Marius Botha Presenter: Marius Botha CFP Topic: PCE Exam Training February 2018 Session 1

Transcription

1 Marius Botha Presenter: Marius Botha CFP Topic: PCE Exam Training February 2018 Session 1

2 Discussion Old Exam Paper Slide 2 Old papers Original dates and question numbers retained but 2017/18 rates and legislation were applied Paper Selected Questions Some facts not applicable to selected questions not given.

3 Client Overview Lizzie grew up as one of two children in a wealthy and respected family. There was never a shortage of money and she always received what she wanted. Lizzie pursued a degree in Human Resources. Her parents paid for her studies and living expenses whilst she was at university. Lizzie does not worry too much about money and she believes that one day she will inherit a considerable amount from her father s estate. Lizzie pays for most of her expenses with her credit card and owes a considerable amount on this account. Patrice frequently urges Lizzie to pay this credit off with the income she earns, but she does not think her spending in this area is extravagant. Discussion Old Exam Paper Slide 3

4 Client Overview Discussion Old Exam Paper Slide 4 Patrice and Lizzie Leon have been referred to you by a colleague of yours. The colleague did not feel comfortable to assist Patrice and Lizzie with their financial needs, as they have been close family friends for a very long time. Your practice s remuneration model is fee-based, even though you, and several other practitioners in your practice, carry a license to sell annuities. The practice members have the annuity licenses for those few times when a client has an insurance-related need. So far, with good disclosures, especially about commissions from the annuities, this has not presented problems. The Leon s indicated that this is one of the primary reasons why they chose your practice to provide financial advice on their needs and goals. Patrice grew up as the eldest of four children and his father lost his farm and everything else due to severe drought, bad financial choices and an extravagant lifestyle. Patrice did not want to end up in a debt trap like his father, so he is very cognisant of having enough money available to cover for any potential financial emergency.

5 General information Discussion Old Exam Paper Slide 5 Patrice Leon Lizzie Leon Comments Age Marital status Married to Lizzie Married to Patrice Out of community with accrual. Married 7 Years. Begin value as per ANC R R DEPENDANTS Dependant 1 Dependant 2 Name Bene Nina Relationship to Son Daughter clients Age 3 years old 1 year old

6 Client Data: Patrice EMPLOYMENT: PATRICE. At the age of 33 Patrice took up employment with the Government at the Department of Public Works as an engineer. He joined the Government Employees Pension Fund (GEPF) as a member at the time. In April 2013, after working in this position for 6 years, Patrice was retrenched due to a departmental restructure. He received R as a retrenchment benefit. Patrice received the benefit option form from the GEPF and has elected to transfer the benefit to a pension preservation fund. He believes this option will allow him to preserve the benefit for retirement but also retain the option to withdraw the benefit in cash in the event of an unforeseen contingency occurring. Patrice was able to secure new employment because of his extensive experience as a civil engineer and started working for his new employer, BNL Construction, on 1 May Patrice s employment contract with BNL Construction provides for the following during the current year of assessment: Salary R Annual bonus R Discussion Old Exam Paper Slide 6

7 Client Data: Patrice Discussion Old Exam Paper Slide 7 There is currently no retirement fund in place at BNL Construction, but the company is planning to offer this benefit to its employees from January BNL Construction has a medical aid and Patrice is a member thereof. His total monthly premium is R5 600 for the whole family. The company currently contributes 35% towards his contribution and he carries the balance. His non-deductible medical expenses for the year of assessment is R This was for an emergency operation where the medical aid did not provide a benefit. ASSETS: PATRICE The investment assets Patrice holds have mostly been accumulated as a result of monthly savings.

