Exam Flashcards
Lectures 1-11 (189 cards)
1
Q
what is financial wellbeing
A
People who both perceive and have each of
1. financial outcomes in which they meet their financial obligations
2. financial freedom to make choices that allow them to enjoy life
3. control of their finances
4. financial security
2
Q
assumptions of financial wellbeing conceptual model
A
- people’s lives are divided into discrete periods
- in each of these periods, people care primarily about the amount of goods and services they consume
- the consumption of these goods and services generates what we observe as ‘financial behaviour’
- people use their household economic and material resources to pay for the expenditures
- people’s economic and material resources are affected by their own behaviour as well as economic conditions around them
- people derive satisfaction from both their current expenditure and their beliefs about their future expenditure potential
- the correspondence between people’s derived satisfaction and their expenditures is characterised by their preferences and attitudes.
- people make expenditure decisions in the best way possible given their personal capabilities and based on the access to financial products and services
3
Q
reported financial wellbeing advantages/disadvantages
A
subjective lens
advantages:
- more easily measurable
- people differ in their preferences and attitudes
*the same objectively observed material resources may lead to different levels of perceived financial wellbeing
disadvantages:
- set-point theories which claim that people’s subjective wellbeing is relatively stable and not affected permanently by major adverse life events
- discrepancy between perceived and objective wellbeing
4
Q
observed financial wellbeing and advantages/disadvantages
A
objective lens
advantages:
- can be measured without input from person
- provides a more objective assessment of a person’s financial wellbeing
disadvantages:
- proper assessment of a person’s financial wellbeing requires data that is typically not readily available in one place
- computing financial well-being based on a person’s financial information is difficult both conceptually and computationally
5
Q
what is ‘complexity barrier’ in financial decision-making
A
- complexity of products
- complexity of contracts
- complexity of distribution
- size of search space (choice overload)
6
Q
financial planning main areas
A
- wealth creation
- asset protection
- retirement planning
- estate planning
7
Q
how to wealth creation
A
- superannuation
- purchasing equities (bonds, property, etc.)
- gearing
- investment in family home
- investment in business
- salary packaging
- etc.
8
Q
retirement income streams
A
superannuation assets
- draw a pension from a super fund
- purchase a term certain annuity
- purchase a life annuity
- apply a theory based lump sum allocation stragety
non-superannuation assets
- e.g. rental income from assets, interest and dividends from cash, bonds and equity investments etc.
9
Q
consumption function
A
C = α + c.Yd
=> S = Yd - C
C = consumption expenditure
S = saving
Yd= disposable income
c = MPC (1>c>0) (‘multipler’)
α > 0
i.e. consumption and expenditure are linearly related. if income increases, so will consumption expenditure but on a 1:1 basis
- there is also a minimum amount that an individual will consume, regardless of the level of income (negative saving is possible)
10
Q
life-cycle hypothesis
A
- link between savings and consumption decisions of individuals through years of childhood, work and retirement
- based of the model of ‘saving decision’
- reflects an individual’s relative preference between present and future consumption at different times of life
- assumes rational behaviour i.e. optimal saving decisions are made
11
Q
assumptions of life cycle hypothesis
A
- individuals prefer a higher standard of living i.e. they want to maximise current consumption
- most individuals want a relatively constant standard of living throughout their lives - avoiding ‘feast followed by famine’
12
Q
life cycle ‘phases’
A
i. young single, no commitments - accumulation phase (growth oriented)
ii. younger couple, two incomes, no children - accumulation phase (growth oriented)
iii. one-income family, young children, tight budget - accumulation phase (growth oriented)
iv. one or two income family, older children - consolidation phase (consolidation)
v. retired, living off private income and/or government pension - spending phase (income-oriented)
13
Q
paid parental leave amount
A
up to $915.80/week for 22 weeks
14
Q
compulsory contributions to super amount
A
11.5% of salary
15
Q
‘saving decision’
A
- reflects an individual’s relative preferences between present and future consumption at different times of life
- life-cycle hypothesis is based off this model
16
Q
definition of money
A
- medium of exchange
- eliminates inefficiencies of barter
- facilitates financial transactions - store of value
- can be stored and used for future consumption - unit of account
- enables valuation of different elements using a common unit
- can be used for calculation, valuation, comparison
17
Q
types of income for individuals
A
- earned (salary/wages)
- passive (return on investments)
- other receipts e.g. gambling winnings/gifts from family
18
Q
what is a real wage
