FIN320 Tax and Estate Planning: Structuring Financial Affairs Well

This report assesses the tax liabilities of Herbert and Dorothy, both individually and if merged, for the business year 2018/2019. It calculates individual tax liabilities based on income from rental properties, term deposits, share portfolios, and business activities, considering relevant tax slabs and Medicare levies. The report advises against merging their businesses due to increased overall tax liability. Furthermore, it suggests financial arrangements like estate planning and superannuation investments for long-term financial security, along with debt reduction strategies. The analysis concludes that while merging increases tax burden, strategic financial planning can improve their overall financial well-being. Desklib provides a platform to access this and other solved assignments.

TEP 1
Tax and Estate Planning

TEP 2
Table of Contents
Introduction......................................................................................................................................3
Task 1: Tax Calculations.................................................................................................................4
Task 2: Advice to Herbert and Dorothy on Merging Business.......................................................7
Task 3: Suggestion to Herbert and Dorothy Regarding Possible Arrangements...........................10
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

TEP 3
Introduction
This report is prepared for generating knowledge about different concepts related to tax and
estate planning. It focuses on the calculation of total tax liability of Herbert and Dorothy for the
business year of 2018/2018. The report will also facilitate the advice to Herbert and Dorothy
with regards to the decision of merger. Final section of this report will provide recommendations
to Herbert and Dorothy with regards to making the arrangements of financial affairs in efficient
manner. It will also facilitate information about other possible alternative strategies that can be
taken into account by the Herbert and Dorothy for purpose of enhancing the long term and short
term business position in the market.

TEP 4
Task 1: Tax Calculations
Valuation of Tax Liability for Herbert and Dorothy:
In Australia, the income received from rental property is also taxable income. The rate of tax on
income in Australia can be depicted through below table:
(Source: Australian Gov, 2018; Aus Gov, 2018)
Tax Liability for Herbert:
On the basis of above table, it can be analyzed that the tax rate in Australia is different according
to income slabs. So, the valuation of total taxable income for Herbert is as below:
Table Showing Valuation of Total Taxable Income for 2018-19
Particulars Details (in $) Total (in $)
Total Income from Rental Property ($500 per week) $500 x 52 x 0.5 $13,000
Income on Term Deposit $41,000 x 2.75%
x 0.5
$563.75

TEP 5
Interest Payment on Rental Property Loan $320,000 x 5.2%
x 0.5
($8320)
Interest Payment on Motor Vehicle Loan $28,000 x 8% ($2240)
Value of Net Income of Herbert (Test and Tag Business) $241,000 -
$43,000
$198,000
Total Income of Herbert $201,003.75
As per the analysis of different tax slabs, it is determined that total income of Herbert is
determined as $201,003.75 that falls in the slab of $180,001 and over. So, the value of tax
liability of Herbert can be calculated in following manner:
Following table summarizes calculations of tax liability for Herbert:
Table showing calculation of tax liability of Herbert
Particulars Amount (in $)
Fix Tax Liability if Taxable Income in higher than
$180,000
$54,097
Tax Calculation @ 45% = $21,003.7 x 45% $9451.59
Calculation of 2% Medical Levy = $182,803.75 x 2% $3,656.075
Total Tax Liability for Herbert $67,204.765
Total Tax Liability = $54,097 + 45% of Income exceeding the level of $180,000 + 2% Medicare
Levy of Total Taxable Income
Value of income exceeding level of $180,000 can be ascertained as below:
= $201,003.75 - $180,000
= $21,003.75
Taxable Income for Medical Levy:
= $201,003.75 – $18,200
= $182,803.75
So, the tax liability can be determined in the following way:

TEP 6
Total Tax Liability = $54,097 + 45% of Income exceeding the level of $180,000+ 2% Medicare
Levy of Total Taxable Income
= $54,097 + $21,003.75 x 45% + $182,803.75 x 2%
= $54,097 + $9451.69 + $3,656.075
= $67,204.765
Working Note:
1. The incomes and expenses like interest on rental property loan, income on term deposit and
income on rental property is given as combined income and combined expenses. For dividing
these expenses and incomes, it is assumed that they divided these amounts in same ratio that is
50% for each.
2. Total number of weeks in a year is taken as 52 weeks for the calculation of total annual
income from rental property.
3. The nationality of Herbert and Dorothy is not given in the scenario. So, it is assumed that both
of them are the resident of Australia, as this was required for selection of the tax rate.
Valuation of Tax Liability for Dorothy:
The valuation of total taxable income for Dorothy is as below:
Table Showing Valuation of Total Taxable Income for 2018-19
Particulars Details (in $) Total (in $)
Total Income from Rental Property ($500 per week) $500 x 52 x 0.5 $13,000
Income on Share Portfolio $45,000 x 4.5% $20,250
Income on Term Deposit $41,000 x 2.75%
x 0.5
$563.75
Interest Payment on Rental Property Loan $320,000 x 5.2%
x 0.5
($8320)
Net Income on Life Supplements Commissions $85,000 -
$12,000
$73,000
Total Income of Dorothy $98,493.75

TEP 7
From the analysis of different tax slabs, it can be analyzed that the total income earned by
Dorothy falls in the slab of $90,000 - $180,000, as the value of total taxable income of Dorothy
is calculated as $98,493.75. So, the valuation of tax liability for Dorothy is as below:
Table showing calculation of tax liability of Dorothy
Particulars Amount (in $)
Fix Tax Liability if Taxable Income in higher than $90,000 $20,797
Tax Calculation @ 37% = $8,493.75 x 37% $3,142.69
Calculation of 2% Medical Levy = $80,283.75 x 2% $1,605.875
Total Tax Liability for Dorothy $25,545.57
Tax Liability = $20,797 + 37% of Total Income Exceeding the level of $90,000 + 2% Medical
Levy on Taxable Income
Valuation of Total Income Exceeding level of $90,000:
= $98,493.75 - $90,000
= $8,493.75
Taxable Income for Medical Levy:
= $98,493.75 – $18,200
= $80,283.75
So, the value of total tax liability for Dorothy can be determined in following manner:
Total Liability = $20,797 + 37% of Total Income Exceeding the level of $90,000 + 2% Medical
Levy on Taxable Income
= $20,797 + $8,493.75 x 37% + $80,283.75 x 2%
= $20,797 + $3,142.69 + $1,605.875
= $25,545.57

TEP 8
Working Note:
1. In the calculation of total taxable income, the interest expense is not taken into consideration.
It is so because the interest expense on credit card is a personal expense, so the tax benefit on this
interest expense in not available for anyone.
Task 2: Advice to Herbert and Dorothy on Merging Business
In general, merger can be defined as the activity of combining two or more business entities. The
impact of merger can be seen on the net profitability position of resulting partnership. The
impact of merger incident can also be seen on the total assets and liability position as well as the
tax liability of companies1. There are different advantages that may be evidenced by Herbert and
Dorothy as a result of merger. Example of these benefits includes the economies of scale, greater
level of profitability to the companies provided increased ability to invest in research and
development activities, and the firms in difficult business situation can get benefits from merger
due to enhanced market share and financial health.
Impact of Merger on the Calculation of Tax Liability for Merged Herbert and Dorothy:
Following table summarizes the valuation of total taxable income for Herbert and Dorothy
merged Herbert and Dorothy:
Table Showing Valuation of Total Taxable Income for 2018-19
Particulars Details (in $) Total (in $)
Total Income from Rental Property ($500 per week) $500 x 52 $26,000
Income on Share Portfolio $45,000 x 4.5% $20,250
Income on Term Deposit $41,000 x 2.75% $1127.5
Interest Payment on Rental Property Loan $320,000 x 5.2% ($16,640)
Interest on Motor Vehicle Loan $28,000 x 8% ($2,240)
Net Income on Life Supplements Commissions $85,000 - $12,000 $73,000
Value of Net Income of Herbert (Test and Tag Business) $241,000 - $43,000 $198,000
Total Income of Herbert and Dorothy Merged $299,497.5
1 Greve, H.R. and Man Zhang, C. (2017) Institutional logics and power sources: Merger and
acquisition decisions. Academy of Management Journal, 60(2), pp. 671-694.

