Question

Question 1: Case study

You are a financial adviser and the following information is an extract of data you gathered as part of fact finding during an initial client consultation for married couple Janet and Steven Blake. Janet works as a Teacher and Steven works as town planner at the local government. The have two children who are aged 12 and 14.

Janet and Steven would like to know how much money they will receive after paying tax and expenses for the year ended 30^th June 2018. They would like advice on how to reduce their tax liability in the future.

The Blake’s have diversified their investments by investing equally in a bank savings account, a fund and some Macquarie Group Ltd Shares. Their risk profile is equivalent to that of a growth investor. They have come to you understand how they should invest in the future.

The Blake’s life goal has been to buy a property in the country and live the quiet life 10 years from now. They need to save a $200,000 deposit to achieve this dream. They have $60,000 invested now and they estimate they can save $5000 p.a. for 5 years and then $10,000 p.a. for the 5 years following this. They have come to you see if they can achieve this goal.

Income for year ended 30^th June 2018:

Income type	Amount
Gross Salary- Janet	$70,000
Gross Salary- Steven	$54,000
Vanguard Bond Fund- Distribution 3.85% (Janet)	$770
NAB Savings Account Janet- Interest 2.3%- Janet	$230
Macquarie Group Limited- Dividend $2.05 per share- Steven	$410 (partial franking credit $80)

Estimated annual expenses

Item	Amount
Rent (650 per week)….………………………………..	33,800
Electricity/Water/Gas ………………………………….	3,000
Telephone/Mobile ……………………………………..	2,200
Pay television/Internet …………………………………	1,100
Insurance –contents …………………………….	1,200
Insurance – car..………………………………………	3,000
Credit cards repayment ($500 a month for 12 months).	6,000
Car loans repayment ($8000 a year for 5 year term).….	8,000
Petrol/maintenance …………………………………….	6,000
Car registration ………………………………………...	800
Public transport ………………………………………..	2,800
Other expenses
Food ……………………………………………………	12,500
Clothing/Haircuts/Beauty ……………………………..	5,500
Medical/Dental ………………………………………...	2,500
Entertainment/Dinners ………………………………...	6,000
Teacher Union Membership (Janet)………………….…………	1,000
Gifts - Birthdays/Christmas ……………………………	3,000
Total …………………………………………………..	98,400

Current Assets and Liabilities

Assets (Ownership)	Current valuation $	Liability (Ownership)	Current valuation $
Home Contents (Joint)	20,000	Credit cards (Joint) Includes the annual interest cost	6,000
Car (Joint)	35,000	Car loan (Joint) 5 year term at 12%	30,000
Bank Account: Cheque Account (Joint)	8,000
Investments: NAB savings Account (Janet) Vanguard Bond Fund (Janet) Macquarie Group Ltd Shares (Steven)	20,000 20,000 20,000

Required:

Calculate Janet’s and Steven’s after-tax income and savings ratio for the year ended June 2018. Explain one way in which Steven and Janet could reduce their tax liability and show the effect this strategy would have.

Review the Blake’s investment portfolio and explain whether they are diversified adequately. Consider both investments across different asset classes and investments within classes. Make two recommendations on how they should change their portfolio for future investments and justify these recommendations.

Calculate the future value of the investment portfolio 10 years from now assuming it will earn a 5% p.a. after tax. In this calculation you should include the FV of the current investments and the FV of the contributions that Blake’s estimate that they make over the next 10 years. Assume that contributions are made at the end of the year and that the first contribution will be made 365 days from now. Finally, explain one strategy that Janet and Steven could reach their goal more quickly and show the influence that this will have.

Important Note:

While answering questions that involve calculations, you are expected to describe your approach and explain your calculations. If assumptions are made, these assumptions must be clearly stated.

                                                                         

(5 + 5 + 5 = 15 marks)

Financial Formulae

  

Savings ratio = savings (or cash surplus)/ net income after tax

Future value FV = PV(1 + i)ⁿ                          

Annuity (Future value) FV = PMT[(1 + i)n – 1] / i

Individual Tax Rates (Adult Australian Residents) - 2017/2018
Taxable Income	Marginal Tax Rate	Tax Payable
$0 - $18,200	0%	Nil
$18,201 - $37,000	19%	$0 + 19% on the excess over $18,200
$37,001 - $87,000	32.5%	$3,572 + 32.5% on the excess over $37,000
$87,001 - $180,000	37%	$19,822 + 37% on the excess over $87,000
$180,001 +	45%	$54,232 + 45% on the excess over $180,000

Answer 1

Above question contains multiple subquestions, so I believe you are looking for first sub question of calculating their income and savings ratio.

Total income for Janet including income from investment = $70000+ $770+$230= $71000

Tax on Janet = 32.5%* (71000-37000) +19%*(37000-18200)

=$11050+$3572= $14622

Total income of Janet post tax = $56378

Total income of Steven = 54000

Total tax on it = 32.5%* (54000-37000)+19%*(37000-18200)

= 5525+3572 = $ 9097

So total post tax income of Steven = $44903+ $410 ( dividend income ) = $45313

Net savings = 45313+ 56378- 98400

= $3291

Savings ratio = 3291/(44313+56378)= 3.268%