A
wage that is inflation adjusted that is the most informative measure
19
Q
credit and debt
A
credit is the earlier portion of debt, i.e. borrower should obtain credit prior to taking on a debt
20
Q
types of credit
A
- fixed payment loans (repaid in instalments e.g. personal loans, car loans, buy now pay later, home mortgage loans)
- revolving credit (credit cards, overdrafts and lines of credits)
21
Q
what is ‘bad debt’
A
the use of debt to fund short-term consumption e.g. nights out, meals, holidays, clothing - is considered financially irrational
- no asset being purchased
- interest paid is not tax deductible
- once spent, there are only intangible benefits gained from debt
22
Q
compulsory mortgage insurance percentage
A
80% (effectively the upper limit on home-equity loans as well)
23
Q
company tax rate
A
30%
24
Q
credit traps
A
- hidden costs
- credit cards with interest free periods
- low introductory credit offers
25
taxable income =
accessible income - allowable deductions
26
assessable income of individuals
- earned income
- interest income
- dividends and distributions
- rental income
- royalties
- short/long-term capital gains
27
what are allowable deductions
expenses incurred in gaining or producing assessable income or in carry on a business. excludes expenses of a private or domestic nature e.g. housing costs, living expenses, personal travel (including to and from work)
28
dividend imputation system
takes into account the amount of tax corporate income tax that was paid before dividends are paid
29
what happens if an asset is held for >1 year
tax discount of 50% is applied to capital gain
30
what is fundamental analysis
- looking at company data, profit/loss
- evaluating current management
- comparing with similar companies in same line of business
31
paradox of fundamental analysis and EMH
- to be efficient, market requires fundamental analysis to be undertaken
- EMH assumes that information has already been taken into share prices
- hence paradox
32
technical analysis
charting/looking at trends
- evaluate patterns
- analyse trends
- evaluate indicators derived from time series
- evaluate "bear/bull dominance"
refutes weak-form EMH
33
weak-from EMH
historical data
34
semi-strong-form EMH
historical data and publicly available data
35
strong-form EMH
all publicly available and private data
36
index fund
a fund that aims to match returns of an index (e.g. ASX200)
37
managed fund
all assets from investors are pooled together and invested into investments by a manager
38
know your client (KYC)
requires advisors to be aware of client's circumstance to a degree that ensures they have a reasonable basis for their advice
39
know your product (KYP)
requires advisors to have an appropriate level of understanding of financial products
40
when is an advisor providing financial service
- providing financial advice
- dealing in a financial product
- making a market in a financial product
- operating a registered scheme
- providing a custodial or depository service
41
who is an advisor
- principles
- authorised representatives
- paraplanners
42
who is a principle
- the holder of a dealer's or adviser's licence
- any person who obtains a licence under FSRA
- a registered life insurance broker
- a life insurance company
43
what is an AFSL (Australian financial services licence)
license that covers those who carry on the business of providing financial services
'carrying on a business' refers to activities that are systematic continuous, and repetitive.
44
who needs an AFSL
- any person providing financial advisory services
- any person who issues or deals in financial products
45
who is exempt from an AFSL
- authorised representatives
- directors and employees of the business
- any other person acting on behalf of the principle
46
when general advice is provided, the advisor must:
- warn that the advice is not based on the knowledge of client circumstances and objectives
- indicate that the client must consider that advice in this light if inclined to act
- suggest that a Product Disclosure Statement should be considered (if applicable) before acting
- give a sufficient warning: "this advice is general; it may not be right for you"
47
when personal advice is given, the advisors must take into account
knowledge of client circumstances and objectives. it does take into account knowledge of client circumstances and objectives
48
quality of advice must satisfy three elements
i. reasonable enquiries have been made into client's relevant personal circumstances
ii. the provider gives considered advice, the subject matter of which has been investigated and is reasonable in all circumstances
iii. the advice must be appropriate for the client
49
suitability rule (quality of advice)
- KYC, KYP rules
- consideration of alternative products suggested
- risk assessment (e.g. questionnaire)
50
informed consent (quality of advice)
- advice to the client must be communicated in a clear and concise manner
- advice is not misleading, deceptive, incomplete or provided in a pressured environment
- if the advisor is responsible for implementation of the plan, a written signed statement to the effect that the client understands the projected course of action and agrees to the adviser's implementation of it, should be obtained and kept.
