UNIVERSITY OF THE FREE STATE

POST-GRADUATE DIPLOMA IN FINANCIAL PLANNING

CORPORATE FINANCIAL PLANNING (LFPC5800)

06 NOVEMBER 2017

Time 09:00 – 13:15 (4 hours and 15 minutes) Total marks: 100

MEMORANDUM
Section A1 – Employee Benefits

1. On the death of Mr Jones, a deceased member of the New Age Pension Fund,
a benefit of about R1 million becomes payable to his dependants. There are no
liquid assets available from Mr Jones’s estate. It appears that Mr Jones is
survived by his spouse, Mrs Jones, and two minor children only, but the trustees
require further investigation to satisfy themselves that he left no other
dependants. Pending the investigation by the board, Mrs Jones requests a loan
from the employer, to cover the funeral expenses and the employer requests
assistance from the New Age Pension Fund. The following options are available
to assist Mrs Jones:

a. The employer may grant a loan to Mrs Jones, provided she pledges the
benefit due by the New Age Pension Fund, as security for the loan. Before
payment to the beneficiaries, the New Age Pension Fund may deduct the
outstanding balance of the loan from the benefit, and pay this over to the
employer;

b. The New Age Pension Fund may grant an advance on the benefit and pay
the funeral expenses directly to the funeral parlour, before payment of the
balance to the beneficiaries;

c. The New Age Pension Fund may grant an advance on the estimated
portion of the benefit that will be awarded to Mrs Jones, and pay this
amount to her. This amount will be deducted from the benefit payable to
Mrs Jones, before payment to her;

d. The New Age Pension Fund is not able to assist and Mrs Jones should
consider taking out a loan with a bank.

(2)
Correct Answer: (c)
Motivation for correct answer: It is certain that Mrs Jones will qualify for a portion of
the benefit and at the very least, for

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(a) is incorrect, because a loan for funeral expenses is not permissible as a
deduction in terms of section 37D of the Pension Funds Act;
(b) is incorrect, because in terms of section 37A(4), payment may only be made to a
third party if a beneficiary is unable to open a South African bank account;
(d) is incorrect, because option (c) is available.

Reference for correct answer: S37A and 37D.

2. The following transfers will require approval by the Registrar in terms of section
14 of the Pension Funds Act: (2)

a. Transfer of the accrued values held by the ABC Pension Fund in respect of
existing pensioners, who receive pensions from the fund, to an insurer, to purchase
annuities in their names;

b. Transfer of the accrued values held by the ABC Pension Fund in respect of
existing pensioners, who receive pensions from the fund, to an insurer, to purchase
annuities in the name of the ABC Pension Fund;

c. Transfer of the administration of the ABC Pension Fund, a privately administered

fund, from the administration of Long Life Benefit Administrators to New Venture
Benefit Administrators;

d. Transfer of a member’s fund share on retirement from the ABC Pension Fund, to
purchase an annuity in the name of the member from an insurer;

e. All of the above.

Correct Answer: (a), because such a transfer involves the transfers of the assets and
liabilities of the ABC Pension Fund to another entity;
(b) is incorrect, because the liability in respect of the pensioners will remain within
the fund;
(c) is incorrect, because the assets and liabilities of the ABC Pension Fund remain
within the fund. It is only the benefit administrator that changes;
(d) is incorrect, because the transfer amounts to the payment and settlement of a
retirement benefit.
Motivation for correct answer:

Section 14 of the Pension Funds Act, read together with PF Directive 6 of 2011.

3. XYZ Corporation is about to retrench employees. They have given notice to the
employees and to the XYZ Pension Fund, of which the employees are members.
They have also requested you to advise these members on the most tax efficient
manner, most suitable to the needs of each individual, to withdraw their benefits from
the fund. The employees are the following:

3.1 Mr Smith: aged 50 years, a senior manager in the finance department of XYZ
Corporation. His benefit from the XYZ Pension Fund amounts to R600, 000. Mr

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Smith has already accepted an offer for a similar position at ABC Investments and
will be joining the ABC Provident Fund;

3.2 Mrs Dlamini, aged 60 years, the legal advisor of XYZ Corporation. Her benefit
from the XYZ Pension Fund amounts to R750, 000. Mrs Dlamini is considering
setting up her own law firm, for which she will require starting capital of about
R450, 000;

3.3 Miss Green, aged 30 years, the personal assistance of Mrs Dlamini. Her benefit
from the XYZ Pension Fund amounts to R300, 000 and she is still looking for
employment. If she does not find employment soon, she may need to have access to
the benefit payable from the XYZ Pension Fund.

Your advice in respect of the three members should be as follows: (2)

a. Mr Smith should transfer his benefit to the ABC Provident Fund, Mrs Dlamini
should take R500, 000 of her benefit in cash and transfer the balance to the XYZ
Pension Preservation Fund and Miss Green should transfer her benefit to the XYZ
Pension Preservation Fund;
b. Mr Smith should transfer his benefit to the XYZ Pension Preservation Fund, Mrs
Dlamini should take R500, 000 of her benefit in cash and transfer the balance to the
XYZ Pension Preservation Fund and Miss Green should take her benefit in cash
from the XYZ Pension Fund;
c. Mr Smith and Mrs Dlamini should transfer their benefits to the XYZ Pension
Preservation Fund and Miss Green should take her benefit in cash from the XYZ
Pension Fund;
d. Mr Smith, Mrs Dlamini and Miss Green should all transfer their benefits to the XYZ
Pension Preservation Fund.

Correct Answer: (b)

Motivation for correct answer:
(a) is incorrect, because Mr Smith’s benefit from the XYZ Pension Fund will be taxed
if transferred to the ABC Provident Fund and Miss Green’s benefit will lose its status
as a retirement lump sum benefit when transferred to a preservation fund and will
become subject to the tax tables applicable to retirement lump sum withdrawal
benefits.
(c) is incorrect, because Miss Green’s benefit will lose its status as a retirement lump
sum benefit when transferred to a preservation fund and will become subject to the
tax tables applicable to retirement lump sum withdrawal benefits.
(d) is incorrect, because the severance benefits of all three members will lose their
status as retirement lump sum benefits when transferred to a preservation fund and
will become subject to the tax tables applicable to retirement lump sum withdrawal
benefits.

