CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION 20 AUGUST 2015

Transcription

1 CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION 20 AUGUST 2015 SUGGESTED ANSWERS: SESSION 2 Question 1.1 Step 1: Value of R25 in 12 years time. 1 P/YR Begin mode Shift clear all 25 +/- PV 6 I/YR 12 N FV = (Rand) Step 2: Determine the PV of the withdrawals for the first year. 12 P/YR Begin mode Shift clear all /- PMT 10 I/YR 1 N PV = (Rand) Step 3: Determine escalation rate Interest rate 10% Escalation rate 6% Resultant rate: 10 6 = 4 4 / 1.06 =

2 Accept as an alternative a resultant rate calculated by using the effective rate of tax rather than the nominal. Step 4: 1 P/YR Begin mode Shift clear all /- PMT I/YR 30 N PV = (Rand) Question 1.2: Commutation of annuity received at death R1 950 Plus: PRIOR Retirement Benefit received by Eric R1 Aggregate R2 950 Tax on R2 950 (using the Retirement Benefit table) 1 R Less: Tax on PRIOR Retirement Benefit of R1 (using same table) R117 Tax payable R The estate is liable to pay the tax on the amount. (The amount is deemed in terms of paragraph 3 of the second schedule to have accrued to the member/past member immediately prior to his death.) The estate can however recover the tax from the beneficiary recipient of the benefit. As such John is the person ultimately paying the tax /2016 tax rates apply

3 Question 1.3: a) The living annuity would not fall into John s estate for estate duty purposes and as such would not be dutiable. b) The benefit in terms of the living annuity remains available for John s nominated beneficiaries or failing which, his estate. c) Investment growth within the living annuity is not taxable in terms of the four fund approach d) The average rate of tax should John take the living annuity as a lump sum amounts to 35.77%. The average rate of tax on an annual income of R300 (25 pm) amounts to 21.42%. Thus John can effectively reduce the overall amount paid in tax thus increasing the amount available to himself. (1 mark) Combined with the tax free investment growth and the savings on estate duty John can create a significant tax benefit by remaining invested in the living annuity. (1 mark) Also accept if candidate points out that another R50 can be taken as a lump at 27% tax before he gets to the 36% bracket and that he should take that as lump sum. NB: There may be other appropriate/applicable suggestions which will have to be considered on merit and marked accordingly. Question 1.4 Yes, a retirement annuity would be an appropriate way to invest to reduce the shortfall. a) The investment in the RA is made with pre-tax money thus allowing John to increase the amount that he is saving monthly. b) As with the living annuity above investment growth in the RA is not taxable in terms of four funds taxation c) Taking a lump sum upon retirement equal to the tax free amount will effectively have netted John a portion of his income tax free. d) Postponing the taxation of the amounts withdrawn as a monthly annuity will once again reduce the overall tax liability in respect of the money contributed. e) Annuity payments after retirement will be taxed (personal income tax) at an average rate of 21,42% as opposed to the 36% (lump sum benefit at retirement) at which the amount contributed to the RA would otherwise have been taxed at in the present.

4 Question 2.1: This is known as estate freezing. The idea is that by transferring the assets to trust any future increase in value in regards to the assets transferred will be captured in the trust and the original estate owner will not be liable for estate duty in respect thereof. The original estate owner is responsible only for the estate duty in respect of the loan account that is owed to him at the time of his death. Question 2.2: Section 29 of the Closed Corporations Act finds application. And yes, a trustee of an inter vivos trust can hold member s interest in a CC provided that the following requirements are met: A juristic person cannot (direct or indirectly) be a beneficiary of the trust. This means that even if a juristic person (such as a CC) is a discretionary beneficiary of a trust, a trustee of such a trust cannot be a member of the corporation If at any time the number of beneficiaries of the trust who are entitled to receive any benefit from the trust, when added to the number of members of the CC is greater than 10, the membership of the trustee shall cease. Once membership ceases in terms of this condition, no trustee of that trust will ever again be eligible for membership of the trust even though the number becomes 10 or less. Question 2.3: A bequest directly to Bennie, Hendrik and Maggies s minor, disabled son, would have his cash inheritance paid into the guardian s fund making it harder/more cumbersome to access. There are also constraints on the amount that may be accessed in the guardian s fund. The alienation of land act prohibits registration of agricultural property in the name of more than one person without first obtaining the consent of the minister of agriculture.

5 Even should such permission be granted it will complicate dealing with the farm in future as selling, bonding or in other ways encumbering the farm will require that an application be brought to court in order to ensure that Bennie s interests are protected. This will make it difficult to access its value in order to use it for his maintenance and care. Bennie is likely to pass away soon after receiving any inheritance and transferring his inheritance to him will of necessity incur unnecessary executor s fees and attendant costs such as transfer fees when his estate, in turn, needs to be administered. Question 2.4: CGT Calculation Market value Base cost Capital Gain CGT combined calc Farm Oranjezicht R R 1 R Van Tonder Saddlery CC R R 1 R Net capital gain R Half of net capital gain R Less: Annual exclusion R Aggregate capital gain R Multiply by inclusion rate of 33,3% R Taxed at 31% R Total CGT liability in terms of both spouses R

6 Transfer duty calculation Value of property R % on the first R750 R 0 Exceeds R750 but not R1 3% R 15 Exceeds R1 250 but n the R1 6% R 30 Exceeds R1 750 but not R2 8% R 40 Exceeds R2 11% R R 222 Transfer duty payable 500 Securities tax calculation R Taxable amount Taxed at 0,25% R Total expense CGT R Trf duty R STT R R Question 2.5: It may be better for the Hendrik and Maggie to delay transferring the farm and the CC at present and to rather bequeath it to the trust in the will of the last dying of them. Cheaper: In this way the CGT expense will be postponed till the death of the last dying and the transfer to the trust could happen free from transfer duty and securities transfer tax saving on the expenditure.

7 Adaptable to changing circumstances: It also provides the opportunity to later change their will to bequeath to Hess directly should Bennie predecease them. Alternative solution: There is still a risk of a liability for estate duty and CGT as a result of the increase of the increase in value of the farm and the CC. This risk I believe can best be addressed by means of life insurance. Better return on their capital: In this way Hendrik and Maggie have their capital (R ) available to them to invest and even a modest return of 6% on their investment would go most, if not all, of the way in covering the premiums on such policy and they receive the insured amount at death.