This statement of advice is provided for financial planning purpose of Kelly and Luke. It states out current financial summary of both clients and a projected financial statements for the next five years. By using these financial data, this SOA also analyses and estimates how the mortgage loan is going to be owe on the next five years and how it have impacts on their wealth. Moreover, there are answers for questions asked by clients in the interview such as advantages and disadvantages of fixed interest rate etc. This SOA also provided recommendations for how to use those cash surplus appropriate. Overall, this SOA summarises all the financial performance of both clients and lists out suggestions and recommendations for Kelly and Luke.
Statement of Current Financial Position as at 30 June 2015
|Balance Sheet as on 30 June 2015|
Cash Flow Statement for 2014/2015
A Projected Cash Flow Statement for 2015/16 to 2019/20
Current level of mortgage repayments on 30 June 2020
This table showed that the amount of money Kelly and Luke have paid and still owed for the fixed and variable mortgage loans. I have assumed the variable interest rates will increased by the inflation each year and the fixed interest rates will be remain the same for each year. Overall, the balance of the mortgage loan will be $238,985 on the 30 June 2020. Kelly and Luke will still owe $131050 for the fixed mortgage loans and $87935 for the variable mortgage loans.
Financial planning issues raised during the interview
As Luke asked about the advantages and disadvantages of fixing an interest rate for shorter or long period. To make perfect financial plan Firstly, fixed interest rates are the rates which will not affect by any impact of the market rates. Which means whenever the interest rate going up or going down, the fixed interest rates will not be affect during the agreed period of time. A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. However, you will have advantages when the market interest rate goes up as you will pay lesser interests on the loan than the variable interest rates. You will also gain advantages when the interest rates are unstable and volatile. If you engage in the fixed mortgage loan in long period when the time interest rate will be going up for the next few years, you will gain a lot of advantages for paying less than variable rates. In sum, the advantages and disadvantages of fixed interest rate for shorter or longer period depend on the variable interest rate on the period of time you engage into the contract. In this case, as the variable interest rates will be getting high each year but it still cannot get even with the fixed interest rates, it means that you are suffering a disadvantage when you borrow a loan with higher fixed rates. After 10 years, if the variable is continue to increase by the inflation rate each year, the repayment would be higher than the fixed rate mortgage.
The second question I would like to answer is about capital gain tax and franking credits. Capital gain tax is a tax realised from capital gains and net capital gain is the money you earn for the year minus the money you invested from current year and previous years. There are three methods to calculate which is indexation method, discount method and non-discount method. The most important things are the assets hold more than 12 months and sell can have a discount on the tax. Those 500 CBA shares can be the example of it, you hold those 500 shares for more than 12 months and you sold it for $92.4 per share. However, the net capital gain is equal to the price you gain minus the price you paid for the shares. You ONLY need to add half of the net capital gain to the taxable income as you have held those shares for more than 12 months. Overall, when you sell your assets, you need to pay tax for the amount of money you gained. On the other hand, under dividend imputation, tax paid by company may be attributed to shareholders and franking credit is amount of money which pass to the investors with dividends. Franking credit usually equal to the dividend times 30 divided by 70 and then times the proportion of franking. It will cover, or partly cover the tax payable on the dividends. Moreover, if the franking credit is excess, it can be used to offset other income or refund to the company. Overall, franking credit is used to offset the investors’ tax payable.
As Luke suggested Kelly should sell the remaining 500 CBA shares because the market is very volatile. I would like to add some explanation about shares, shares are generally high risk and return. If you forecast the price of the share will be going down in the future, you should sell them off in order to prevent loss as price is lower than the price you buy the share. Term deposit is also another way to gain money but it is totally different with shares. Term deposit is safer and lower return than the shares. As the price of the share is higher than the price you bought at the moment, I suggest that Kelly should sell another 500 CBA shares and put those money into term deposits as you would exactly know how much you will get in the term deposit.
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