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Case Study 1: 09h00 12h00 (3 Hours) 50 Marks Section A: [Total 19] Question 1 [9] Calculate the following: SHOW ALL CALCULATIONS/STEPS FOLLOWED 1.1 The tax he paid on the withdrawal of 10 March 2011 (3) 1.2 The amount of tax he will need to pay should he retire from his provident fund this month. (6) Show all steps followed in doing your calculations. 1.1 2 February 2007 withdrawal Not used in calculation Pre 1/3/2009 Withdrawal: R800 000 (10 March 2011) R103 950 + 27% of the amount above R600 000 = R800 000 R600 000 = R200 000 x 27% = 54 000 + 103 950 = R157 950 1.2 Retirement calculation: [6] Feb 2007 Withdrawal Not used in calc. Withdrawal 10 March 2011 R800 000-00 Retirement from Prov. Fund (Feb 2016) R2 500 000-00 Total R3 300 000 Tax payable at retirement R130 500 +36% of the amount above R 1 050 000 = R810 000 + R130 500 = R940 500 Minus tax (hypothetical tax calc) payable on the withdrawal [R800 000] (using the retirement tables) Total tax liability R36 000 +27% of the amount over R700 000 = R100 000 x 27% = R27 000 + R36 000 = R63 000 R940 500 R63 000 (hypothetical tax deemed to have been paid) = R877 500 1

Question 2 (1) If Doug had been the victim of forced retrenchment on 10 March 2011 (instead of him resigning), would it affect your answer as calculated in 1.1 above? Very briefly explain your answer. No calculations are required in this instance. Yes he would have qualified to be taxed according to the retirement tables and not the withdrawal tables. He would also have been entitled to transfer the benefits tax free to another fund. Question 3 (1) How much tax will he need to pay if he decides to retire from his Old Mutual Retirement annuity three months after retiring from his current employer and takes the maximum lump sum that he is entitled to? (He resigned from his previous employment and was not retrenched in this scenario). Show calculations 1/3 rd of R890 000 = R296 666 x 36% = R106 799 Question 4 [8] His attorney has told him about the clean break principle in respect of a person s pension interest on divorce. Briefly discuss the concept of the clean break principle by answering the following questions. Assume, for the purposes of this question, that the divorce is granted on the day of your consultation with Doug. 4.1 What options/elections are available to Ellen (non-member spouse) should the divorce order state that one-half of Doug s pension interest in the provident fund and one-half of Doug s pension interest in his retirement annuity fund is assigned to her in terms of section 7(8) of the Divorce Act? Do not do calculations. (3) RA: She can transfer the RA proceeds to her own RA (or start her own RA) Provident fund: She can preserve her 50% of his provident fund by electing to have it transferred into another retirement fund for her benefit. She can choose to withdraw the funds allocated (paid out) to her immediately. 2

4.2 What are the income tax implications in respect of each of the different options available to her? No calculations are required but the implications must be explained. (2) If the funds are transferred to an RA or preservation fund no tax will be payable. If she chooses to withdraw the funds she will be taxed according to HER withdrawal tables. 4.3 If Mr. Fox, for arguments sake, retired from his Retirement Annuity at the age of 55 and transferred the full fund into a living annuity at that point in time, would the funds in the living annuity today enjoy any protection considering that the divorce order is granted on the day he consults with you? (1) Yes it would. A living annuity cannot be divided (split) in terms of a divorce order. It is not pension interest as defined in the act. Assessor if a candidate disagree with this point of view the mark must be awarded if he/she gives acceptable argument for the different point of view. 4.4 How would the court theoretically calculate the value of the pension interest (for purposes of the divorce order) in respect of the provident and Retirement Annuity fund? No actual calculations are required but the basis of the calculation must be explained. (2) Pension interest: Pension interest is defined in the Divorce Act as: Pension and provident fund - The benefits to which a member would have been entitled to in terms of the rules of the fund if his/her membership had terminated, due to resignation, at the date of the divorce. Retirement annuity- The sum of the member s contributions to the fund up to the date of divorce plus simple annual interest at the prescribed rate (currently 15, 5%). Moderator. This percentage has changed. Could not find the applicable Gazette this but remember to change before the marking process is started. 3

