • Wealth accumulated is protected for future generations
  • wealth goes to where it is intended
  • minimise family squabbles
  • minimise tax
290
Q

(12) What are the 6 steps of estate planning?

A

1) assess size of estate
2) establish objectives of client
3) Decide best means of wealth transfer
4) Provide for liquidity
5) minimise tax
6) Schedule a periodic review

291
Q

(12) What is a will?

A

A legal document which disposes of a deceased’s estate assets to the people of his or her choice.

292
Q

(12) What does ‘sound of mind’ mean?

A

Capacity to understand:

  • the act of making a will and its effects
  • what they are doing in signing a will
  • the property to be willed to beneficiaries
293
Q

(12) What does a will provide information on?

A
  • who the beneficiaries are
  • directions if a beneficiary should die before the testator
  • who the executors are
  • who the guardians for minors are
294
Q

(12) Who are the parties to a will?

A
  • will maker (the testator / testatrix)
  • executor
  • beneficiaries
  • witnesses
295
Q

(12) What assets can a will not deal with?

A
  • assets that are jointly held
  • assets held in trust by the deceased
  • assets held in a discretionary family trust
  • superannuation
  • life insurance proceeds
  • allocated pensions with a reversionary.
296
Q

(12) What is a codicil?

A

A little will, where someone wants to make minor adjustments to their will.

297
Q

(12) What is probate?

A

It is the process of proving and registering in the supreme court the last will of a deceased person.

298
Q

(12) What are letters of administration?

A

They give authority to carry out functions of administering an estate and apply when an executor dies without a named replacement or when a person dies intestate.

299
Q

(12) What effect does a marriage have on a will?

A

It revokes all previous wills except one made in contemplation of marriage.

300
Q

(12) How does divorce affect a will?

A

It does not revoke it, but generally revokes a gift to the ex-spouse and appointment of them as executor, trustee or guardian.

301
Q

(12) How does entering into a defacto relationship affect a will?

A

Does not revoke it, but does cancel distributions to an ex spouse, same as divorce.

302
Q

(12) What is intestacy?

A

Where a person dies without a will, or the will is lost, or the will is invalid.

303
Q

(12) What are the rules of intestacy (Victoria)?

A

a) less than $100K all to surviving spouse and if none, split amongst children
b) if more than $100K - first to spouse then remainder is split, 1/3rd to spouse, remainder equal among children
c) no children - paid to family members
d) no next of kin - paid to state Govt

304
Q

(12) When may a will be contested?

A
  • will maker did not have testamentary capacity
  • will maker did not make the will freely
  • inadequate provision for a beneficiary
  • inadequate provision for a dependant
  • will is incorrectly executed.
305
Q

(12) When will a will be revoked?

A
  • Voluntary revoke - either when a new will is accepted or the will maker destroys the will with intent to revoke.
  • Involuntary revoke - marriage and divorce.
306
Q

(12) What considerations should be thought of when allocating assets / money in a will?

A

The beneficiaries:

  • eligibility to age pension
  • exposure to risk (bankruptcy)
  • taxation status
  • ability to manage finances
  • potential family law problems
  • age - if under 18 usually has to wait
307
Q

(12) Why would you not use a beneficiary as a witness?

A
  • limits entitlement to what applicable under intestate laws
  • beneficiary will not receive gifted item only the value of the item
  • if the beneficiary is not a relative, they are likely to not receive anything.
308
Q

(12) What is the role of the executor?

A
  • ensure the testator’s instructions are executed
  • arrange for the funeral
  • identify, collect & take control of deceased’s assets
  • identify and pay liabilities
  • obtain probate of the will
  • pay the costs of administering the estate
  • distribute the assets
  • lodge tax returns and pay taxes
309
Q

(12) How are assets that are passed to a beneficiary treated for tax where purchased after 19 Sep 1985?

A

The cost base is that of the deceased, however the acquisition date is the date of death.

310
Q

(12) how is a primary residence treated for tax on the death of the holder?

A

It is not subject to CGT if the house is kept as a primary residence or sold within 2 years of death by the beneficiary.

311
Q

(12) How long is allowed to finalise an estate under the ITAA 1936?

A

3 years

312
Q

(12) What is a testamentary trust?

A

It is a trust contained within a will and operative when the person dies

313
Q

(12) What are the advantages of a testamentary trust?

A
  • Income tax advantages for beneficiaries
  • Beneficiaries may continue to be eligible for social security benefits
  • CGT may be deferred or minimised
  • Preservation of assets from creditors
  • Protection from a spendthrift beneficiary
314
Q

(12) What is a power of attorney?

A

A document which gives another person power to act on his or her behalf.

315
Q

(12) Who is eligible to be appointed as an attorney?

A

A person at least 18 years of age, sound of mind and if more than one person whether the attorneys must act individually or jointly.

316
Q

(12) What are the different types of power of attorney?

A
  • Limited power of attorney
  • General power of attorney
  • Enduring power of attorney
317
Q

(12) What is the difference between a general power of attorney and an enduring power of attorney?

A

A general POA allows almost any decision regarding the person’s assets and affairs, however an enduring POA remains valid when the grantor becomes of unsound mind.

318
Q

(12) What are the three types of enduring POA?

A

1) Financial - financial affairs
2) Guardianship - accommodation needs
3) Medical - decisions about health and treatment.

319
Q

(e) How is net worth calculated?

A

Total assets - total liabilities

320
Q

(e) How is current debts calculated?

A

1 year loan repayments and other debt (including credit card where payable within that year).

321
Q

(e) How is a cash surplus calculated?

A

Net salary - all current debts & expenditure

322
Q

(e) What is included in the monthly loan repayment figure?

A

All loan amounts / 12 and any credit card debt where there is a commitment to pay it off within a year.

Financial Planning (1 decks)

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