Marking Rubric Flyer FIN200 – Corporate Financial Management – T118 – Individual Assignment – Due Week 10 - Assessment Marking Rubric Student’s Name...

FINANCIAL ACCOUNTING ASSIGNMENT
    TABLE OF CONTENTS
     
    Description
    Page no.
    1.0 Introduction
    3
    2.0 Background of the study
    3
    2.1 The tertiary sector and its importance
    3
    2.2 Superannuation- Meaning and Importance
    4
    2.3 The Defined Benefit Plan
    5
    2.4 Investment Choice Plan
    5
    3.0 Defined Benefit Plan versus Investment Choice Plan- Factors to be considered while making a choice
    6
    4.0 Role of time value of money in choosing between DB and IC plans
    8
    5.0 Tax Implications
    9
    6.0 Recommendations
    9
    7.0 Conclusion
    10
    References
    10
    Appendices
    12
1.0 Introduction
It is rightly said that savings, investing and remaining invested are the primary keys to achieve success in one’s financial goals. It would be unrealistic to plan investments at the hour of retirement as it is rather the time to reap the benefits of one’s economic decisions (Bailey, W., et al, 2011). This report proposes to study the superannuation scheme of Australia by understanding its two different variants, namely, the definite benefit plan and the investment choice plan. While the former enjoys the advantage of being a secure investment, which is built over years, the latter generates extraordinary returns in the form of lump sum payments.
As the services sector is the major contributor to the GDP and hence the economy of any nation, the various factors to be considered by the employees of this sector while making a choice between the definite benefit plan and the investment choice plan of the superannuation scheme is discussed in this report. Further, the role played by time value of money and the tax implications involved in these investments is also highlighted in this report. The report also proposes to provide recommendations to the members of the scheme to make an optimal choice depending upon their age and remaining years of service.
2.0 Background of the study
2.1 The tertiary sector and its importance
The three-sector theory classifies an economy into three sectors, namely the primary sector that is engaged in the production of raw materials, the secondary sector that is engaged in the manufacture of goods and finally the tertiary sector, commonly called the services sector that is engaged in delivering services rather than end products. The services sector includes industries like telecommunications, mass media, hospitality and tourism, information technology, retail sales, education and financial management services. Statistics points out that in Australia, while agriculture and manufacturing industries contributes about 2.61% and 24.33% respectively to the national GDP, the services sector contributes about 73.07% to the same (Australian Industry Report, 2016).
2.2 Superannuation- Meaning and Importance
Commonly referred to as organisational pension plans these superannuation programs are tax effective means of savings, till retirement or withdrawal. Contributions to this monetary fund are made both by the employer and the potential employee, but are paid out to the employee, only when he becomes qualified or eligible to receive the same. Upon reaching a prescribed age or owing to infirmity, the employee qualifies to receive the benefits of the fund (Bateman, H., et al., 2016).
Despite being a retirement fund, this program sees to it that the benefits are rendered to the qualifying employee not based upon the performance of the fund, but based upon a set schedule. Looking into the benefits rendered by this program, it could be seen that both the government and the Australian households have benefitted out of this program. While it has reduced the cost of Age pension to the government, compulsory investment in this program by normal households has transformed the household balance sheet altogether. A balance sheet that contained only investments in domestic residential real estate and cash, now boasts varied investments in domestic and overseas assets, equities and commercial properties, thanks to the superannuation program that has made a major contribution to the saving rate in these households. Australian treasury estimates rightly point out that the superannuation system contributes about 1.5 to 2% points to the national savings rate that is likely to grow to 3% points by 2050 (Superannuation and the economy, 2015).
The fact that the value of superannuation assets reached 1.4 trillion AUD by 2012 equivalent to 94.5% of the country’s GDP and is expected to grow by 3.7% every year shows the prominent role played by the superannuation funds in the Australian economy. (Refer chart 1 in Appendices).
The superannuation program mostly comes with two variants in Australia – the defined benefit plan and the defined contribution plan.
2.3 The defined benefit plan
This pension plan guarantees the employee a certain amount of payment for life time upon his retirement. Depending upon the employee’s salary and his total years of membership in this plan and based upon a fixed...