8 Client Data: Patrice Discussion Old Exam Paper Slide 8 Market value Base Cost Primary residence (note 1) BMW Money market Collective investment scheme Efficient World Wide Flexible Fund (note 2) Furniture and household goods Flat (note 3)

9 Client Data: Patrice Notes: 1. The primary residence was bought by Patrice on 1 July 2001 for R It was not valued on 1 October He made additions to the residence in 2003 for R The Unit trusts produce dividends of R and accrues interest of R each year, both of which are re-invested in the fund. He purchased the Unit trusts in November Two months ago Patrice inherited a flat in London from his Grandmother. She was a resident of the United Kingdom at the date of her death. The property has been in the family for 3 generations. She stated in her will that he is not allowed to sell the property. The monthly rates and taxes are R5 500 pm which will now be paid by Patrice. Discussion Old Exam Paper Slide 9

10 Client Data: Patrice LIABILITIES: PATRICE Note 4: The retirement annuity is invested in the Prudential Money Market Fund (see Annexure 2). This amount is the current fund value. The premium escalates annually at inflation. The projected maturity value at age 60 based on the most recent fund statement received is R This amount was used in shortfall calculation. Discussion Old Exam Paper Slide 10

11 Client Data: Patrice Discussion Old Exam Paper Slide 11 Benefit Life cover (policy 1) Life cover (policy 2) Endowment in Money Market Fund RA. Prudential Money Market Fund (note 4) Cover/Cash Value Owner Life assured Beneficiary Monthly Premium Patrice Patrice Lizzie Patrice Patrice None Lizzie Patrice Patrice 630 Cease age Whole life Whole life 2018 (10 years) Patrice Lizzie Age 60

12 Client data: Lizzie EMPLOYMENT: LIZZIE Lizzie has been working as a Human Resource Manager for FNB for the past 7 years. Her employment contract with FNB provides for the following during the current year of assessment: Salary: R Bonus: R (non-pensionable) Lizzie is a member of FNB s provident fund. Her monthly contribution to the fund is 8% of her pensionable salary; the company does not contribute to the fund. The current fund value of the fund is R Discussion Old Exam Paper Slide 12

13 Client Data: Patrice The fund provides the following Unapproved Group life benefits: Life cover: 4x annual pensionable salary Income Disability cover: 65% of her total cost of employment should she be unable to perform her duties until she either recovers or reaches retirement age. Spouse pension: A monthly pension equal to 30% of her salary as well as 5% of her salary to each child when she dies while still in the employ of FNB. Discussion Old Exam Paper Slide 13

14 Client Data: Patrice Discussion Old Exam Paper Slide 14 ASSETS: LIZZIE Lizzie inherited from her mother s estate. This inheritance was invested in unit trusts and offshore shares. Notes: Market Value Base Cost Townhouse (note 5) Honda Jazz Plot (note 6) Unit trusts (note 7) Offshore shares (note 8)

15 Client Data: Patrice 5. The townhouse was bought in April 2007 and is currently being rented out. The rental income is R5 500pm which increases annually with inflation. The levy is R1 200pm which includes electricity and water. 6. In 2010 Lizzie bought the plot in Hermanus. She is not sure whether she wants to keep it as an investment or be utilised as a beach house in future. She pays a monthly mortgage of R1 700pm. 7. The Unit trusts are in Property unit trusts and earn dividends of R60 000pa which are re-invested in the fund. The Unit trusts were purchased in October These shares earn dividends of R6 000pa which are re-invested in the fund. The shares were purchased in July Discussion Old Exam Paper Slide 15

16 Client Data: Patrice Liabilities: Lizzy Plot (bond) Credit card overdraft Benefit Life cover (policy 1) Life cover (policy 2) RA. (note 9) Cover/ Cash Value Owner Life assured Beneficiary Lizzie Lizzie Ceded to FNB for mortgage Monthly Premium Cease age years Lizzie Lizzie Patrice 300 Whole life Lizzie Children Not specifi ed Note 9: The Retirement annuity was taken out 3 months ago. The premium escalates annually at inflation plus 2%. The maturity age is not specified as it can be anytime from the age of 55. Discussion Old Exam Paper Slide 16