Reference for correct answer: Definition of “retirement lump sum benefit”, “retirement
lump sum withdrawal benefit” in the Income Tax Act, paragraph 6 of the Second
Schedule to the Income Tax Act and the withdrawal tax tables.

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4. Choose the options that correctly describe the types of funds referred to:

a. A provident preservation fund is a fund established for the benefit of employees

in service of an employer, from which the full benefit may be paid in cash to the
members on retirement;
b. A pension preservation fund is a fund established for the preservation of benefits
payable from another pension fund on termination of service of the member under the
pension fund or on liquidation of the pension fund and from which a maximum of one-
third of the member’s retirement benefit may be paid to him in cash on retirement and
the balance must be paid as a pension;
c. A provident fund is a fund established for the benefit of employees in service of an
employer, the rules of which must specify that the retirement benefit may be paid fully
in cash and that the fund may not receive transfers from a pension fund;
d. An umbrella pension fund is a retirement annuity fund established for employees
in service of different employers and from which at least two-thirds of the retirement
benefit must be paid as a pension
(2)
Correct Answer: (b)
Motivation for correct answer:
(a) is incorrect, because no employer-employee relationship is required under a
preservation fund;
(c) is incorrect, because although a transfer from a pension to a provident fund will
be taxable, it is permissible;
(d) is incorrect, because an umbrella pension fund is an occupational pension fund
and not a retirement annuity fund.

Reference for correct answer: definitions of provident preservation fund, pension

preservation fund, provident fund and pension fund in the Income Tax Act, read
together with paragraph 6 of the Second Schedule to the Income Tax Act.

5. Mr Donald, an employee of Trump Enterprises, dies at the age of 30 years. As a

member of the Trump Retirement Fund, a benefit equal to R1 million becomes
payable on his death. Mr Donald was unmarried and left no children on his death.
After a comprehensive investigation, the trustees of the Trump Retirement Fund
concluded that Mr Donald did not support any person financially and that he was
under no legal obligation to support any person financially. Mr Donald had, however,
nominated his best friend, Mr Smart (who is unemployed and who has no income), to
receive an amount of R500, 000 of the benefit payable from the Trump Retirement
Fund on his death. The debts in Mr Trump’s estate, exceed the assets in the estate,
by an amount of R250, 000.

a. The Trump Retirement Fund must pay R1 million to Mr Trump’s friend, Mr Smart;
b. The Trump Retirement Fund must pay R1 million to Mr Trump’s estate;
c. The Trump Retirement Fund must pay R500, 000 of the death benefit to Mr
Trump’s friend, Mr Smart, and R500, 000 of the death benefit to Mr Trump’s estate;
d. The Trump Retirement Fund must pay R250, 000 of the death benefit to Mr
Trump’s estate and the balance of R750, 000 to Mr Trump’s friend, Mr Smart;
e. None of the above.
(2)
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Correct Answer: (c).
Motivation for correct answer: The Trump Retirement Fund must first establish
whether the liabilities in the estate exceed the assets in the estate and first settle the
shortfall, before payment of the balance to nominated beneficiaries who are not
dependants of the member. However, the fund may only pay the amount specified in
the beneficiary nomination form, to non-dependent nominated beneficiaries.

Reference for correct answer: Section 37C of the Pension Funds Act, read together
with definition of “dependant” in the Pension Funds Act.

6. The Alpha Retirement Fund is presented with the following divorce orders and the
trustees of the fund request your advice as to whether they may pay the amounts
claimed from the respective non-member spouses:

6.1 Order 1: Claim in respect of member X, who became a member on 1 October

2016: issued by the Court on 1 March 2017, in terms of which the former spouse of
member X, who left service on 28 February 2017, but who has not yet been paid her
benefit from the fund, is awarded 50% of the withdrawal benefit payable to member X;

6.2 Order 2: Claim in respect of member Y, who became a member on 1 October

2014: issued by the Court on 1 February 2017, in terms of which the former spouse of
member Y is awarded 100% of member Y’s minimum individual reserve in the fund,
net of the tax payable on that amount;

6.3 Order 3: Claim in respect of member Z who became a member on 1 January 2015:
issued by the Court on 1 March 2007, in terms of which the former spouse of member
Z is awarded 50% of member Z’s minimum individual reserve in the fund, net of the
tax payable on that amount;

The Alpha Retirement Fund may give effect to the following orders: (2)

a. Order 1 and Order 2.

b. Order 2 and Order 3;
c. Order 1 and Order 3;
d. All of the above;
e. None of the above.

Correct Answer: (e)

Motivation for correct answer: The fund may only deduct a portion of the member’s
“pension interest” calculated as at the date of divorce as the benefit that the member
would have become entitled to, had he/she resigned from service on that date, and
the tax on that amount is payable by the spouse.

Reference for correct answer: Definition of “pension interest” in the Divorce Act,
Second Schedule to the Income Tax Act.

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7. The ZZZ Retirement Fund has no active members and the board of management
wishes to terminate the fund, but the board is unsure about how to expedite the
termination of the fund whilst it holds assets, to the value of about R3 million, in respect
of the following:

7.1 150 withdrawal benefits that became payable more than 12 months, but less than
24 months ago, in respect of which the fund is unable to trace the members;

7.2 50 withdrawal benefits that became payable more than 24 months ago, in respect
of which the fund is unable to trace the members;

7.3 1 death benefit, notified to the fund 6 months ago, in respect of a member who
passed away 12 months ago, but in respect of whom no beneficiaries can be
traced;

You should advise the board of management as follows: (2)

a. Transfer the unclaimed withdrawal benefits listed in item 7.2 to an unclaimed

benefits fund, but the board must wait 12 months in respect of the benefits in item 7.1
and 18 months in respect of the benefit in item 7.3, before it will be able to transfer
those assets to an unclaimed benefit fund and terminate the fund;

b. Transfer the unclaimed withdrawal benefits listed in items 7.1 and 7.2 to an
unclaimed benefits fund, but the board must wait 12 months in respect of the benefit
in item 7.3, before it will be able to transfer those assets to an unclaimed benefit fund
and terminate the fund;

c. Transfer the unclaimed withdrawal benefits listed in items 7.1 and 7.2 to an
unclaimed benefits fund, but the board must wait 18 months in respect of the benefit
in item 7.3, before it will be able to transfer those assets to an unclaimed benefit fund
and terminate the fund;

d. Appoint a liquidator, to liquidate the fund and to transfer all of the above to an
unclaimed benefits fund on liquidation;

e. None of the above.

