Question

SECTION B

SHORT ANSWER QUESTIONS

The short answer questions are worth 50% in this paper.

QUESTION ONE

(a)The study of risk and return relationship continues to be an area of vital importance for financial planners. Explain risk and return relationship.

What is the purpose of a product disclosure statement (PDS)? Is there an argument for scrapping PDSs on the basis that most investors are financially illiterate and don’t read or understand the documents?

When making recommendations (assume that you are speaking to a husband and wife with children) in the area of Life insurance, what factors does a financial planner have to consider? In general, how would you work out the required level of Life insurance to recommend to clients?

QUESTION TWO

JKL Ltd. purchased a car for $32,200 for use by an employee who frequently travels to oversee the company’s business operation. The car was fitted with vehicle-to-vehicle communication system costing $2500 and other necessary upgrades costed the company $1,800.

For the year ended 31 March 2017, the car travelled 18,500 km. Receipts show that the contribution by employee to the provision of the vehicle is $950. The car was made available for 280 days during the year. The car is used 70% for business usage.

The cash expenses paid on the car during the year total $6,500.

(a)       You are required to calculate the Taxable value of the fringe benefit using the Statutory Formula method.

(b)        What will be the Taxable value of the fringe benefit using the Operating Cost method?

(c)       Show the FBT payable using the method that provided the lower taxable value. (Note: Gross up amount 1.8868)

(d)       What are the general conditions that need to be satisfied for an expense to be considered an allowable deduction for tax purposes?

QUESTION THREE

What are the key estate planning matters that a financial planner should identify when advising clients.   

Jasmine receives a distribution from her father’s estate which includes a property. Jasmine sells the property four years later and wants to know if there are any CGT implications. Discuss.

Answer 1

Answer 1:-

Finance is the life blood of business.

Financial management is applicable to every type of organization, irrespective of the size, kind or nature. Every organization aims to utilize its resources in a best possible and profitable way. For this purpose, they make an efficient financial plan.

Financial Planning is the process of estimating the capital required and determining it’s competition.

For financial planners, the risk and return relationship is of very much importance.

Risk and return are opposing concepts in the financial world.

The definition of “risk” is the chance that an investment’s actual return will be different from what was expected. One can measure risk in statistics by standard deviation. Because of risk, there is always a possibility of losing a portion (or even all) of a potential investment.

Return, on the other hand, is the gains or losses one brings in as a result of an investment.

The relationship between risk and return is that, at low levels of risk, potential returns tend to be low as well. High levels of risk are typically associated with high potential returns.

A risky investment means that there is more on stake and you’re more likely to lose everything; but, on the other hand, the amount you could bring in or profit or return is higher.

The tradeoff between risk and return, then, is the balance between the lowest possible risk and the highest possible return.

It’s crucial that a financial planner decide how much risk to take on with different portfolio of investments. The financial manager has to decide the level of risk the firm can assume and satisfy with the accompanying return. Similarly, cheaper sources of capital have other disadvantages. So to avail the benefit of the low cost funds, the firm has to put up with certain risks.

A Product Disclosure Statement (PDS) is a document, or sometimes a group of documents, that contains the information about a financial product/services including any significant benefits and risks, the cost of the financial product and the fees and charges that the financial product issuer may receive.

The purpose of a PDS is to give all the relevant information that a potential buyer of a financial product needs to consider prior to investing into a financial product. It gives each and every detail to the investor to be known before investing in it.

Scrapping PDSs would mean that an investor would have even less information on a financial product which does not help the investor at all.

This argument is not worth to say that the investors are illiterate and does not read the documents. Rather a PDS should be in everyday language and simple enough such that an investor that is financially illiterate would understand the document in order to make an informed decision, knowing all risks associated with it.

A financial planner has to consider various factors and aspects before recommending them any life insurance plan. The things that will be taken into consideration are as follows:-

• Medium term goal like buying a home or sending kids to private school; or Long term goal like debt-free and financially independent by retirement
• What are their current health issues
• Assets & liability amounts
• Expenses/budget
• Income details like pay slips or tax return
• Superannuation annual statements
• Details of existing insurance
• Spouse’s and/or dependents’ details - their earnings, health issues, etc.

After knowing the current position and goals of the person, being a financial planner he will have to to determine their needs and recommend a strategy to fulfil those needs. The financial planner will have to provide a SOA- Statement of Advice, which is a written document and also includes commission and remuneration disclosure of financial planner. The recommendation are discussed and the person may chose to go ahead with it or not. If the person decides to go ahead with the insurance plan, the required paperwork and application process will be done. And after that, the financial planner will review it and your financial situations after a regular period of time.

Note:-

Since you have multiple questions and sub questions, I have answered the first one with all sub parts in detail (as per the guidelines).