80.2K

Verified Solution

Link Copied!

1. Statement of Current Financial Position (prepared in Excel) as at 30 June 2021 using the spreadsheet template provided. (Assume that the values given during the interview remain valid for 30 June 2021). [TAB Financial Position] - Use the current stock prices as of 26/03/21 to calculate current value

Financial Planner (FP): Jack and Dianne thanks for coming in. I understand that you have just purchased a new home and are interested in putting together a financial plan.

Jack: Thats correct. We bought a new house about two months ago in Mentone, Melbourne, Victoria. Actually, settlement is today and we will effectively move in tomorrow as the property we currently rent is being occupied the day after.

FP: Congratulations buying a home is usually the first step to wealth creation so now is a good time to assess your current financial position and to make some plans for the future, particularly in light of the current economic environment.

Dianne: I must say that I am nervous about making plans for the future so many things can change and upset the best laid plans the current Covid situation is an extreme example.

FP: True but my philosophy is that a plan is much better than no plan and plans can always be updated and changed to meet new circumstances. Tell me a bit more about this house purchase.

Jack: Well the house cost $1,150,000. We have had to borrow $660,000. Our mortgage broker who is an old school friend suggested that we split the loan into two. So we have a $400,000 fixed rate loan. The rate is 2.64% fixed for five years. The loan itself is a 20-year loan and repayments are fortnightly.

FP: What about the other $260,000 did you borrow that a variable rate?

Dianne: Yes. It is a variable rate, 20-year loan with fortnightly repayments. The advertised rate was 2.69% however I just got an email saying that the comparison rate is 2.86%. Im confused is the rate 2.69% or is it 2.86%?

FP: Rather than answer that now, let me make a list of questions you want answered and I will include my answers in my report to you.

Dianne: Also, with interest rates low at the moment, should we increase the amount of the fixed rate loan so as to reduce our exposure to interest rate variations?

FP: I will include a response to these is my report as well. Dianne: Sounds good. FP: Can you tell me a bit more about your age, jobs and how much you earn? Jack: Im aged 31 and work as a sales manager for a transport logistics company. My salary

package for the year just ended was $150,000 and this includes the standard superannuation guarantee contribution. In the last five years my salary has gone up by about 3.0% per annum and I think this rate of increase is likely to continue for the next five years. Im fortunate that my employer has large contracts with many of the major retailers who have largely been unaffected by the pandemic so my position is quite secure. FP: What about you Dianne? Dianne: I work from home as a freelance IT consultant and am aged 28. This financial year I had a taxable income from my business of $88,000. FP: Thats excellent, how is business for you? Do you see any change in your business income? Dianne: I do have a business plan. My business plan projects that I will earn taxable business income of $95,000 in the 2021/2022 year and then increase by about 5% per annum. As with Jack, my income is relatively secure as I have a number of Government contacts, though as I said earlier I get nervous about plans because so many things change but so far so good. FP: Dianne, Im impressed that you have a business plan in place, many small businesses dont, what about contributions to superannuation? Dianne: None Im afraid. I do have about $50,000 in the Bendigo Conservative Index Fund as a result of the various part time jobs I have done in the past. FP: Whilst we are on the subject of superannuation Jack how much do you have in super? Jack: My last statement from TWU Super showed a balance of $136,500. I think it is invested in a cash plus option. The only contributions that go in are from my employer as part of their Superannuation Guarantee obligations. A friend suggested that making non-concessional contributions to superannuation is much more tax effective than making concessional contributions. Im not sure what they mean by concessional and non-concessional contributions and Im not sure if their advice is correct can you help me out? FP: As I mentioned to Dianne earlier lets concentrate on gathering data during this interview and not get too side-tracked by these other issues. These are however very important issues and I will certainly address your concerns in my final report. Now, besides your house and your superannuation what other assets do youhave? Jack: I own a small unit in Caulfield that I lived in previously, it cost me $365,000 back in 2016 and is now valued at $540,000. I know that value is correct because the bank re-valued the property as part of our recent home purchase. I have a loan on the property of $292,000 which is an interest-only loan with an interest rate of 3.19% fixed for the next 5 years. The rental return from the property is $320 per week and this covers both the interest on the loan and the other costs associated with the property like insurance, council and water rates, etc. so I see it as a no- cost investment. In fact, my tax accountant says that whilst I break-even from a cash perspective, I generate a tax loss on my investment due to depreciation allowances of $4,000 per year which generates some tax savings for me. Dianne: I inherited 500 CSL Limited shares and 1,000 Wesfarmers Limited shares back in 2010 when my father passed away. Back then the CSL shares were valued at $35.00. I sold 100 of the CSL shares at $270.00 on 1 July 2020 to free up some cash which we have used to assist with the purchase of the house. I still have the other 400 CSL shares and the original 1,000 Wesfarmers shares. I guess I am going to have to pay some capital gains tax on the sale of the CSL shares. Capital gains tax has me very confused and whilst on the subject of confusion franking credits have me completely bamboozled. Can you give a simple and straight forward explanation of capital gains tax and dividend imputation maybe an example might help. FP: Let me add that explanation to my list I will explain both of these issues separately.