Correct Answer: (d)

Reference for correct answer: Definition of “unclaimed benefit” in the Pension Funds
Act.

8. In terms of the rules of the Blue Moon Provident Fund, the board of management of
the fund must have at least 8 trustees, of whom 4 must be elected by the members
and 4 must be appointed by Blue Moon Enterprises, the principal employer in the fund.
The board has identified the need for an independent expert in pensions matters to
serve on the board. In order to arrange for such an independent trustee, within the
parameters of the Pension Funds Act, the board could consider the following: (2)
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a. Increase the number of board members to 9, to have 50% elected by the members,
50% appointed by the employer, and one independent trustee appointed by the board;
b. Allow for the members to elect 4 trustees, one of whom must include an independent
trustee nominated by the members;
c. Allow for Blue Moon Enterprises to appoint 4 trustees, one of whom must include
an independent trustee nominated by the employer;
d. Options (b) and (c);
e. Options (a) and (c);
f. None of the above.

Correct Answer: (d)

Motivation for correct answer: At least 50% of the board must be elected by the
members. However, it is not required that an elected trustee must be a member of
the fund.

Reference for correct answer: Section 7A of the Pension Funds Act.

9. The Simple Tax Pension Fund is a defined contribution fund. The fund may apply
for valuation exemption under the following circumstances: (2)

i. The fund maintains an error processing account, which in terms of the rules can
never have a negative balance, and on retirement of a member, an annuity is
purchased from a registered insurer in the name of the member;
ii. The fund maintains a risk reserve account to which the employer contribution in
respect of risk benefit premiums are allocated and to which risk insurance premiums
are debited and paid to the insurer. On the death of a member, the proceeds of the
risk benefit policy is paid to this account and the amount received is used to purchase
an annuity from a registered insurer in the name of each beneficiary, alternatively, the
benefit is paid in cash to the beneficiary;
iii. The fund maintains a pensioner account from which monthly pensions are paid to
pensioners;
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. None of the above.

Correct Answer: (d)

Motivation for correct answer: See Board Notice 59 of 2014.

10 The New Beginnings Pension Fund, a fund with 600 members and 100
pensioners, requests your assistance with developing its investment strategy and
specifically asks whether the following proposals made by certain of its board
members are permissible:

10.1 To invest 15% of its assets in shares in Great Enterprises (Pty) Ltd, a listed
company and issuer market capitalization of R10 billion;
10.2 To hold the assets representing pensioner liabilities (about 30% of total
assets) in a separate bank account with ABC Bank;
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 10.3 To grant housing loans to the 300 members who have requested this (about
40% of total assets) in accordance with the provisions of section 19(5) of the
Pension Funds Act;
10.4 To take out a loan with ABC Bank, for an amount equal to 30% of the
projected income of the fund over the next 6 months, in order to provide sufficient
liquidity to meet its operational requirements;

You should advise the fund that the following is NOT permissible:
(2)
a. 10.1 and 10.4
b.10.2 and 10.3;
c. 10.1 and 10.2;
d. 10.3 and 10.4;
e. All of the above.

Correct Answer: (c)

Motivation for correct answer:
10.1 is incorrect, because the maximum permissible exposure to shares in a listed
company, issuer market capitalization between R2 billion and R20 billion, is 10%.
10.2 is incorrect, because no more than 25% of the assets of a fund may be held
with one bank.
10.3 is permissible: Item 7 of Table 1 in Regulation 28;
10.4 is permissible: Paragraph 5(b) of Regulation 28.

Reference for correct answer:

Regulation 28 of the Pension Funds Act

Section A2 – Health Benefits

11. Choose the incorrect option regarding membership that was denied or
terminated due to fraud or non-disclosure: (2)
a. A Medical Scheme will not be able to deny membership to an applicant whose
previous membership of that scheme was terminated because of fraud or non-
disclosure.
b. Re-enrolment may be denied for up to three years under such conditions (fraud or
non-disclosure), provided that it is stated in the scheme rules.
c. Contributions must be paid back to the member and all claims paid by the scheme
on the member’s behalf must be reversed.
d. A member under these circumstances must be placed in the same position they
would have been in had they never joined the scheme.
e. All of the above
f. None of the above
Correct Answer: b
Motivation for correct answer: DHMS had sought to amend its rules in 2014 to be
able to deny re-enrolment for up to three years under such conditions, but wanted its
rules to reflect that it would re-enrol you if it was satisfied there was no intention on
your part to commit the act for which your membership was terminated. It argued

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that allowing members whose membership was terminated to enrol again the very
next day is, in effect, no sanction at all.

The Registrar of the Council for Medical Schemes found DHMS’s application to
amend its rules to be inconsistent with the Medical Schemes Act, which states that
anyone who applies to join an open scheme may not be denied membership. (DHMS
is an open scheme.)

Reference for correct answer: PERSONAL FINANCE / 26 November 2016,

Laura du Preez.