TEP 9
On the basis of analysis of different tax slabs of government of Australia, it can be observed that
total income of Herbert and Dorothy merged is $299,497.5 that falls in the tax slab of $180,001
and over. In this context, the valuation of tax liability for Herbert and Dorothy merged can be
determined in the following manner:
Table showing calculation of tax liability of Herbert and Dorothy Merged
Particulars Amount (in $)
Fix Tax Liability if Taxable Income in higher than
$180,000
$54,097
Tax Calculation @ 45% = $119,497.5 x 45% $53,773.875
Calculation of 2% Medical Levy = $281,297.5 x 2% $5,625.95
Total Tax Liability for Herbert & Dorothy Merged $113,496.825
Tax Liability = $54,097 + 45% of Total Income exceeding the level of $180,000 + 2% Medicare
Levy of Total Taxable Income
Valuation of Total Income Exceeding level of $180,000 can be carried out as below:
= $299,497.5 - $180,000
= $119,497.5
Valuation for Taxable Income for Medical Levy:
= $299,497.5 - $18,200
= $281,297.5
So, the valuation of total tax liability of the Herbert and Dorothy merged can be calculation as
below:
Tax Liability = $54,097 + 45% of Total Income exceeding the level of $180,000 + 2% Medical
Levy on Total Taxable Income

TEP 10
= $54,097 + $119,497.5 x 45% + $281,297.5 x 2%
= $54,097 + $53,773.875 + $5,625.95
= $113,496.825
Summary Table for Before Merger and After Merger Tax Liabilities:
Following table is helpful to understand the differences in before merger and after merger tax
liabilities of the individual companies and merged:
Table Summarizing Before and After Merger Tax Liabilities
Particulars Herbert Dorothy Merged
Tax Liability before merger $67,204.765 $25,545.57
Total Liability of Herbert and Dorothy
before Merger = $92,750.335
So, equalization of tax liability before
merger = $92,750.335/ 2
$46,375.17 $46,375.17
Tax Liability of Merged after the merger $113,496.825
So, equalization of total tax liability in
Herbert and Dorothy after merger =
$113,496.825/ 2
$56,748.41 $56,748.41
On the basis of above table, it can be analyzed that there is no any tax benefits available with the
strategy of merger for both Herbert and Dorothy. For example, the total tax liability for Herbert
and Dorothy before the merger was $92,750.335 that increased to $113,496.825 that is very high.
In this context, it can be stated that this merger will not be beneficial for the companies from the
point of view of tax expenses in business.

TEP 11
Task 3: Suggestion to Herbert and Dorothy Regarding Possible Arrangements
There are different financial arrangements or financial strategies that could be taken into account
by Herbert and Dorothy for achievement of better financial position. Example of these strategies
includes the estate planning, investment in superannuation funds, insurance and the debt
reduction strategies. In general, estate planning can be defined as the process of preparing legal
documents for transfer of owner of particular assets or property in the situation of death. It is a
requirement of estate planning that it must be in written, notarized by the person, and signed2.
This would give right to the nominee to get the assets and money legally, at the time of
unfortunate accidental death or illness death of life partner. This should be done by both Herbert
and Dorothy.
It can also be recommended to Herbert and Dorothy to invest in the superannuation funds. In
general, superannuation funds are the investment opportunities provided by Government of
Australia to all Australians through which they can ensure the availability of an income stream
for them after age of retirement. This type of investment is also known as the pension fund. In
other words, the investment in superannuation funds can help to both Herbert and Dorothy to
secure their lives in the older age3. The investment in this fund is suggested to both Herbert and
Dorothy, because the tax benefits are available on the investment in superannuation funds for all
Australians. There are different debt reduction strategies that can be adopted by Herbert and
Dorothy like timely transfer for payment of transactions done through credit card, increase in
2 Yang, L., He, B.J. and Ye, M. (2014) Application research of ECOTECT in residential estate
planning. Energy and buildings, 72, pp. 195-202.
3 Cummings, J.R. (2016) Effect of fund size on the performance of Australian superannuation
funds. Accounting & Finance, 56(3), pp. 695-725.