17 Client Data: Wills and retirement TESTAMENTARY PROVISIONS: PATRICE AND LIZZIE Neither of them currently has a will. Patrice and Lizzie indicated that they want to make provision for their children in the event of their simultaneous death. They would further like provisions to be made until Nina completes her tertiary education (estimated duration of education - 5 years) RETIREMENT NEEDS: PATRICE AND LIZZIE Patrice and Lizzie are hoping to be able to retire when Patrice turns 60. They would like to receive a post-tax total income equal to R (current value) in retirement. They want the income to escalate at inflation annually for 25 years post retirement. Discussion Old Exam Paper Slide 17

18 Needs and wishes Lizzie wants to stop working full-time. She would like to start her own business from home, but also be there for her children when they need her so the business must be flexible. They would like to know if they can afford it, especially with her wanting to retire when Patrice retires. Lizzie s business plans: Lizzie will probably sell the business in 6 years time unless the business is very profitable. As a Human Resource manager, her plan is to do executive placements within the banking sector. She wants to use their cottage at home as an office as she s heard that you can deduct all your expenses from tax which would save her a lot with regards to expenses. Discussion Old Exam Paper Slide 18

19 Lizzie Business Lizzie will draw a personal salary of R per month as she wants to adopt prudent measures in order to avoid cash flow problems in the initial stage of her business. She is going to hire Anne as an assistant who will do the administration, but who could also assist with the placements when needed. She expects her turnover to be between R R for the first three years. Initially Lizzie will not implement the group life scheme or any pension fund within the company and will make use of the continuation option to continue all her insured group benefits at their current rand value. Discussion Old Exam Paper Slide 19

20 Annexure 1 ANNEXURE 1 Assumptions and rates Use the following rates and assumptions when you make recommendations: An inflation rate of 6% In respect of any investment product that you recommend, use a growth rate of 11% for any pre-retirement investments and 9% for post-retirement investments. All instalments for a given year are payable in advance at the beginning of the year Income after retirement is payable in advance at the beginning of the year Should the details provided prove insufficient for your purposes, you may make the necessary assumptions, provided that: Discussion Old Exam Paper Slide 20

21 Question 3 Discussion Old Exam Paper Slide 21 Question 3.1 Lizzie indicates that she does not fully understand the options available to her regarding her unapproved group life benefits. She mentions that she heard that there has been recent tax changes related to company owned policies and wants to know what the tax implication are for: her employer (FNB); and (3) Answer to The premiums paid by her employer is deductible in the hands of the employer under section 11(w)(i) of the ITA.

22 Question 3 Question for herself as an employee. (4) Question to The amount so paid is included in her gross income. See paragraph 2(k) of Seventh Schedule. (k) the employer has made any payment to any insurer under an insurance policy directly or indirectly for the benefit of the employee or his or her spouse, child, dependant or nominee: Provided that this paragraph shall not apply in respect of an insurance policy that relates to an event arising solely out of and in the course of employment of the employee; The employee will be taxed on the contribution as it is not deductible in his her/hands. (See section 23(r) of the ITA which prohibits deduction in hands of employee.) The benefits are exempt from tax when received by the employee. Discussion Old Exam Paper Slide 22

23 Question 3 Discussion Old Exam Paper Slide 23 Question 3.2 Lizzie wants to know what will happen to her group life benefits when she resigns from FNB. She does not want her benefits to be cancelled. Advise Lizzie on the options available to her as well as the possible income tax implications. (6) Answer to Question 3.2 Lizzie may have the option to convert her existing group life insurance cover to an insurance policy when leaving her employment. Continuing group life insurance benefits when leaving employment 17 October 2016, Linda Sherlock, Alexander Forbes. As part of group life insurance benefits, members may have the option to convert their existing group life insurance cover to an insurance policy when leaving their employer.