12. Linda is 34 years old and is healthy. She applies to ABC Medical Scheme.
She has had a hospital cash plan since the age of 21 with Easy Insure.
Choose the correct option regarding Linda’s conditions of membership of the ABC
Medical Scheme: (2)
a. A 3 month general waiting period and a possible 12 month condition specific
waiting period may apply. Late joiner penalty of 5% on contribution will be levied.
b. A 12 month condition specific waiting period may apply on pre-existing conditions.
No late joiner penalty will be levied on the contribution.
c. Linda has not turned 35 yet, therefore no waiting periods or late joiner penalties
will apply.
d. Linda will have to resign from Easy Insure before the ABC membership will
commence.
e. None of the above

Correct Answer: b
Motivation for correct answer:
a) No Ljp on persons younger the 35
b) A 12 month pre existing condition waiting period may apply
c) Age 35 is applicable to ljp not waiting period
d) Hospital cash plan is insurance and not medical scheme therefore
membership to Easy Insure is still allowed pending the demarcation ruling
Reference for correct answer: Section 11.5 South African Financial planning
Handbook. Section 29 A (1)(2)(3) of the Medical Schemes act

13. John is a member of WOW medical scheme. He is currently on a low income

option. In October 2017 he was diagnosed with renal failure and needs a kidney
transplant urgently. His current option does not cover organ transplants, however,
another option (the comprehensive option) does cover transplants. . In November
2017, during the window period of WOW medical scheme, he gives notice of his
intention to upgrade to the comprehensive option.
Choose the correct option: (2)
a. John will be allowed to upgrade but will be subject to 12 month condition specific
waiting period.
b. John will be denied the upgrade. It is anti-selection.
c. John will be covered under the comprehensive plan with effect 1 January 2017.
d. John will be covered under the comprehensive plan with effect 1 December 2017.
e. None of the above

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Correct Answer: c
Motivation for correct answer: No waiting period if a member changes options within
the same scheme, members have the right to move between benefit options once a
year provided they give prior notice as per scheme rules. The cover from the chosen
new benefit option for the year will commence 1 January each year.

Reference for correct answer: Section 29A and Regulation 4 of the Act.
South African Financial Planning Handbook. pg.295

14. Harry is 42 years old. He was a member of his parents’ medical scheme until the
age of 22, and then had no medical cover for 8 years. At 30, he took out his own
medical aid for 5 years until moving overseas, where he had medical cover that
lasted for 8 years. Upon returning to South Africa, he applied to become a member
of ABC medical scheme. Choose the correct option: (2)
a. Harry will pay a 5% late joiner penalty due to a 1 year gap in creditable coverage.
b. Harry will pay a 5% late joiner penalty due to a 2 year gap in creditable coverage.
c. Harry will pay a 25% late joiner penalty as he had 5 years creditable coverage.
d. Harry will not pay a late joiner penalty, he has sufficient creditable coverage.
e. None of the above
Correct Answer: a
Motivation for correct answer:
a) 42- (35+6) = 1 ; 22-21= 1 on parents medical; 5years on own medical = 6
b) Error, not taking cover on parents medical in account
c) Error, not doing the A= B-(35+C) calculation only using brackets 1-4; 5-14
years
d) Error, Medical coverage overseas is not creditable coverage.

Reference for correct answer: Regulation 11 of the Act. Section 11.5.5 South African
Financial planning Handbook.

15. The Thuli family is expecting a baby boy. He is born in June 2017. 4 months later
he has repeated ear infections and needs grommets. While waiting for pre-
authorisation from the medical scheme they realised they neglected to add him to
the medical scheme.
Choose the correct option: (2)
a. The scheme may refuse to add him to the membership.
b. A 3 month general waiting period may apply and a 12 condition specific waiting
period on ear related treatment may also apply.
c. The medical scheme may not impose waiting periods on a baby born into the
membership; the baby will be covered under the mother for the first 12 months.
d. The Scheme may make an exception to back date the membership provided that
the arrears contributions are received. There is however no obligation to do so.
e. b & d
f. None of the above
Correct Answer: e
Motivation for correct answer:
a. No membership may be refused, only restrictions to membership may apply.

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 b. Children born into membership will be covered under the mother for the first
90 days. After 90 days it will be a break in membership and waiting periods
may apply.
c. As above
d. Exceptions have been made by schemes in these cases but have no
obligation to do so.

Reference for correct answer: South African Financial Planning Handbook 11.5.4.2/3

16. Ms Dear belongs to XYZ Medical Scheme. She has been a member since
January 2001. Her mother is suffering from high cholesterol and osteoporosis, and
has never belonged to a medical Scheme. She wants to add her mother as a
dependant on her medical scheme. Choose the correct statement as part of your
advice to Ms Dear. (2)

i) The mother can be added with no waiting period as Ms Dear belonged to the
scheme without a break since 2001.
ii) The mother can be added but with a 3 month general waiting period and a 12
month condition specific waiting period and no prescribed minimum benefits
cover will apply during the waiting period.
iii) The mother will have a 3 month waiting period after which she can claim for
her chronic cholesterol and osteoporosis medication.
iv) The mother will have to reside with Ms Dear in order to qualify as a dependant
v) Ms Dear will have to provide documentation to justify that dependence is
necessary in order to benefit from the tax credit from SARS.

a. ii and v
b. iii, iv and v
c. iii and v
d. i
e. None of the above

Correct Answer: a
Motivation for correct answer: The mother has no previous membership therefore the
general waiting period will apply with no PMB benefits and due to pre-existing
illnesses the 12month condition specific waiting period will also apply.
SARS requires proof of income to show dependency in order to benefit from tax
credits.

Reference for correct answer: South African Financial Planning Handbook 11.5.4.2
and 11.5.4.3; Sec 29 of the medical schemes act and Section 18 Income tax act

17. A member applied to move his medical scheme membership from ABC Medical
Scheme, where he was a member for 20 years to GREATmed. GREATmed
requested a medical report on his hypertension and an emotional wellbeing
questionnaire before accepting him. Choose the correct statement: (2)

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a. Medical Schemes may specify that an applicant must submit a medical report so
that the scheme knows which conditions to apply waiting periods to.
b. The member will be liable for the cost of these tests or examinations as requested
by the scheme as this is a voluntary move to the scheme.
c. The medical scheme is obliged to pay for any tests according to the Medical
Schemes Act.
d. These requirements are a violation of the applicant’s right to open enrolment and
should be brought as a complaint before the Council for Medical Scheme.
e. a and c
f. None of the above

Correct Answer: e
Motivation for correct answer: In terms of sec29A(7), a medical scheme can specify
that an applicant must submit a medical report so that the scheme knows what
conditions to apply waiting periods to, but in terms of regulation 12, the scheme must
pay the cost of any medical tests or examinations required.