51
best practice requires advisers to act __________, ___________ and _________.
efficiently, honestly, fairly
- ‘efficiency’ in conducting business, e.g. providing a plan and documentation in a timely manner
– ‘honesty’ relates to ethics, conduct and fiduciary principles
– ‘fairly’ requires advisers to treat clients equally, i.e. not discriminate between clients
52
disclosure to client
issues that have the potential to impact the objectivity of advice provided
conflict of interest
limitations of operating capacity
methods of remuneration, (fees, commissions)
internal and external complaints resolution system
identify services that can be provided upfront
53
when providing financial services to a client, an advisor must operate under an ____ and provide
AFSL
- a Financial Services Guide (FSG)
- a Statement of Advice (SoA)
- a Record of Advice (RoA)
- Product Disclosure Statements (if applicable)
54
what is a Financial Services Guide (FSG) and what must it include (9 points)
discloses the services offered to the client and must be offered to a client at commencement of negotiations
contents of FSG:
- on the cover it must be called: a “Financial Services Guide” but can be referred to as an FSG (note for assignment) and must be dated
- name and contact details of the adviser; any special instructions (e.g. feel free to email, etc.)
- similar information about the authorising principals, or each of them
- the kinds of financial services provided and the financial products to which they relate
- who the adviser acts for when services are provided
- the remuneration and other benefits that the principal, the adviser or any other associated person will receive for providing the financial services
- information about any business relationships or associations between principal and issuers of any products
- details of internal and external complaints resolution mechanisms (one page may be sufficient)
- a statement that the FSG has been authorised by the principle
55
what is a Statement of Advice (SoA) and what must it include
sets out the advice provided to the client by the adviser
it must be given to a retail client when providing personal advice, prior to any action required to be taken to implement the advice
must contain:
- the title 'Statement of Advice' on the cover
- the advice
- the basis on which it was given
- the adviser's name and contact details
- the name and details of the authorising principle, stating that the adviser is an authorised representative of the principle
- information on remuneration and benefits anyone may receive; i.e. fees, charges and how and to whom they are distributed
- information about any associations which might reasonably by construed as influencing the advice given
- a warning if the advice is based on inaccurate or insufficient information
- information on replacing one product with another
56
best interest (Corporations Act) duty principles
1. perform a detailed investigation of the client and research the client's needs
2. carefully record all relevant aspects of the client
3. formulate clear advice for the client
4. obtain the client's decision and implement it
57
competencies, experience and training
principles must ensure their advisers have proper experience and training and keep up to date
- training in investment principles, preparation and formulation of suitable personal advice, knowledge of how the business operates
- ongoing learning: keeping up-to-date with economy, financial markets, legislative and regulatory environments and changes
- product training: provided by the principal if the principal is the issuer, otherwise (usually) by the issuer
any adviser must be adequately supervised by the principal, who should provide advisers with written directions that they are bound to implemen
58
what must a statement of advice include
i. the title 'Statement of Advice' on the cover
ii. the advice
iii. the basis on which it was given
iv. the adviser's name and contact details
v. the name and details of the authorising principal, stating that the adviser is an authorised representative of the principle
vi. information on remuneration and benefits anyone may receive; i.e. fees, charges and how to whom they are distributed
vii. information about any associations which might reasonable by construed as influencing the advice given
viii. a warning if the advice is based on inaccurate or insufficient information
ix. information on replacing one product with another
59
SoA documentation requirements
i. information elicited from client e.g. assets, family circumstances, expectations, existing cash flows, risk profile, etc.