Section B: [Total 31] James Frisbee (single) is a director and majority shareholder in Micron (Pty) Ltd. You have recently taken over his investment and risk portfolio. He asked you to review his buy-and-sell structure and to review his personal risk and group risk options. Micron is doing extremely well despite tough economic conditions as it manufactures back-up generators for households and small businesses. The current value of the company is R100 million. There are three shareholders in the business: James (his shares are held by the Frisbee Trust and he is a trustee and a beneficiary of this trust): R60 million (60%) Peter Small: R10 million (10%). Shares are held in his own name. The Ubuntu empowerment Trust. R30 million (30%) Question 5 (2x½=1) James heard about the advantages of a buy-and-sell agreement. However, his previous financial planner stated that a trust cannot be a party to a buy-and-sell agreement (neither as a purchasing party nor as the selling party) as a trust cannot die. James wants you to confirm if a trust can be a party to a buy-and-sell agreement or not. Motivate your answer. Yes the trust can be a party to a buy-and-sell agreement - as either the purchaser and/or seller, depending on the scenario. ½ Although the trust cannot die; a trustee of the trust is insured as a representative of the trust and if the trustee dies or becomes disabled the trust will be forced to sell its shares in terms of the buy-and-sell agreement. ½ Question 6 (8) James indicated that the Ubunto trust s shares must never be sold as the company will lose its BEE rating. James also indicated that Ubunto s shareholding must always stay at 30%. Given these restrictions, describe how you would structure the buy-and-sell policies by completing the table below for James and Peter only. Both James and Peter are high net worth individuals (net worth in excess of R30 mil) 4

Owner of the policy** Life assured** Life cover required (Rand amount) Show calculations) **(1) **(1) Will the policy be exempt from estate duty? Briefly explain your answer. R..(1) (1) (1) R..(1) (1) (1) Are the premiums tax deductible? NB Briefly motivate your answer. **Combination of owner and life assured must be correct in order to obtain marks in first two columns. If one of the two is incorrect no marks will be allocated. Owner of the policy Life assured Life cover required (Rand amount) Will the policy be exempt from estate duty? NB - Briefly explain your answer. Frisbee Trust Peter Small R10 mil Yes Both the trust and Peter are shareholders on date of death Peter Small James Frisbee R75 mil (60 mil/0.8) No James Frisbee is not a shareholder on date of death (as required by the estate duty act) His trust owns the shares He is merely a proxy for the trust Are the premiums tax deductible? NB Briefly motivate your answer. No (No employer employee relationship exists between the shareholders) No (No employer employee relationship exists the shareholders) between Question 7 (6) After providing James with all the relevant information regarding the buy-and-sell agreement, you receive a call from the company s accountant. He says that he has been told that a company share buy-back is a viable alternative to a normal buy-and-sell structure. Briefly explain the benefits and pitfalls of a share buy-back structure compared to a normal buy-and-sell structure by using the table below (Calculations are not required): 5

Standard buy and sell structure Share buy back Ownership of the policy Dividend tax implications Complexity of the buy a and sell contract (*Additional reading - See Insurance and Tax Volume 29 No4 December 2014 Share buy-back Caveat emptor Martin Swanepoel) Ownership of the policies (Who owns the policies in each scenario) Standard buy and sell structure The shareholders Share buy back The company Dividend tax implications None Depends on the utilisation of reserves. May have dividend tax implications. Complexity of the buy and sell/share buy-back contract Tried and tested standard contracts Extremely complex and untested contract Question 8 [9] Peter Small was so impressed with your advice pertaining to the buy-and-sell agreement that he sent you the following questions with regard to his own financial planning. Peter is 42 years old and single. He has one child (Beverly 16 years old) from a previous relationship and is in a current relationship with Pamela. Peter and Pamela have been in a committed exclusive relationship for seven (7) years and live together in a house registered in his name. Apart from his shareholding in Micron he has the following assets: Asset Rand value Unit trusts (Collective Investment R10 million Scheme) Life assurance (pure risk) policy R4 million Unapproved Group risk cover R3 million Retirement annuity R300 000 You have scheduled a meeting with him for next week. Indicate what feedback you will give him by answering the questions below: 6

Question 8.1 (3) Advise Peter in respect of each of the assets listed below whether or not he can nominate a beneficiary to receive that asset in the event of his death, and if such nominated proceeds will pay to the actual nominated beneficiary? Briefly motivate your answer Asset: a. Unit trust portfolio b. Unapproved group risk cover c. Retirement annuity a. Unit trust: No it is not possible to nominate a beneficiary, funds will be property in his estate b. Unapproved group risk cover: Yes you can and the nomination is binding on the Insurer. c. Retirement annuity: Yes you can but it s not binding on the trustees of the fund. The trustees are bound by section 37C of the Pension Funds Act. They must distribute the assets to the dependents of the deceased. Question 8.2 (3) Peter is concerned about the wellbeing of Beverly. He has made her the beneficiary of his life policy (R4 million). He has a list of questions as indicated below. Briefly provide him with the appropriate feedback. a. Must the insurer pay out to Beverly directly given the fact that she is a minor? Explain what could happen who could the insurer pay out to? (1) b. If Beverly was not the beneficiary of the said policy, what structure/s can he use to make sure the funds are protected and can only be used for Beverly s benefit? (1) c. In what scenario will the proceeds of the life policy end up in the Master of the High Court s Guardian s fund? (1) a. Yes, the insurer must pay the nominated beneficiary. Not always the case in practice. Some companies pay the guardian (of the minor), some pay into a trust and some pay into a beneficiary trust and some into guardian s fund. b. A testamentary OR Inter Vivos trust can be made the beneficiary of the policy. Or it can pay to the deceased estate and the testament will have a clause setting up a testamentary trust and the testament will indicate that the money must be paid to the testamentary trust. c. If the proceeds pay into the estate for the benefit of the minor child and no provision is made for the setting up of a testamentary trust in the will. 7