Reference for correct answer: Section 29A (7) of the Act.

South African Financial Planning Handbook 11.5.4.3

18. An employer wants to move the company’s medical scheme to CLOSEDmed, a

restricted medical scheme. He wants your advice.
Choose the correct statement?
a. He can move to CLOSEDmed at any time without any waiting periods as they are
a company with more than 50 members.
b. He can move to CLOSEDmed but only at the beginning of the scheme’s financial
year if he wants to avoid underwriting.
c. He can move to CLOSEDmed but only at the end of the company’s financial year
to avoid tax implications.
d. The continuation members will be subject to restrictions if they move as they are
no longer active employees.
e. None of the above.

Correct Answer: b
Motivation for correct answer:
An employer changing the medical scheme to another can do so without waiting
periods, provided that the move occur at the beginning of the scheme’s financial
year. (Medical scheme financial year is Jan-Dec)

Reference for correct answer: Section 29A(6)(b); Section 29(1)(u)

The South African Financial planning Handbook 11.5.3

19. Choose the correct statement relating to the amendment of the 2016 Regulations
under the Short-term Insurance Act.
a. Existing hospital cash plan policies sold by short term insurers will have until
January 1, 2018 to comply.

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b. Once the low-cost medical scheme benefit option is in place, providers of primary
healthcare plans will be expected to register under a medical scheme.
c. Top-up cover offered by insurers that pays out when you exhaust your medical
scheme benefit or annual limits will not be able to continue after 1 January 2018.
d. The regulations provide for a maximum annual gap cover benefits of R150 000.
e. All of the above
f. None of the above

Correct Answer: e
Motivation for correct answer: All the statements are correct.

Reference for correct answer: Government Gazette no. 40515; 23 December 2017.

20. Choose the correct option: (2)

a. A member will be able to deduct from the tax payable, a medical tax credit of
R303 a month for himself and all adult dependants added on the medical scheme.
b. A main member will be allowed a deduction of R303 a month from his taxable
income as a medical tax credit.
c. A deductible tax credit of R192 per child dependant is allowed.
d. A deductible tax credit of R204 a month is allowed from the second dependent.
onward.
e. a &d
f. None of the above

Correct Answer: d
Motivation for correct answer:
a. The deduction allowed is for the member and the first dependent not all adult
dependents on the scheme
b. Deduction is allowed from tax payable not taxable income
c. Not R192 but R204 and not only for children but from the second dependent
onward that can be applicable to adult dependents.
d. A deductible tax credit of R204 a month is allowed from the second dependent
onward is correct.
e. “a” is incorrect

Reference for correct answer: Medical tax credit up only six percent
PERSONAL FINANCE / 25 February 2017. Laura du Preez

Section A3 – Business Entities, Business Insurance and Financial

Statements
21. A2Z (Pty) Ltd took out a policy on the life of one of their employees, Masey.
Masey paid the premiums of R12 000 per annum for 7 years. Masey passed away at
the end of 7 years after a short illness. The policy proceeds of R125 000 was paid
directly into Masey’s estate. Calculate the amount that is deemed to be property in
her estate. (2)
a. R125 000

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b. R24 273
c. R0
d. R41 000
e. None of the above
Correct Answer: a
Motivation for correct answer: For the policy proceeds not to be deemed property in
Masey’s estate she must not have paid the premiums of the policy and the policy
proceeds must not have paid directly into her estate. She paid the full premium, thus
the proceeds – (premiums + 6%) cannot be applied and thus the full amount is
dutiable.

Reference for correct answer: SAFP Handbook, P 1025

22. Making Stuff bought new manufacturing equipment to the value of R375 000.
Using the reducing balance method calculate the value of the equipment after 3
years assuming an 8% depreciation rate per annum.
(2)
a. R285 000
b. R375 000
c. R292 008
d. R125 000
e. None of the above
Correct Answer: c
Motivation for correct answer: Reducing balance depreciation method calculates the
annual depreciation charge on the value of the asset. This value is net of
depreciation charged in the prior year.

Depreciation charge in year 1 = R375 000 x 8% = R30 000

Second year depreciation charge = (R375 000 – R30 000) x 8% = R27 600
Third year depreciation charge = (R375 000 – R30 0000 – R27 600) x 8% = R25 392
Value of equipment in after 3 years = (R375 000 – R30 000 – R27 600 – R25 392) =
R292 008

Reference for correct answer: SAFP Handbook, P 1048

23. Ella, Bella, Nella and Stella are shareholders in Umbrella (Pty) Ltd. Their
shareholding is as follows:
Ella = 25%, Bella = 15%, Nella = 40% and Stella = 20%. The value of the business is
R2 750 000. They decide to effect policies on multiple lives, in other words each
shareholder owns one policy and pays one premium, but the lives of the other
shareholders are covered with the policy.

Calculate the cover amount per shareholder that Nella must effect on the lives of
Ella, Bella and Stella, keeping in mind that Nella has a 40% shareholding (rounded
off).

