Management Letter on Share Disposal: Estate of Alexander P Spencer

This management letter addresses George E Spencer, the executor of the Estate of Alexander P Spencer, concerning the optimal strategy for handling shares owned by the deceased. The audit, conducted according to International Standards on Auditing, reveals challenges due to incomplete financial records. The letter details the implications of Alexander's participation in Dividend Reinvestment Plans (DRP) and the potential capital gains tax liabilities associated with either selling the shares within the estate or transferring them to George, who has a substantial personal income. The analysis considers Australian tax brackets and capital gains tax regulations, ultimately recommending selling the shares within the estate to minimize tax liability, given the significant appreciation in share value since their original purchase. The letter also notes that the estate administration is expected to continue until 2020 and offers further clarification on the presented information. The document also refers to bibliography to support the claims.

Management Letter
15th November, 2015
George E Spencer
Estate of the Late Alexander P Spencer
Dear Sir,
We have recently completed audit of estate of Alexander P Spencer, same is conducted
according to provisions of International Standards on Auditing. According to those standards, we
do planning for audit and perform the audit in such manner, so that we can obtain sufficient and
appropriate audit assurances that the data which we are checking is free from material
misstatement. We do gather such assurance not for commenting on internal controls but for
having base for expressing opinion. And our audit does not relieve the management from there
responsibility.
However in course of such normal practice, we want to draw you kind consideration on
important matters found, those are listed below:-
We Would Like to Draw your attention on the difficulties which we come across during
verification of estate, Alexander moved into to a age care unit about 5 years ago and most of his
financial records were lost at that time, as the records are not completely available, we are trying
to gather them, in the absence of complete records, administration of those documents relating to
estate is difficult.
a) As stated above, we do audit of estate and such audit is performed according to
International Standards of Auditing, those Standards required us to obtain reasonable
assurance that there is no material misstatement in records, We are required to check
whether records are free from material misstatement to express an appropriate opinion
and give advice on them.
b) We are in process of keeping records relating to Alexander estates together, filling of
those records is under process.

c) Our administration process of records / Audit of records are a step by step gradual
process, those processes takes time, in performing those process we keep Professional
skepticism, so that nothing will remain doubtful for you to a great extent, those process
are performed with an appropriate planning.
d) Our opinion is based upon facts of the case and opinion changes according to the facts
provided and documents produced before us.
e) For Alexander’s estate we have following records :-
Commonwealth Bank
12thSeptember 1991 Share Purchase $6,480
1st November 1993 Share Purchase $7,480
22nd July 1996 Share Purchase $9,000
14th November 1997 Share Purchase $6,675
National Australia Bank
15th April 1983 Purchase 1000 Share $2,420
In both of the above case Alexander has participated in Dividend Reinvestment Plan and
has acquired additional shares through bonus issue and New issues.
As stated above that Alexander has opted DRP for both shares, we would explain what
actually happens in DRP, DRP is Dividend reinvestment plan, under which company in
which one has made investment, receives a offer form company to receive shares in lieu
of dividend and in such case investor do not receive dividend in cash on quarterly basis,
however some shares may be given by said company instead of dividend, even though
investor do not receive dividend in cash, he is required to pay tax on said dividend which
has been received in form of shares (Foundation of taxation law,2016)
Under this scheme, dividend is immediately invested for the purpose of compounding
and price appreciation, and with nil brokerage charges. Under this scheme investor do not
require to accumulate cash and then purchase shares, in this scheme investor will receive
shares in fractions in accordance with dividend amount.

We would like you to fetch details of D- Mat account of Alexander, so that complete
details with regard to shares can be obtained (ASX Release,2015)
In present Situation you are the sole executer of estate of Alexander, however you are
also having your own income of $2,00,000/- per annum, the question is to whether to
should sell the shares in the estate or transfer the shares to you and then sale them, in case
of sale of Shares you would require to pay capital gain tax,
Capital gain tax in Australian taxation system, is a tax applied on disposal of any kind of
capital assets. However there are various significant exemptions, and with the help of
which tax burden can be reduced.
Under Capital gain tax, only net gain is taxed, in the year in which assets is transferred or
sold to any other person or any assets is disposed off. For determining the net capital
gain, cost is required to be reduced out of fair market value or sales consideration, to
know how much cost is required to be deducted one needs to be aware about the period
of holding of the said assets which is bring sold / transferred / disposed off. If any assets
which is being sold/ transferred/ disposed of is held for a period more than a year then in
such case gain is directly reduced by 50%, for the individual tax payer, and same for
other assessee too, however in case of superannuation funds said reduction is capital gain
is 33%. Capital loss can be set off against capital gain in same any in any another
financial year but with any other heads income. Capital loss remaining after set off can be
carry forwarded to indefinite period (EXFIN, 2015)
For coming up on any opinion we would like to know your own taxation liability, for this
we need tax slabs of Australia and in Australia any person having income above
$18,0000/-, that person has to pay tax of $54,232/- in addition with 45C for each dollar
earned over and above $180,000/-
As you are earning $2,00,000/- per annum you would already be paying tax under highest
tax slab, hence transferring shares to your estate and then selling them off would require
you pay higher tax in comparison to selling those shares in estate of Alexander
Current Market Price of Commonwealth Bank’s share is aprrox $85/- and in year
1991 share price of Commonwealth Bank’s share was $5.40/- this difference in
purchase price and expected selling price will result in huge capital gain.
Current Market Price of National Australia Bank’s share is aprrox $28.48/- and in
year 1983 share price of National Australia Bank’s share was $2/- this difference in
purchase price and expected selling price will result in huge capital gain.

Conclusion :-
In our Opinion it would be better to sale shares in estate of Alexander as this would
be a tax saving option for you as prices of shares must have raised since 1991 and
that would result in capital gain, if such capital gain would be taxed as income of
Alexander, lower tax would required to be paid in comparison with tax liability on
Capital gain if shares are transferred to your estate and then sold as you are already
in higher tax bracket, further in addition to this we would like to bring into your
notice that Alexander estate would require time till 2020 for administration.
We would be like to give any information / clarification that you may feel necessary to
understand this report.
Yours faithfully
CPA
Bibliography
ASX. (2015). Pros and cons of dividend reinvestment plans (DRPs). Retrieved from
https://www.asx.com.au/education/investor-update-newsletter/201409-pros-and-cons-of-
dividend-reinvestment-plans.htm
EXFIN. (2015). Current Australian IncomeTax Rates - Resident and Non-Resident. Retrieved
from https://www.exfin.com/australian-tax-rates
Foundation of taxation law, 9th edition, Stephen Barkoczy 2016
Gray,D(2015). Dividend Reinvestment plan. Available at
https://www.smh.com.au/business/companies/bhp-confirms-introduction-of-dividend-
reinvestment-plan-20180327-p4z6gu.html
ASX Release (2015). Dividend policy. Available at
https://stbarbara.com.au/wp-content/uploads/2018/03/2017.08.07_asx_2017_dividend__
policy_and_dividend_reinvestment_plan.pdf