TEP 12
debt repayment percentage, use of savings for paying off larger debts, making negotiation with
financial institutions for obtaining loan at lower interest rate etc.
The third financial strategy that can be recommended to Herbert and Dorothy is the investment
in insurance plans. Insurance policy can be purchased by both Herbert and Dorothy for securing
the life of partner as well as life of nominee in case accidental or illness death of the insurance
holder. At the same time, rate of return is also very high for making investment in the insurance
policies as compared other normal investment plans of banks and financial institutions. This
policy is also recommended to the both Herbert and Dorothy, because the tax benefits are
available on the amount paid as insurance premium. In other words, the individuals can claim for
tax deduction from the government and tax regulation bodies in Australia for the insurance
premium paid for income protection under individual policy4. Tax benefits are available on
different types of policies like income protection insurance, life cover insurance, total and
permanent disability insurance, etc. There are different benefits of investing in insurance policies
like keeping pace with the inflation, cover suspension benefits, waiver of premium benefits,
financial planning benefit, terminal illness as well as death benefits etc.
Specific Suggestions: It can be suggested to Herbert and Dorothy to invest in life insurance plan,
because this investment will help both of them to enjoy the tax benefits. It is so because the tax
benefits are offered by the government of Australia over insurance premiums paid. At the same
time, return on life insurance plan is also very high at the time of maturity. Another benefit of
life insurance plan is that it provides cover from accidental death or illness death of one of the
life partner to the nominee. It means the economic stability can be ensured in case of unfortunate
4 Baker, T. and Logue, K.D. (2017) Insurance law and policy: cases and materials. UK: Wolters
Kluwer Law & Business.

TEP 13
or sudden death of one of the partners. In addition to this, the superannuation fund is also an
attractive financial plan for both Herbert and Dorothy for ensuring economic security of their
lives at the old age stage. At the same time, they will also be able to avail tax rebate benefits
available by Australian Government on this plan.
Conclusion
On the basis of above calculations and analysis, it can be concluded that Australian government
has set different income slabs for charging the tax charges from its residents. It does not charge
tax from individuals the income level of whom is below the level of $18,200. At the same time,
maximum tax lab is 45% for income above the level of $180,000. From the analysis of given
scenario, it is observed that there will be not benefit of merger of their businesses in terms of tax
liability resulting from merger activity. The after merger tax liability of the companies is very
higher as compared to original tax liability before merger. There are different financial planning
strategies that can be recommended to Herbert and Dorothy for better financial position such as
estate planning, investment in superannuation funds, investment in the insurance policies like
income protection plan, life cover plan etc and the focus on debt reduction strategies. This will
improve the overall business position and financial position of Herbert and Dorothy.

TEP 14
References
Aus Gov (2018) Medicare levy. [Online]. Available at:
https://www.ato.gov.au/Individuals/Medicare-levy/ (Accessed: 24 September 2018).
Australian Gov (2018) Individual income tax rates: 2018-19. [Online]. Available at:
https://www.ato.gov.au/rates/individual-income-tax-rates/ (Accessed: 24 September 2018).
Baker, T. and Logue, K.D. (2017) Insurance law and policy: cases and materials. UK: Wolters
Kluwer Law & Business.
Cummings, J.R. (2016) Effect of fund size on the performance of Australian superannuation
funds. Accounting & Finance, 56(3), pp. 695-725.
Greve, H.R. and Man Zhang, C. (2017) Institutional logics and power sources: Merger and
acquisition decisions. Academy of Management Journal, 60(2), pp. 671-694.
Yang, L., He, B.J. and Ye, M. (2014) Application research of ECOTECT in residential estate
planning. Energy and buildings, 72, pp. 195-202.