Ella Bella Stella

a. R229 000 R137 500 R183 000

14
 b. R382 000 R194 000 R275 000
c. R172 000 R62 000 R110 000
d. R0 R0 R0
e. None of the above None of the above None of the above

(2)
Correct Answer: B / E
Motivation for correct answer:

Nella = 40% share = R2 750 000 x 40% = R1 100 000

Ella = 25% (R687 500) 40 / 75 x R687 500 = R367 000
Bella = 15% (R412 500) 40 / 85 x R412 000 = R194 000
Stella = 20% (R550 000) 40 / 80 x R550 000 = R275 000

Reference for correct answer: SAFP Handbook, P 1030

24. Brian is a majority shareholder in Nuke (Pty) Ltd. The company manufactures
parts for electronics and small appliances. He holds 65% of the shares in the
company. Brian asked you to calculate the value of the business as he would like to
sell his share of the business. What would be the most suitable method of valuing
the business?
(2)
a. Dividend Yield method
b. Earnings Yield method
c. Super Profits method
d. Intrinsic Value method
e. None of the above
Correct Answer: C
Motivation for correct answer: This method is most suited valuing a majority holding
in a business entity. This method takes asset value as well as expected income into
account

Reference for correct answer: Premiums and Problems 2016, D63

25. With reference to question 24 and using the valuation method most applicable,
calculate the value of Nuke (Pty) Ltd using the following information.
Total capital employed R8 750 000
Total net assets R7 500 000
Expected annual income per year from this R1 250 000
capital – estimated for 5 years
Fair rate of return 12%

(2)
a. R7 500 000
b. R11 670 000
c. Not enough information to calculate

15
d. R8 221 000
e. None of the above
Correct Answer: D
Motivation for correct answer: Calculation using Super Profits method

Total capital employed R8 750 000

Total net assets R7 500 000
Expected annual income per year from this R1 250 000
capital – estimated for 5 years
Fair rate of return 12%
Projected income from capital employed R1 050 000
R8 750 000 x 12%
Super profits per year R200 000
R1 250 000 – R1 050 000
Discounted value of super profits of 12% R721 000
over 5 years to present value
R200 000 x 3.61
Total value of the business – total net R8 221 000
assets + discounted value of super profits
R7 500 000 + R721 000

Reference for correct answer: Premiums and Problems 2016, D63

26. Legal Eagles is a small partnership with 2 partners and has been in business
since 2014. In 2017/2018 the income from business activities was R485 000.
Calculate the tax payable for 2017/2018 by this partnership.
(2)
a. R45 500
b. R135 800
c. The business does not qualify as a micro business and partners will be taxed
individually.
d. R33 950
e. None of the above
Correct Answer: C
Motivation for correct answer: Even though Legal Eagles is a small business run by
individuals and has a taxable income below R1mil, they do not qualify as they are a
business that renders “professional services”. Professional services businesses don’t
qualify as a micro business

Reference for correct answer: SAFP Handbook, P 681

27. Family Affair (Pty) Ltd is a company owned by the Smith family and John Smith
has an 80% shareholding in the company. Due to the key role John Smith plays in

16
the managing of the business, the company decided to take out a pure risk policy on
his life. The premiums payable by the company qualify for a tax deduction in terms of
section 11 (w)(ii). The sum assured is R5 350 000. Calculate the estate duty payable
based on the current sum assured. Accept that the dutiable estate exceeds
R3 500 000.
(2)
a. R1 070 000
b. R214 000
c. This policy is not deemed property in John Smith’s estate and therefore no estate
duty is payable
d. R370 000
e. None of the above
Correct Answer: B
Motivation for correct answer:
Policy proceeds R5 350 000
Less: Sec 4(p) deduction (80% of R4 280 000
R5 350 000)
Dutiable portion of the proceeds R1 070 000
Estate duty @ (20% x R1 070 000) R214 000

Reference for correct answer: SAFP Handbook, P1026

28. Excellent Providers (Pty) Ltd. is the policyholder of a group life plan for their
employees. The plan provides group life cover which will be paid out to the employee’s
nominated beneficiary. Excellent Providers (Pty) Ltd. is paying the premiums on Joe
Blogs’s portion of the premium, to the value of R1 000 per month. (2)

Excellent Providers (Pty) Ltd. can deduct R12 000 under Section 11 (w)(i). Which one
of the following statements is NOT correct?

a) The R12 000 premium contributions paid by Excellent Providers (Pty) Ltd. must
be included in Joe’s gross income.
b) The plan can be pure risk, and endowment policy with a surrender value or a
combination of these options.
c) Joe cannot deduct the premiums paid by the company from tax and the
proceeds paid to beneficiaries will be taxed at the beneficiary’s marginal rate.
d) Joe will be taxed on the R12 000 that is included in his gross income and the
proceeds paid to beneficiaries will be tax free
e) None of the above

Correct Answer: C
Motivation for correct answer: The employee enjoying the benefit cannot deduct the
premium paid by the company from tax. This benefit will be included in his gross
income. The proceeds paid out to beneficiaries are however tax free.

Reference for correct answer: SAFP Handbook, p1019

17
29. Fast Move Cash and Carry (Pty) Ltd would like to apply for a small loan to
expand their business. Taking the information below into account, determine whether
Fast Move Cash and Carry will be able service additional debt and be likely to qualify
for a loan.

Net profit after tax R3 475 000

Cash R350 000
Debtors R235 000
Capital employed R1 600 000
Stock R1 850 000
Total current assets excluding stock R2 250 000
Current liabilities R1 350 000
(2)
a. The acid test ratio is 1: 1,67 which indicates that the business will be able to meet
their liabilities and will probably qualify for a loan
b. The acid test ratio is 1: 0,30 which indicates that the business will not be able to
meet their current liabilities and will probably not qualify for a loan.
c. The liabilities to capital employed ratio is less than 1% and the business will
probably qualify for a loan
d. The ratio of assets and stock to current liabilities is 1 : 3 and the business will
probably qualify for a loan.
e. None of the above
Correct Answer: A
Motivation for correct answer: Calculating the acid test ratio will assist in determining
if the business will be able to meet their current liabilities with available assets.

Acid test ratio = current assets – stock / current liabilities

R2 250 000 / R1 350 000 = 1 : 1,67 which indicate that the business would be able
to meet their current liabilities.