Dianne: We have two cars worth about $80,000 in total. We also have $55,000 in a bank term deposit which is in Jacks name and which pays 0.35% interest and a bank transaction account in joint names which has $38,160 and which pays zero percent interest. FP: Do you have any personal risk or health insurance policies? Jack: If by personal risk you mean life insurance then I have $125,000 default life cover in my superannuation fund. Dianne: No, never really considered insurance apart from house and car insurance. We thought about health insurance but it is so expensive and Jack and I are pretty healthy. I think it is a complete waste of money dont you agree? FP: Well Im not sure that I do agree with you I will include in my report some of the financial considerations you need to take into account with respect to health insurance. What about your living expenses do you budget your living expenses? Jack: Yes, we do. To save some time I prepared this list of living expenses for 2020/21 last week. I was surprised as to where our money actually goes. (At this point Jack hands over a copy of the living expenses. These expenses are itemised in the 2020/21 column of the Excel template) FP: OK what about what you owe? I know that you have a $660,000 mortgage and $292,000 investment loan. Any other debts? Jack: We both have credits card which access the same account. We have a Bendigo Bank Platinum Awards Credit Card with about $21,000 owing. FP: Do you know what rate of interest you are paying on this card? Dianne: Not really I know we should it is just so convenient. We never really pay it off with the interest, our payments and new purchases each month the balance owing stays fairly constant I guess the balance probably increases each year by about the rate of inflation. FP: In your list of living expenses for 2020/21 you did not include credit card interest and the annual cost of the credits cards. Dianne: We were hoping that you could work this out for us. FP: Anything else you think we should consider. Jack: Just one last thing. My work mates are telling me that cryptocurrency is the investment product of the future. I know nothing about things like cryptocurrency or bitcoin, is that something we should consider as in investment option? FP: Again, I will come back to you on this with some pros and cons of such a strategy. There are more questions that I need to ask but maybe that is enough for now. Thanks for your time today. In order to prepare my report, I will need to make some assumptions. For example, I will assume that the inflation rate is 1.0% per annum, I will assume that the current tax rates and levels of

dividend income remains unchanged for the next five years and that your expenses will rise by inflation, unless there are contracts in place, which will affect these payments. I will also be using the shares prices as at 26 March 2021 for the purposes of valuing them for the Statement of Current Financial Position. I will build a simple model in Excel and if you wish to change any of my assumptions it will be a simple matter of changing a cell or two and seeing what impact it has on the overall outcome.

Jack: That sounds terrific I look forward to our next meeting and seeing your report.

Answer & Explanation Solved by verified expert

See Answer