ii. information on fees - the amount and nature of fees for the service (SoA) should be disclosed in the first meeting with the client as part of the FSG
iii. recommendations made by the adviser that address client needs in the four main areas, or as limited by agreement
60
product switching additional information to be included in SoA
- the client's existing product has been considered
- costs and charges payable on reduction or disposal
- benefits the client may lose as a result of disposal or reduction
- entry or ongoing fees attaching to the replacement product
- any other significant consequences of the switch
61
when is a SoA not required
- advice consists solely of an offer to sell a product
- client makes it clear that they do not intend to buy
- no issue or sale results from the offer
- advice related to a CMT where the client is not retail
- a basis deposit product, or traveller's cheques
- where the advice relates to general insurance
- advice over the telephone on traded products, subject to client's approval
62
what is a Record of Advice (RoA)
may be provided rather than an SoA in these circumstances:
- previously been provided with client circumstances
- the relevant circumstances have not changed significantly
- the relevant basis has not changed significantly
63
what is the minimum amount for a SoA or RoA to be required
investments of less than $15,000
64
what is a Product Disclosure Statements (PDS)
a PDS is designed by an issuer of a product to provide clients with sufficient information to make an informed decision about whether or not to buy (invest in) a financial product
65
what must a PDS include
- it must be entitled 'Product Disclosure Statement' on the cover, but PDS can be used elsewhere
- details of significant risks of the product
- fees, expenses, charges and taxation implications
- any other information that would influence a client
66
four elements to consumer protection provision
Corporations Law, TPA (third party administrator), FSRA (financial services reform act 2001)
- misleading and deceptive conduct
- restrictive trade practices
- Corporations Act 2001 requires advisors to provide services 'efficiently, honestly, fairly'
ACCC administers the TPA generally
ASIC (Australian Securities and Investments Commissions) administers provision in relation to financial services
67
what counts as misleading and deceptive conduct
- either intentional or inadvertent
- it is not necessary that someone is actually misled, rather, it is only necessary that there is a real chance that they might be
– it is enough that a gullible, not-so-intelligent or poorly educated person is misled
- an accurate statement can be misleading because of context
- a disclaimer does not absolve responsibility when the conduct as a whole is misleading
68
how can misleading and deceptive conduct be conducted
- making or writing a statement
- doing something
- failing to say or do something which is needed to prevent someone from being mislead
69
complaints procedure (8-step)
1. Is there a complaint? If so, assist the client to put it in writing
2. Can the adviser satisfy the client immediately?
3. If the complaint cannot be resolved immediately:
i. Internal system: adviser and client state their case
ii. Decision by principal
4. Make decision and advise the client
5. If the complaint is justified: amend procedures, apologise in writing, and pay compensation if applicable
6. If client not satisfied with decision. Advise client of external procedures
7. If client not satisfied with external (industry) procedures? Client may need to go to court
8. Court or regulator action
70
Financial Ombudsman Service (FOS)
FOS is an independent body existing to handle complaints:
- in relation to investment advice to a retail client, or insurance contracts;
- on handling of a complaint by a member
- about the operation of managed investment or superannuation schemes sold to retail investors
- also aims to conciliate any dispute between members but if necessary, can then move to arbitration and adjudication where it has powers to make decisions
71
aspects to constructing a diversified investment portfolio
1. asset allocation ('macro' decision)
2. security selection (micro decision)
72
asset allocation refers to
the percentage of available funds invested in the different asset classes (i.e. equity, cash/fixed interest, property)
73
security selection refers to
selection of and investment in individual securities within each asset class
74
strategic asset allocation (SAA)
setting target (%) allocations amongst asset classes
- buy and hold
75
tactical asset allocation (TAA)
asset allocation that managers would choose if they believed that certain asset classes are mispriced
- engaging in market timing
- active/aggressive application of asset allocation decision
76
dynamic asset allocation (DAA)
a mix of TAA and SAA strategies
77
list asset allocation strategies from passive management to fully active
- SAA and stock selection - buy and hold [passive]
- SAA - buy and hold; stock selection - trade
- TAA - active; stock selection - buy and hold
- TAA - active; stock selection - trade [active]
78
mutual fund theorem
investing strategy that uses mutual funds exclusively in a portfolio for diversification and mean-variance optimisation
79
bond definition
a contract between the issuer (borrower) and the investor (lender), evidencing the issuer's obligation to make specified cash payments to the investor on specified future dates
80
zero coupon bond (ZCB) PV formula
P = FV/ [1+(r x d/365)]
where
r = interest rate (quoted p.a.)