Reference for correct answer: Premium and Problems 2016, D66

30. Cape Cheese Company (Pty) Ltd has an agreement with their head of research
and development, Mark that if he should leave their employment, he is not allowed to
work in the same industry for 2 years. The amount that will be paid to him is
R2 000 000. What is the amount that will be tax deductible by Cape Cheese
Company as well as the period over which the amount can be deducted? (2)
a. R 2 000 000 in the year of the payment
b. R666 667 per year over 3 years
c. R1 000 000 per year over 2 years
d. The payment is not tax deductible for the company
e. None of the above
Correct Answer: B
Motivation for correct answer: A restraint of trade payment will be tax deductible by
an employer on the following conditions:
 The amount constitutes income in the hands of the person to whom it is paid
 The tax deductible will be deductible in equal instalments over the longer of:
o 3 years; or

18
 o The period of the restraint of trade period

Reference for correct answer: SAFP Handbook, P 664

31. Below are a number of statements related to close corporations. Which one is
false?
(2)
a. There is a limitation on the number of members in a close corporation.
b. A new member of a close corporation will be bound by the terms and conditions of
an existing agreement.
c. A close corporation cannot own shares in a company.
d. A close corporation can buy a member’s interest from an existing member with the
consent of the existing members.
e. None of the above
Correct Answer: C
Motivation for correct answer: A close corporation can own shares in a company, but
a company cannot be a member of a close corporation

Reference for correct answer: LFPC5800 Study Guide, P 51

32. In terms of the King Code the Board of a business is responsible for: (2)
a. Executing strategic decisions effectively
b. Determining strategic direction
c. Oversight of operational and sales activities
d. All of the above.
e. None of the above
Correct Answer: b
Motivation for correct answer: Management is responsible for executing strategic
decisions and oversight over business activities. The Board is required to determine
the strategic direction.

Reference for correct answer: Study guide page 76

33. Where a business is operated under a trust structure, ownership of the business
assets will vest as follows: (2)
a. Ownership always vests in the trustees
b. Ownership always vests in the beneficiaries
c. Ownership vests in the trustees, unless it’s a bewind trust where ownership vests
in the beneficiaries
d. Ownership vests in the beneficiaries, unless it’s a bewind trust where ownership
vests in the trustees
e. Ownership vests in the business trust as a separate legal entity
f. None of the above
Correct Answer: c
Motivation for correct answer: Trustees are the default owners of trust’s assets,
except in the case of a bewind trust.

Reference for correct answer: Study guide page 74

19
34. Liquidity ratios are used to determine (2)
a. whether a business is in a healthy cash flow position.
b. whether the business maintains an adequate cash balance in the bank.
c. whether the business maintains appropriate stock/inventory levels
d. whether a business is able to service its short term debt.
e. None of the above
Correct Answer: d
Motivation for correct answer: Liquidity refers to the ratio of current assets to current
liabilities, to ascertain how comfortably the business is able to service its short term
debt.

Reference for correct answer: Study Guide page 88

35. The following ratio is used to determine the returns shareholders are earning
from the business as well as whether management of a business is able to use the
assets of the business to generate business profit: (2)
a. Solvency ratios
b. Return on equity
c. Return on Investment
d. Return on income
e. None of the above
Correct Answer: b
Motivation for correct answer: The return on equity looks at net dividends over total
equity, measuring the return the business is generating for shareholders as well as
management’s ability to generate profits using the assets and investment of the
business.

Reference for correct answer: Study Guide page 98

[70]

SECTION B: BUSINESS INSURANCE AND CORPORATE PLANNING

THIS WAS TH SUGGESTED ANSWERS. ANY OTHER RELEVANT ANSWERS
THAT WAS WELL MOTIVATED WAS CONSIDERED.
[30]
QUESTION 1
Question 1.1
Star Properties (Pty) Ltd is an investment company with assets of R21 000 000
(market value). The liabilities in the business amount to R10 000 000. A fair rate of
return for investing in this type of business is 15% and the low risk rate of return (e.g.
bank deposit rate) is 7%. Use an appropriate valuation method to calculate the value
of the business.
[5 marks]
Learning outcome relevant to question: Interpret and evaluate financial statements
Answer:
Intrinsic valuation method (1)
as it is an investment company with its value mainly in its assets: (1)

20
 R25 000 000 (1)
Less R14 000 0000 (1)
R11 000 000 (1)
Mark with error throughout question.
Reference: SA Financial Planning Handbook and Premiums and Problems

Question 1.2
Star Properties (Pty) Ltd has three shareholders:
Hugo who owns 60% of the shares
Derick who owns 30% of the shares; and
Marius who owns 10% of the shares in the company.

Given the value of the business calculated above; advise the owners of Star
Properties on the appropriate cover structure to implement in order to support a buy
and sell agreement (9 marks)

Learning outcome relevant to question: Understand buy and sell solution

Answer:
Derick and Marius need to acquire R6 600 000 cover on Hugo’s life. (R11 000 000 x
60%) (1)
Derick will own ¾ of the cover (R4 950 000) and (1)
Marius will own ¼ of the cover (R1 650 000) (1)

Derick and Hugo need to acquire R1 100 000 cover on Marius’s life (R11 000 000 x
10%) (1)
Derick will own 1/3 (R366 667) of the cover; and (1)
Hugo will on 2/3rds of the cover (R733 333) (1)

Hugo and Marius need to acquire R3 300 000 on Derick’s life (1)
Hugo will own 6/7 of the cover (R2 828 571) (1)
Marius will own 1/7 of the cover (R471 429) (1)
Reference: Premiums and Problems

Question 1.3
The shareholders have looked at your calculations and proposed buy and sell
structure and would like to implement the cover as per your recommendations. They
have now informed you that there is also a shareholder loan (unsecured) of
R1 500 000 owed to Derick. The shareholders would like to know if provision for
repayment of this loan can also be included in the buy and sell agreement and the
cover. Advise the shareholders accordingly.
Further, should the shareholders choose not to include this in the buy and sell
agreement, what other option would there be to make provision for repayment of this
loan and what would the tax considerations be? (6)

Learning outcome relevant to question: buy and sell implications, contingent liability
implementation and implications