24 Question 3 Linda Sherlock, Managing Executive for Business and Distribution Enablement at Alexander Forbes, said it was very important that members understood what life insurance benefits they gave up when leaving their place of employment, and to what extent they would be able to replace these benefits in their personal capacity. Not all benefits provided to employees include the option to continue cover after leaving employment. Benefits available to convert existing group life insurance benefits to an individual policy: Members can take out an individual policy without having to go for any medical assessment or testing. This allows exiting members to obtain a policy at a better premium than they would be able to on a like for like basis in the open market. Discussion Old Exam Paper Slide 24

25 Question 3 Discussion Old Exam Paper Slide 25 Most individuals are under-insured, even taking into account the existing group life insurance benefits that they enjoy, so even if they move to a new employer that provides them with similar benefits it s a good idea to improve their financial position by securing cover in their personal capacity and without the need to undergo any medical assessments. When joining an employer, one of the employer-based benefits which form part of the employment contract may be group life insurance benefits. The benefits covered will be specified in the employment contract. These may include life, disability (income or lump sum) and/or critical illness protection. The amount that you are covered for is directly related to your salary (more specifically, generally your risk salary) and will increase and change as your salary changes.

26 Question 3 Discussion Old Exam Paper Slide 26 As mentioned above, this may or may not include the option to convert your existing benefits to an individual policy on termination of employment, Sherlock said. Why is this option important? When employees retire, the benefits that they enjoyed with a company will cease. Therefore should they have outstanding liabilities, such as debt or inheritance considerations for their children, these may no longer be covered. By exercising the option to continue cover in their personal capacity, they can ensure they remain protected.

27 Question 3 Discussion Old Exam Paper Slide 27 Upon resignation, members have the opportunity to: Replace the cover that they enjoyed with their employer Reduce any financial gaps identified by their financial adviser Take out a new policy to provide protection in the event that they are setting up their own business or partnership and to secure any debt that they may acquire. Make sure you take the time to speak to both your human resources consultant and to an accredited financial adviser when leaving employment. This will help you understand you re your options are and how any existing benefits you ll be able to keep will work to ensure you can stay on track to secure your financial well-being.

28 Question 3.3 Question 3 Lizzie is worried about (the possibility) that she and Patrice may pass away simultaneously. This has recently happened to two friends of theirs who died in a motorcar accident. She is especially worried about the risk in respect of their two children who are both still minors. Patrice and Lizzie informed you that they are considering using a discretionary inter vivos trust as an estate planning vehicle for this purpose. Advise Lizzie on the following: The risk to their children in respect of their inheritances if they do not make use of a trust as considered; and (1) Discussion Old Exam Paper Slide 28

29 Discussion Old Exam Paper Slide 29 Question 3 Answer to See sec 43 of the Administration of Estates Act. (1) The natural guardian of a minor shall, subject to the provisions of subsections (2) and (3)and to the terms of the will (if any) of the deceased, be entitled to receive from the executor for and on behalf of the minor, any movable property to which the minor is, according to any liquidation and distribution account in any deceased estate, entitled. (2) Subject to any express provision to the contrary in the will a) no sum of money shall be paid to any such guardian in terms of subsection (1) and b) if the Master so directs, no other movable property shall be delivered to any such guardian under that subsection, c) unless payment of such sum of money or payment, in default of delivery, of the value of such movable property according to a valuation by an appraiser or any other person approved by the Master, as the case may be, to the minor, at the time when he is to become entitled to the payment of such sum of money or delivery of such property, has been secured to the satisfaction of the Master.

30 Question 3 Discussion Old Exam Paper Slide 30 Question How a trust can address any risk; Answer to Question Discussion about bequest to the trust. Section 43 not applicable if the bequest is to a trust. Special trust discussion (discretionary).

31 Question 3 Discussion Old Exam Paper Slide 31 Question List one other important provision to be included in the will to better cater for the minor children. (1) Answer to Question They must nominate a Guardian for the children.