d = days to maturity
81
Coupon bond valuation
Sum of the value of coupons: C/(1+r)^t
plus
Face value of bond = F/(1+r)^T
where
C= future cash flows (coupon payments)
r = discount rate (yield to maturity)
F = face value of bond
t = number of periods
T = time to maturity
82
risks of bonds
1. interest rate risk
2. reinvestment risk
3. inflation risk
4. credit/default risk
5. liquidity risk
6. rating downgrade risk
83
bond types
- convertible
- callable
- annuity
- asset-backed
- indexed
- "junk"/speculative (non-investment grade)
84
what is a cash management trust (CMT)
managed fund, comprising a pool of investors' funds applied to investing in money market securities of various maturities
85
what is a bond ETF
a collection of individual bonds that trades on exchange
- makes investing in fixed income simple and transparent
86
methods for share selection
1. fundamental analysis
2. technical analysis (charting)
3. random selection
87
which share selection method is most consistent with portfolio theory/diversification
random selection
88
how does fundamental analysis work
- examination of available company data
- evaluate current management
- compare with similar companies in same line of business
- to be efficient, mark requires that fundamental analysis is undertaken
- yet the EMH assumes that information has already been impounded into share prices hence paradox of EMH
89
how does technical analysis work
- time series prediction technique
- uses price history charts and other indicators
- chartists believe that there is additional information contained in the behaviour of the price over time
three sources of information are therefore required
- price
- volume of trade
- open interest
90
technical analysist's study:
- charts of financial time series
- evaluate patterns
- evaluate indicators derived from time series
- analyse trends
- evaluate "bull/bear dominance" and similar jargon
- implicitly refutes weak-form EMH, which is the easiest form to prove
91
documentation in shareholding
Contract note
dividend statement (when relevant)
Holding Statement
- Holder Identification Number (HIN)
- specifies company and numbers of shared held
92
total risk =
unsystematic risk + systematic risk
93
what is a managed investment fund
pooling of funds from individual investors that is then invested by a fund manager into a range of asset classes such as shares, bonds, property and infrastructure assets
94
what is an index fund
a managed fund that are passive investments that track a benchmark such as a market index (e.g. S&P ASX200 share index)
95
why do people want to invest on index funds
- it outperforms actively managed investment funds after fees and taxes
- passive investing is easy
96
two forms of investing in property
1. direct (residential, commercial or land)
2. indirect (property trusts, property index funds, etc.)
97
objective of property investment
generate returns in the form of rental income (residential or commercial), and/or capital gains (residential or commercial, plus land)
98
risks of investing in property
- income risk, related to vacancy rates
- property damage, repairs and maintenance costs
- interest rate risk on borrowings
- market risks, since capital gains are not assured, and can be negative
- liquidity risk, property is an illiquid asset
- time and cost of buying and selling
99
how does negative gearing work
when an investor borrows to acquire an investment property and the interest and other tax-deductible costs exceed the income received from the investment
100
what is a real estate investment trust (REIT)
unit trusts that raise funds from the public in a manner similar to companies issuing shares that generally invest in commercial property, e.g. CBD office buildings, supermarkets, shopping centres, factories, hotels etc.
101
what happens when an asset is held >1 year
discount applies to the amount that is subject to tax (generally 50%)
102
dividend imputation explain
- the effect of the dividend imputation system is to ensure that the tax rate applicable to dividends will be the MTR of the recipient shareholder
- corporate income tax that was paid before dividends are paid is added to the net dividend to get to the taxable income (gross up), and it is also the amount of a tax (franking) credit that reduces individual tax
- dividend received by a shareholder is 'grossed up' by the amount of corporate tax paid, to bring it back to the pre-tax corporate income
103
imputed income formula
tcD/(1-tc)
which is always 3/7 * D at the 30% corporate tax rate
104
what is the super tax rate
15%
105
tax-free threshold for minor
$416
106
home ownership financial considerations
- rent v buy decision
- savings discipline
- capital appreciation
- tax treatment of owner-occupied housing (e.g. CGT exemption)
107
steps to purchasing a home in Australia
- determine price range
- approach selected financier
- consider financing alternatives
- find an appropriate dwelling
- make an offer (direct or at auction)
- await the outcome
108
what information do mortgage lenders require
1. details of employment such as evidence of salary/wages
2. evidence of a savings discipline history
3. evidence that you have the required deposit for the loan
4. a credit check may be necessary to prove that no default loans exist
5. a valuation or other proof that the purchase price of the desired property matches its value
109
additional costs to purchasing a property
- loan application fees
- stamp duty
- registration fees
- transfer fee
- title and search fees
- legal fees
- mortgage insurance
- indirect costs, including moving expenses
110
minimum deposit for a mortage
20%
if below this, mortgage insurance will usually be payable (very high so try to avoid)
111
how much is land (stamp) duty
~5.5%
112
the four 'pillars' of retiree pension provision
- individual savings
- social security
- state (government) sponsored complementary private schemes
- continued earnings in retirement
113
what is the pension problem
- proportion of persons in working age (18-65) and persons over working age (over 65) was relatively stationary
- governments had the option of levying tax at a relatively constant rate to provide a pension on which retirees could live
- however this is no longer the case as the proportion of persons over working age is increasing
- which means workers in successive generations would have to pay more and more tax to support the increasing proportion of retirees
114
longevity risk
the risk that you outlive your retirement lump sum by surviving into old age
115
inflation risk
the risk that inflation will rise significantly over a lifespan, eroding the purchasing power of your income stream
116
economic imperative of superannuation
provides a large amount of available cash to invest in:
- equities, bonds, property investment and development, infrastructure projects
providing significant liquidity to ASX, bond markets, etc.