Question 8.3 (2) Peter has heard about the 4(q) deduction under the Estate Duty Act. Is section 4(q) applicable to assets that Peter bequeaths to Pamela? Briefly motivate your answer by firstly indicating if section 4(q) finds application in this instance. Secondly, motivate your answer by referring to other applicable legislation. She may (note not will). No court cases yet, but if she can prove that she was in a heterosexual union which the Commissioner is satisfied to be permanent, she will qualify for the 4(q) deduction. Section 4(q): Spouse in relation to the deceased person includes a person who at the time of death of that deceased person was a partner of the deceased: (a) (b) (c) In a marriage recognised in terms of the laws of South Africa In a marriage entered into in accordance with any system of religious law which is recognised in South Africa; or In a same-sex or heterosexual union which the Commissioner is satisfied to be permanent Question 8.4 (1) Peter is a trustee on his best friend s (Thabo s) business trust. Thabo is continuously bragging about how safe his assets are in the trust and that even if he is sequestrated that he will still be able to control the trust as his is also a trustee. Comment on the accuracy of Thabo s statement by referring to and quoting specific legislation. It s not accurate. The Master of the High court may remove Thabo as a trustee of the trust if Thabo personal estate is sequestrated or liquidated. Please see section 20(2) [c] below: Trust Property Control Act, 1988 (Act No. 57 of 1988) Section 20. Removal of trustee 2) A trustee may at any time be removed from his office by the Master- a)...; or b)..; or 8

c) if his estate is sequestrated or liquidated or placed under judicial management; Question 9 [3] Mrs Brown has been referred to you by her son (Peter). Her husband (David) has recently passed away and she in the beneficiary on her husband s living annuity. The insurance company has given her two options: 1. Continue with the living annuity 2. Take the proceeds from the living annuity as a lump sum. The value of the assets in the living annuity is R4 000 000-00 (David took R2 000 000 as a lump sum during his lifetime when he retired). Would it be the appropriate advice for her to take the full benefit in the form of a lump sum? Give brief reasons for your answer by referring to the tax consequences, if any, on her taking the lump sum. The lump sum with be taxed in her husband s (David) estate according to his (now the deceased estate s) retirement tables. The current value of the annuity (R4 000 000-00) will be added to his previous retirement benefits. That means that the effective rate of tax will be 36%. She will lose R1 440 000 in taxes. It s far better for her to continue with the living annuity if she does not require a lump sum immediately. Question 10 [4] 10.1 In terms of the new FPI Code of Ethics and Practice standards, name three new definitions (vs. the Old FPI Code) that were added to the new code. Formal document means any contractual agreement that indicates the existence of a contractual relationship between parties such as the FPI professional member and his/her client. Examples of such formal document may include but is not limited to a Service Level Agreement and an Advice Agreement. This definition highlights the fact that the relationship between an FPI professional member and his/her client is one of a contractual nature. And Remuneration means the compensation that one has agreed with a client to receive in exchange for work and or services performed, which includes any amount of income which is paid or is payable to any person by means of any fee(s), commission and/or emolument, 9

whether in cash or otherwise. This new definition replaces commission, compensation and fee only in the current code and is consistent with other definitions used in other professions such as accountancy. and Writing means and includes communication by telefax or any appropriate electronic medium that is accurately and readily reducible to written or printed form; and written has a corresponding meaning. This definition is consistent with the meaning of writing found in Section 1 of the General Code of Conduct for Authorised Financial Services Providers and Representatives. This section was specifically included to include correspondence such as e-mails and faxes between a professional member and his/her client. 10.2 Explain what your understanding/comprehension of the Practice Standards is as contained in part 3 of the new code. (I.e. what is it commonly known as?) The practice standards are commonly known or referred to as the six (6) steps of financial planning THE END of CASE STUDY 1 50 marks 10