21
Answer:
Yes, they would be able to include provision for repayment of the shareholder in the
buy and sell cover as a buy and sell agreement can make provision for purchasing
any interest in a business (ownership as well as liabilities) (1)

The structure would need to look as follows:

 Hugo would acquire an additional R (6/7 x R1 500 000) cover on Derick’s life (1)
 And Marius an additional R (1/7 x R1 500 000) cover on Derick’s life (1)

Should they choose not to include this additional cover as part of the buy and sell
agreement, the company can also purchase R1 500 000 credit loan account cover on
Derick’s life. (1)

Tax implications
If the cover for the loan is included in buy and sell agreement, this cover will be owned
by the remaining shareholders (Hugo and Marius) and premiums will not be
deductible, and proceeds will be tax free. (1)
If the cover is acquired by the company as credit loan account cover arrangement, the
premiums can be tax deductible if the requirements of sec 11(w)(ii) are met, and then
the proceeds will be subject to income tax. (1)
Reference: SA Financial Planning Handbook

Comment from Quality assurer:

I think the difference between the two options is that if the loan is included in the buy-
and-sell agreement the policy that includes the loan value is still free of estate duty
[see section 3(3)(a)(iA)].
If the company ensures the life of the shareholders to repay the loan on death the
policy could attract estate duty. It is not a family company in relation to any of the
shareholders as they are not related.
The fact is that the premiums that the company pays are not deductible in terms of
section 11(w)(ii) as it insures a capital asset – not a loss.
The amount of cover should thus provide for the additional income tax
(R1 500 000 ÷ 0.72 = R2 083 333).

Comment from Examiner to be considered in the exam:

Comment from Quality assurer:
I think the difference between the two options is that if the loan is included in the buy-
and-sell agreement the policy that includes the loan value is still free of estate duty
[see section 3(3)(a)(iA)].
If the company ensures the life of the shareholders to repay the loan on death the
policy could attract estate duty. It is not a family company in relation to any of the
shareholders as they are not related.
The fact is that the premiums that the company pays are not deductible in terms of
section 11(w)(ii) as it insures a capital asset – not a loss.
The amount of cover should thus provide for the additional income tax
(R1 500 000 ÷ 0.72 = R2 083 333).

I think this is going to a too academic technical level: the two relevant provisions of the
Estate Duty Act read as follows:

22
the Commissioner is satisfied that the policy was taken out or acquired by a person who on the date of
death of the deceased was a partner of the deceased, or held any share or like interest in a company in
which the deceased on that date held any share or like interest, for the purpose of enabling that person
to acquire the whole or part of—
(aa) the deceased's interest in the partnership concerned; or
the deceased's share or like interest in that company and any claim by the deceased against that
(bb) company, and that no premium on the policy was paid or borne by the deceased;
except where the provisions of paragraph (i) or (iA) of this proviso apply,
the Commissioner is satisfied and remains satisfied that such policy was not effected by or at the
instance of the deceased, that no premium on such policy was paid or borne by the deceased,
that no amount due or recoverable under such policy has been or will be paid into the estate of
the deceased and that no such amount has been or will be paid to, or utilized for the benefit of,
any relative of the deceased or any person who was wholly or partly dependent for his
maintenance upon the de ceased or any company which was at any time a family company in
(ii) relation to the deceased;

It can be argued that sec 3(3)(a)(iA) will apply if the loan cover is included in the buy
and sell, but there is also an argument that it will not be covered if the loan account is
not interpreted as being a share or ‘like interest’ (as a loan is not akin to business
ownership). It can also be argued that the loan cover (whether part of the buy and sell
or covered separately by the business as part of a business contingency plan will be
excluded from the dutiable estate in terms of section 3(3)(a)(ii) – this interpretation of
this sections as it relates to loan account cover has never been tested in Court (to my
knowledge) and a very strong argument can be made that it will indeed apply (but this
is still uncertain). As a result I would prefer that the question does not require an
analysis on this very academic level of detail of the interpretation of these provisions
of the Estate Duty Act (which is also not dealt with in this level of detail in any of the
prescribed learning material).

Question 1.4
In the event of the death of one of the shareholders, what should the buy and sell
agreement determine regarding the cover owned by the deceased shareholder’s
estate on the lives of the surviving shareholders and what the tax implications be of
such a provision? (4)
Learning outcome relevant to question: buy and sell implications

Answer: The agreement should determine that the cover owner (deceased estate)
would cede the cover to the surviving life assured shareholders (1)

The cession will result in the policies becoming second policies and potentially subject
to capital gains tax, (1)
But in terms of para 55(1) (c) (1)
Regardless of whether it was a pure risk policy or not (1)

Reference: SA Financial Planning Handbook 2017

[5+9+6+4]
QUESTION 2

23
Fast Movers (Pty) Ltd distribute a wide range of skateboards, in-line skates and
designer skateboarding footwear and clothes. Below is an extract from their 2016
financial statement.

Net income after tax R6 530 000

Current assets excl. stock R4 350 000
Stock R2 860 000
Cash R385 000
Debtors R765 000
Current liabilities R2 180 000

Peter Jones, was recently appointed as finance manager for Fast Movers and is busy
investigating the financials. He is concerned about current outstanding liabilities as
well as high stock levels and the ease of meeting liabilities should the need arise.
Should he be concerned?
(6 marks)
Learning outcome relevant to question: Using the appropriate ratio calculation

Answer:
Peter needs to use the acid test ratio to determine if Fast Movers will be able to meet
their current liabilities on short notice (1)

Acid test ratio: Current assets – Stock

Current liabilities

R4 350 000 – R2 860 000

R2 180 000 = 0.7 :1 (2)

The ratio of 0.7:1 indicates that the company might struggle to meet their current
liabilities due to high stock levels that can be problematic in times of slow business, to
realise in case they need additional cash to repay their liabilities (3)

Reference: SA Financial Planning Handbook; Premiums and Problems 2016, D67

[6]

TOTAL 100

24