117
the traditional two tiers of RIS provision
tier 1: social security - e.g. age pension
tier 2: complementary nationally coordinated or state-sponsored private 'pension' scheme (superannuation system)
118
salary superannuation contribution
11.5%
119
how can a superannuation fund qualify as a Complying superannuation fund (CSF)
- a resident fund (resident and controlled in Australia)
- regulated fund, achieved by: 1. having given an irrevocable undertaking to obey the Superannuation Industry (Supervision) Act 1993, and 2. having had its regulated status confirmed
- in compliance with the SISA, i.e. a regulated fund not in breach of SISA
120
benefits of being a CSF
1. contributions into the fund - 15% tax instead of marginal tax rate
2. earnings, dividends and realised capital gains within the fund - taxed at 15% on earnings and dividends (reduced by franking credits), and a 10% maximum on CGs
3. lump sums and pensions taken from the fund: 0% (zero) tax if the amount withdrawn arose from a 'taxed' source (most common)
121
why is it a bad thing to be a non-complying super fund
- taxed at 45% regardless of the reason for its being deemed non-complying
122
how is a superannuation fund non-complying
- non-resident fund
- regulated funds contravening SISA and not 'pardoned' by APRA/ATO
- super funds that do not elected to become regulated
123
how to get money into a superfund
1. contribution (new money paid into fund)
2. rollover (transfer of a benefit into another fund rather than taking it as a lump sum withdrawal)
124
what are concessional contributions to super
- mandates employer contributions
- additional (voluntary/salary sacrifice) contributions from remuneration
- other rules relating to contribution e.g. for those aged over 65 or spouses
125
what are non-concessional contributions to super
after-tax contributions or 'undeducted' contributions, sourced from after-tax income or personal sources
126
maximum amount of mandated employer contributions
$30,000 per year
127
maximum amount of salary sacrifice to super
$30,000 but it is the sum of employer contributions plus salary sacrifice
128
tax on earnings that a super fund derives from non-concessional contributions
15%
129
acceptable contribution amount - non-concessional
$120,000
persons under 75 are allowed to bring forward two years of UDC in any one year so a member is able to contribute up to $360,000 in the current year. however they are not able to make further UDC in the following two years
130
sources of undeducted contributions (after-tax contributions)
savings, gifts, inheritances, lottery, gambling winnings
131
exemptions from non-concessional contributions cap
1. proceeds form disposal of an eligible small business, in the form of either the "small business 15-year exemption" or the "small business retirement exemption" (both exemptions apply up to a lifetime limit of $1.782m. indexed)
2. downsized contributions from selling your home
3. contributions made from a settlement resulting from permanent injury or disablement
4. transfer of an overseas annexation balance
132
how does contributions splitting work
contributions into a superannuation fund may be split with a member's spouse (if also a member of the fund)
133
name all terms in EAV = SS x CR x (1–tc) x [r/r^(p)] x [(1+r)^n – (1+g)^n]/(r–g)
where r^p = p[(1+r)^1/p – 1]
SS = annual starting salary
CR = contribution rate
tc = tax on contributions
r = expected net annual compound earning rate of the fund
p = number of times per year the fund adds contributions to the fund; used in r^p = p[(1+r)^1/p – 1]
n = number of years in accumulation
g = expected annual compound rate of salary growth
134
factors that will reduce a super accumulation
- periods of non-contribution (unemployment, family-raising)
- poor choice of long-term investment portfolio and/or investment manager
- unexpected changes to the SGS
- divorce
135
main types of superannuation funds
1. corporate funds; run by companies for their employees
2. industry funds; large funds catering for entire industries
3. public sector funds
4. public offer or retail funds
5. small funds
6. master funds or trusts
136
who regulates superannuation funds
- APRA oversees all (excluding SMSF) super funds and banks, credit unions, building societies, life insurance
- ATO for SMSFs
137
maximum amount of members in SMSF and their membership
- no more than 6
- each member is a trustee (or director of the corporate trustee) who cannot be remunerated
- only family members
138
max no. of members and what is Small Australian Prudential Regulation Authority fund (SAF)
- max 6 members
- has a corporate trustee (only)
- can include an employee as a member
- regulated by APRA
139
eligibility to be a SMSF trustee
- over 18
- do not have a mental disability
- not an undischarged bankrupt
- not been convicted of an offence involving dishonesty
- not previously received a civil penalty under superannuation legislation
- not been disqualified by a superannuation regulatory body (ATO or APRA)
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what is a corporate trustee
a company that can be used to meet the 'all members are trustees, all trustees are members' requirement
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eligibility for companies to be SMSF corporate trustees
- not been deregistered by ASIC
- do not have any directors or other responsible officers who are disqualified individuals
- have not had a receiver or provisional administrator appointed to manage their operations
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specific trustee duties (list 4)