32 Question 4 Discussion Old Exam Paper Slide 32 Question 4.1 A friend at the bank has advised Lizzie that she should consider operating her business in a company or Close Corporation (CC) instead of in her own name. She was also told that she should declare the profits to herself as a dividend, which is tax free, (no longer) instead of drawing a salary which would be subject to income tax. Advise Lizzie on the tax treatment of the following: Answer to Declaration of 100% of the available profits made in the company or CC to herself as a dividend; and (3)

33 Question 4 Answer to The rate of company tax is 28%. If the full after-tax profit is distributed as a dividend, the effective rate of tax calculated as follows: The percentage of the income that remain after company tax is = 72 If the R72 is distributed as a dividend the amount that will remain after payment of the dividend tax of 20% is: = 57.6 (this remains i. r. o. the 100) The effective rate of tax is 42.4% ( ) Discussion Old Exam Paper Slide 33

34 Question 4 Discussion Old Exam Paper Slide 34 Question Drawing only a salary (receiving no dividends) (1) Answer to Question If she takes a salary only the company will qualify for a section 11(a) deduction in respect of the salary that is paid to her and consequently it is not liable for tax if the full pre-tax profit is distributed. If Lizzie withdraws a salary of R per month (R p.a.) the amount of tax that she is liable for will be at 18%. Tax payable is R minus the rebate of R = R See the tax table on the next slide.

35 Question 4 Discussion Old Exam Paper Slide 35 Taxable income Year of assessment ending 28 February 2018 Natural Person But does Rates of tax Exceeds not exceed % of each R % of the amount over % of the amount over % of the amount over % of the amount over % of the amount over and over % of the amount over

36 Question 4 Question Whether a combination of and can render a better result for tax purposes. (2) Answer to A combination of the two would be best. If her salary does not exceed R her highest marginal rate of tax will be 41%. Anything above that at 45%. Therefore a maximum salary of R and the balance as a dividend (effective tax 42.2%). Discussion Old Exam Paper Slide 36

37 Question 4 Discussion using the R at as tax rates have changed the principle rather than the question is discussed. The two top marginal tax brackets for individuals are shown below: If one compares a bonus/salary that falls to be taxed in the maximum bracket of 45%, to a dividend distribution by the company the position will be that: the bonus will be taxed at an effective 45%; and the effective rate of tax in the dividend distribution chain is as follows: = = 42.4% % of the amount over and over % of the amount over Discussion Old Exam Paper Slide 37

38 Question 4 Discussion Old Exam Paper Slide 38 The R that is not paid as a bonus can be distributed as a dividend (after-tax portion). If not the tax on that would be The effective rate of tax on the R , taking dividend tax into account, is as follows: Tax on R = R (59 098/ = %) = = 28.6% (less than both the other 2 rates)

39 Question 4 Question Explain the qualifying criteria of a small business corporation (6x½) Answer to These tax rates apply if: All shareholders or members throughout the year of assessment are natural persons who do not hold shares in any other private companies or members interest in any other close corporations or co-operatives other than those which: are inactive and have assets with a market value less than R5 000; or have taken steps to liquidate, wind-up or deregister (effective for years of assessment commencing on or after 1 January 2011). Gross income for the year of assessment does not exceed R20 million Discussion Old Exam Paper Slide 39

40 Question 4 Not more than 20% of the gross income and all the capital gains consists collectively of investment income and income from rendering a personal service. Investment income includes any annuity, interest, rental income from immovable property, royalty or any income of a similar nature, local dividends, foreign dividends (as from 1 April 2012) and any proceeds derived from investment or trading in financial instruments (including futures, options and other derivatives), marketable securities or immovable property. The company, close corporation or co-operative is not a personal service provider or venture capital company Discussion Old Exam Paper Slide 40

41 Question 4 Discussion Old Exam Paper Slide 41 Personal service includes any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, which is performed personally by any person who holds an interest in the company, co-operative or close corporation, except where such small business corporation employs three or more unconnected full-time employees for core operations throughout the year of assessment

