Assessment – 2 (3 scenarios)
Scenario 1 – Debt Management
Debbie is 26 and enjoys life to the full. She studied at university for four years, before spending two years travelling overseas. She has been working as a IT contractor for the last two years, earning an annual salary of $55,000.
Debbie has found herself in a difficult situation, as her rent has risen to $320 per week. She owes $12,000 on her credit card (5% of the balance to be paid each month), has a HELP debt of $15,000, and makes monthly repayments of $350 on a personal car loan (principal balance of $25,000). Her basic living expenses are currently about $14,000 per annum, but Debbie often exceeds this amount by overspending on luxury items.
Debbie is finding it hard to pay her bills. In addition, there has been an interest rate increase, meaning that the rate on her credit card is increasing to 22% per annum (interest calculated daily) and the variable interest rate on her personal loan is increasing to 9.5% per annum. Debbie has only $800 in her bank account. Her only assets are her car, furniture, jewellery, and clothes. Debbie has come to you for financial advice.
Question) Read Scenario 1 carefully. What advice would you give to Debbie to address her financial
situation?
Scenario 2 – Growth Investor
In 2013, Rose Harris, a retired 64-year-old, divorced her husband of 38 years. As part of the property settlement, the family home was sold and Rose’s share was approximately $450,000. In addition to this amount, the remainder of the property settlement amounted to an additional $250,000. Her total settlement hence amounted to $700,000. Since she was going through a difficult adjustment, she decided to rent a unit in in a nearby suburb, on a six-month lease, but she always intended to buy a unit in the near future.
Rose went to see a friend Arturo, who was a financial planner, to get advice as to how to invest the funds to secure a comfortable retirement. She made it clear to Arturo that her priorities were income, and to make the money work for her. In her initial interview with Arturo, Rose indicated that she intended to buy a property in the next 12 months.
Based on their conversations, Arturo assessed Rose to be a growth investor and recommended the following investments: Allocated pension $350,000
Bank shares $80,000
Unlisted property trust $140,000
Managed Australian share fund $115,000
Bank account $15,000
In mid-2015, Rose became concerned about property market, particularly about property market, particularly about recent significant increases in property prices. She decided it was time to buy a property to live in, and approached Arturo to realise the funds. Rose planned to immediately purchase a unit for $480,000, as prices in the suburb she wanted to live in were increasing rapidly. Rose was shocked, when Arturo told her that it would take weeks to make the funds available, as the allocated pension and the unlisted property trust would now need to be commuted to a lump- sums, both with sizeable early exit fees.
Arturo also advised her that the bank shares could be readily sold, but the share price was slightly less than the purchase price. The managed share fund could be liquidated, but again, there were fees and charges for early exit.
Because of the time delay liquidating the investments, Rose was gazumped on the unit she wanted, and had to settle for another, less attractive unit, at a cost of $505,000.
Question) Carefully read Scenario 2, especially in relation to Rose’s risk assessment and the suitability o
the investments chosen given her situation. Discuss what risk profile should have been assigned to Rose
f and, if this had occurred, how might the outcome have been different for her.
Scenario 3 – Taxation
Ted (64 years old) and his wife Alice (63 years old) own their own home worth $400,000 (land value 275,000). In addition, they own a holiday home worth $280,000. Ted and Alice believe that the current economic conditions provide a perfect opportunity for them to purchase an investment property. They are considering purchasing one for $450,000 (land value $300,000) and expect to rent out the property at $500 per week. Ted and Alice believe the investment property will help provide them with extra income in their retirement. They have saved $90,000 and are looking to borrow the balance at 7% pa (effective interest rate). Ted and Alice are no longer working full-time and each of them earns $35,000 annually.
They are planning to fully retire in the next 1–2 years and move to their holiday home permanently.
Their annual living expenses are $28,000 and they like to take a few short holidays throughout the year
(costing around $12,000 in total). Ted also has $100,000 in a managed fund earning around 5% pa and Alice has $10,000 in a cash management account earning 4% pa. They both have superannuation in a fixed-interest securities fund, totalling around $280,000.
Question) Now, read Scenario 3 carefully. Briefly discuss what taxation issues Ted and Alice might need to consider with regards to their investment property. Also, explain some of the other issues you may need to discuss with Ted and Alice, with regards to their property investment sand their future lifestyle needs.