- act impartially
- exercise discretions properly
- obey terms of trust deed
- not act under direction
- act in best interest of beneficiaries
- avoid conflicts of interest
- act personally
- act unanimously
- invest promptly and prudently
- seek advice
- protect assets
- keep proper accounts
- act with reasonable skill and diligence
- sign an undertaking that they have read and understand the trust deed
- avoid compliance errors
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sole purpose test must provide
- retirement benefits accumulating prior to retirement or meeting another condition of release
- benefits on meeting a condition of release
- benefits to LPR (legal personal representative) on death of a member
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what requirement is sole purpose test
a regulated fund is maintained solely for provision of retirement benefits to members
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condition of releases
- genuine termination of employment on or after age 60, irrespective of future employment intentions
- reaching age 65
- death
- becoming permanently incapacitated
- being able to demonstrate severe harship
- 'compassionate grounds'
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what is a pension
provided from a super fund, by drawing directly on the fund
account-based RIS
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what is an annuity
- purchased from an annuity provider such as a Life (insurance) Office, bank or commercial provider
- non account-based RIS
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pricing of an ordinary annuity formula
PV = (C/r)(1-1/(1+r)^n)
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name all terms in indexed term certain annuity
p = payments per year (e.g. 12 or 4)
n = number of years
i = yield
g = growth rate
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what happens if a member is still working at least part time but has also met a condition of release
- they can still contribute to an accumulation account in the fund
- member will have two accounts, pension account and accumulation account
- only possible in retirement phase
- pension account assets remain tax free but earnings on the accumulation account are taxed at 15% (as are the contributions)
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key elements of an estate plan
- will
- appointment of executor
- establishment of a trust
- power of attorney (PoA)
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what counts as an estate asset
- all real property
- financial assets
- personal and household items
- cars
etc. you get the point
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what counts as non-estate assets
- unreleased superannuation benefits
- assets held in trust
- life insurance proceeds
- jointly-owned assets (e.g. home)
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what is a will
a legal document that disposes of a deceased estate's assets to the people intended
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who can make a will
- anyone over 18
- having sound mind 'testamentary capacity'
- must not be made under duress or coercion
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what proves testamentary capacity
understanding the nature of
- the act of making a will and its effects
- what they are doing by signing the will
- the property to be willed to the beneficiaries
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how to make a valid will
- all wills must be in writing
- the testator must sign the will themselves or it must be signed by someone else in their presence and at their direction
- a will must be executed in the presence of two independent witnesses
- a will does not necessarily have to be prepared by a solicitor
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when is a will revoked (voluntary and involuntary)
voluntary
- a will is redrafted or a new will made
involuntary
- marriage automatically revokes a will
- however, divorce and separation do not revoke a will
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what is a codicil
by preparing a codicil, a will can be changed
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responsibilities of an executor
needs good business and organisational skills to:
- take control of body, locate the will, arrange (and pay for) the funeral
- identify, collect, control and protect the assets
- obtain a 'grant of probate' of the will
- pay the costs of administering the estate
- distribute the assets
- lodge tax returns and pay taxes (usually trwuires two ITRs in the year of death)
- defend the will if there are any challenges
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what is a probate
an executor will be required to obtain a grant of probate to take possession of the estate assets
- it evidences that proper administration of the estate has been completed
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what is a letters of administration
in cases where probate cannot be obtained, Letters of Administration is the court's approval for someone to administer the estate of a person is provided
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what is full intestacy
- a will is not made
- a will is made but cannot be admitted to probate as it execution was obtained under duress, or the deceased lacked testamentary capacity
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what is partial intestacy
- will does not dispose of all estate assets
- a particular bequest is invalid