42 Question Advise Lizzie as to whether her business will qualify as a small business corporation. (3) Answer to Question Yes. It does not render a personal service. Discuss other requirements. Shares (her offshore shares are not private company sharers) listed company means a company where its shares or depository receipts in respect of its shares are listed on (a) an exchange as defined in section 1 of the Financial Markets Act and licensed under section 9 of that Act; or (b) a stock exchange in a country other than the Republic which has been recognised by the Minister as contemplated in paragraph (c) of the definition of recognised exchange in paragraph 1 of the Eighth Schedule; Discussion Old Exam Paper Slide 42

43 Question 4 Question 4.3 The tax rates in respect of the taxation of Small Business Corporations have recently been changed. Assuming that the company makes R profit in the first year. Determine how much tax (after declaring a dividend) Lizzie will save by availing herself of the relief provided to Small Business Corporations as opposed to being taxed as a company. (Assume that the entire after tax amount is paid over as a dividend.) (4) Discussion Old Exam Paper Slide 43

44 Discussion Old Exam Paper Slide 44 Question 4 Answer to Question 4.3 If it is a SBC Tax as SBC = R Distributable profit = R R = R After tax dividend = 80% of R = R If is not a SBC the distributable dividend would R The net dividend income is the R ( ) The difference is R ( ) Years of assessment ending between 1 April 2017 and 31 March 2018 Taxable income Rates of tax R 0 - R Nil R R % of the amount over R R R R % of the amount over R R R % of the amount over R

45 Question 5 Discussion Old Exam Paper Slide 45 Question 5.1 You have done some preliminary calculations which indicate that the couple s capitalized income requirement need after retirement is R Advise Patrice whether his and Lizzie s retirement annuity funds and the preserved GEPF benefit will be sufficient to provide for the couple s income need after retirement as calculated. Show all calculations. Please note that the monthly premiums are paid annually in advance. (9) Answer to Question 5.1 RA Lizzie R/R Rate (esc inflation plus 2) 11 8 = =

46 Question 5 Discussion Old Exam Paper Slide 46 Then PMT ( ) I/YR 20 N PV = R (total of 2 present values) 1 P/YR PV 20 N 11 I/YR FV

47 Question 5 Discussion Old Exam Paper Slide 47 Patrice s RA Given Pension preservation fund 1 P/YR R PV 20 N 11 I/YR FV R R (see note 4 to assets) On retirement any lump sum taken will be subject to tax. This is ignored.

48 Question 5 Discussion Old Exam Paper Slide 48 Capital available RA Lizzie RA Patrice (given) Pension preservation Total Shortfall = R = R

49 Question 5 Discussion Old Exam Paper Slide 49 Question 5.2 In the light of the above, is there a specific regulatory proposal Lizzie should take note of in future that might influence her retirement situation? (1) Answer to Question 5.2 Discuss harmonisation of pension and provident funds.

50 Question 5 Discussion Old Exam Paper Slide 50 Answer to Question 5.3 From Government Pension Law A member who resigns from his or her employer s service or is discharged from his or her employer s service because of misconduct or ill-health occasioned by his or her own doing or for a reason not specifically mentioned in the rules and who is not entitled to receive benefits provided elsewhere in the rules, is entitled, on the written choice of the member, to (a).; or (b) a transfer benefit to an approved retirement fund equal to the aggregate of (i)..; and (ii)..;.

51 Question 5 Discussion Old Exam Paper Slide 51 Interest shall be added to the transfer benefit to account for any delay in payment thereof to the approved retirement fund. Such transfer shall be made subject to the rules of the approved retirement fund specifying that, with reference to the transfer benefit, any subsequent lump sum benefit payable by that fund or any successor fund to the member and/or his beneficiaries shall be limited to one third of the said transfer benefit, with interest. The balance of the member s transfer benefit with interest, after deduction of any lump sum payment referred to above, shall be applied for the purchase of an annuity, albeit immediately or upon the member s ultimate retirement.

52 The End Good luck!! Best Wishes