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When does an SMSF qualify as a 'wholesale' investor?

Qualifying as a ‘wholesale’ investor opens many investment opportunities not available to most retail investors, but the interpretation of the rules is inconsistent across the industry

Introduction by Graham Hand

If an investor has sufficient assets or income, there may be benefits in their accountant providing a certificate confirming their status as a ‘wholesale’ or ‘sophisticated’ investor. It may give access to investments normally reserved for the institutional market, especially unlisted bonds. There are many long term annuities or inflation-linked bonds available which are useful for retirement planning.

A couple of months ago, I wanted to invest through my SMSF in a Social Benefit Bond issued by The Benevolent Society. The lead managers were Westpac and CBA. Although I have a large SMSF, after much time and exchange of emails, I received this reply from Westpac:

“There have been some on-going internal discussions with our Legal and Compliance areas around what constitutes a sophisticated investor from an SMSF perspective and I just wanted to update you on how this has played out.

We have been advised yesterday that for the Social Benefit Bond, any Investment via a SMSF must actually meet the Professional Investor test as follows:

“a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 if the fund, trust or scheme has net assets of at least AUD 10 million“

This is a change from our previous understanding where an SMSF with more than $2.5m in net assets would satisfy the test.

Can you please advise if this change will affect your requirement to invest in your Super Fund?

If so, is there another name you could possibly look at investing in (Company or Personal) where you do obviously meet the $2.5m net asset test that your Accountant can sign off on?”

I wrote this reply to Westpac:

“I realise you are only following legal instructions, but I believe Westpac is out of market with this interpretation. Not only have I been investing and working in markets for about 35 years, and now write a financial newsletter, but I have a large SMSF with about $X million in assets. As trustee of my SMSF, I deal with many brokers based on the $2.5 million threshold, as signed by my accountant. I buy ‘wholesale’ bonds not intended for retail distribution.

How many SMSFs do you think have over $10 million of assets? You are ruling out a major market. I only want to hold this investment in my SMSF so it is not relevant what my other assets are … I guess you can cancel my order.”

Westpac replied as follows:

“I fully understand your commentary and before contacting you, I had specifically put your case forward for an exception to the ruling (having researched your experience etc). However, it has been decided that there will be no exceptions in regard to this particular SMSF ruling.

I believe the CBA at this point in time will be taking a similar stance.

Over the next few days I will monitor if there are any AFSL Holders that will be putting a “group” bid for clients in under their name and this may provide me with the ability to refer you through to a different contact to access the Bond.

Obviously I am disappointed with this outcome and that we are not able to assist you.”

I then contacted the other lead manager at CBA, and Westpac was correct. CBA would also not sell to an SMSF with less than $10 million in assets. But I could invest in my own name.

What’s happening? Other fixed interest brokers accept the SMSF of which I am a trustee as a sophisticated investor. This is a recent reminder notice from one of my brokers, which allows my SMSF to invest:

“Your Accountant Certificate classifying you as a Sophisticated Investor will expire shortly. Accountant Certificates are only valid for up to two years after they were issued. By providing an additional Accountant Certificate we can ensure that you continue to be classified as a Sophisticated Investor under 708(8) of the Corporations Act 2011, and as such are able to trade Wholesale bonds.

Updating your Sophisticated Client classification ensures that we can continue to provide you with a more comprehensive and diversified portfolio of fixed income investment services and research than what we can make available to Retail Clients.

To retain your Sophisticated Investor status for a further two years please arrange for the enclosed Accountant Certificate to be completed and certified by your Qualified Accountant.”

Why is there so much doubt about such an important issue? SMSFs are one-third of superannuation, with a million trustees holding $500 billion, yet both CBA and Westpac say they must have over $10 million to invest in the wholesale market.

What’s going on? Andrew Bloore explains.

In accordance with section 708 (11) of the Corporations Act, the SMSF itself can be a wholesale or sophisticated investor only where its assets are greater than $10 million.

So how can a SMSF utilise the wholesale or sophisticated investor rule?

One of the benefits of the SIS Act for an SMSF is section 58. This section allows a member of an SMSF to direct the trustees on the investments it can make. Outside of the trustee not allowing the investment because it breaches another provision of the SIS Act or another Act, the trustee must make that investment.

If the individual member meets the sophisticated investor or individual wealth rule, in my opinion, that member can direct the trustee of the SMSF to make the investment.

Therefore provided that the individual’s accountant, AFSL holder or other person that is allowable under the Act who is able and familiar with the client’s full position, signs the declaration and that individual member meets the criteria, then by utilising section 58, the individual can direct the trustee to make the investments.

What are the key tests for meeting the standards?

Test 1: Product value

Product value applies if the product being invested in or advised on has a value exceeding $500,000. This does not apply in relation to risk-based products (such as life insurance) or to the extent that investment funds are sourced from a superannuation fund.

Test 2: Individual wealth

This test requires a person to have net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000, as certified by an accountant. The certificate lasts for two years before requiring renewal.

In determining the net assets or gross income of a person, the net assets or gross income of any entity controlled by that person can be included. The general rule is the SMSF assets are excluded unless the assets are segregated to the member being tested.

Test 3: Professional investors

This category includes a range of investors with one of the following specific attributes:

  • an AFSL holder
  • a body regulated by APRA, other than a trustee of a superannuation product
  • a body registered under the Financial Corporations Act 1974
  • a trustee of a superannuation product with more than $10 million in assets
  • a person having or controlling more than $10 million in gross assets (including moneys held by an associate or on trust)
  • a listed entity and its related body corporates
  • an exempt public authority
  • a person who carries on an investment business that is offered to the public or
  • a foreign entity that would meet one of these requirements had it been established in Australia.

This only applies to large superannuation funds and not the overwhelming majority of SMSFs.

Test 4: Sophisticated investor

This category includes persons who the AFSL holder has determined to be experienced in using financial services. The test consists of five elements which can be summarised as follows:

  • the product is not general insurance, a superannuation or an RSA product
  • the product or financial service is not used in connection with a business
  • the client signs a written acknowledgement in relation to certain matters.

Make your own enquiries

Legal departments within major financial institutions are making different determinations. Some are imposing the $10 million minimum on the SMSF itself, while others are accepting the qualification of the SMSF member. While this goes on, some bond dealers are developing their unlisted bond distribution, while others wring their hands in frustration. Given the industry uncertainty, every person affected should take their own personal advice.

A footnote from Graham Hand

When my accountant gives me the certificate in respect of sophisticated/wholesale/professional status, he does it based on the assets of my super fund, and the brokers I use to access wholesale bonds accept this. It’s not based on my other assets. So who knows what’s going on!

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