- a beneficiary predeceases the testator
- beneficiary predeceases the operation of the "doctrine of forfeiture" (criminally responsible for the death of the testator)
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intestacy distributions (Victoria) in order
- spouse (first $100,000 + 1/3 of balance of estate; remainder is spilt evenly between children; if there are no children, spouse gets everything)
- if no spouse, to children - equally
- if no surviving spouse or children, to any living next of kin (parents, siblings, grandparents, uncles, aunts, cousins)
- Crown (government)
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wills can be challenged on grounds of:
- lack of testamentary capacity
- undue duress
- incorrect execution
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what is family law in wills
if inadequate provision is made i.e. a responsibility to make provision for family/others is not met, the will can be contested
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what is a binding financial agreement
pre-nuptial agreement
detail outcomes relating to separation, divorce and even on death
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how long does Australian tax law allow executors to finalise estate
3 years
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what can PoA not do
- make a will for donor
- undertake illegal acts
- delegate power to another (unless specified by PoA)
- exercise the donor's power as trustee
- make decisions about the donor's 'lifestyle' e.g. medical treatments
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what is a fixed (unit) trust
gives beneficiaries a fixed entitlement to distributions and capital in proportion to number of units held (like shares in a company)
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what is a discretionary trust
gives beneficiaries and entitlement to be considered for distributions from the trust but not the right to receive distributions
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how do SMSFs get dealt with upon death
transfer of benefits can be accomplished by:
- trustee directive
- forfeiture into the fund's reserves
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what is insurance
a risk transfer mechanism that ensures full or partial financial compensation for the loss or damaged cause by event(s) beyond the control of the insured party
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what is risk pooling
sharing of total losses among a group
e.g. only 1 in 5 cars have a chance of being in a crash so for every 100 cars insured, expected payout is $???? so they would need to charge that amount divided by the total customers
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indemnity definition
security or protection against a loss or other financial burden
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what is a peril
a cause of loss
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what is a hazard
increases the chance of a peril event
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what is a moral hazard
insured party actively gets involved in a risky event to cause a loss
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morale hazard
carelessness or indifference to a loss due to the existence of insurance
181
utmost good faith definition
a positive duty to disclose voluntarily, accurately and fully, all facts material to the risk being proposed, whether requested or not
182
who regulates life insurance
- corporations act
- ASIC act
- insurance contracts act 1984
- life insurance act 1995
- privacy amendment act
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parties to a contract of life insurance
1. owner of the policy
2. the insured life
3. the beneficiary(ies)
4. the 'Life Office' (Life insurance company)
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how are life insurance premiums determined
- life expectations experience
- a (market) rate of interest
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two major life-insurance categories
1. (term) protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment
2. investment policies - main objective is to facilitate the growth of capital by regular premiums
186
what is key person insurance
a form of life insurance that is used to alleviate financial loss to a business arising from premature death, disability or incapacitation of a key employee
- e.g. potential sales loss, reduced profitability, time and cost of finding a suitable replacement
- paid for and owner by the business
187
what is a buy-sell agreement
- contract entered into between business partners, to which the remaining partners are compelled to buy out the other partner's interest in the business should a specific event occur
e.g. divorce, death, retirement, bankruptcy, long-term disability
- purchase of business interest is funded by proceeds of a policy of life insurance, paid to the estate of the deceased owner
188
what two principles with The Family Court seek to find the best solution
1. encourages financial settlement and other accommodation without resort to arbitration
2. The Court aims to achieve 'a financial clear break' and strives to be as 'fair' as far as possible, to both parties (applying the 'four step approach')
189
what is the Family Court's four step approach
1. identify and value the pool of marital property
2. assess contributions that each of the parties has made to the accumulation of the pool
3. assess the 'future needs' factors of each party
4. justice and equity
