Last month, ASIC issued a release announcing that it was investigating the inappropriate use of accountant's certificates to treat investors as wholesale clients.
Holley Nethercote partner David Court said while ASIC provided few details of what this "inappropriate use" involved and there was no specific mention of SMSFs being targeted, it is a timely reminder for financial advisers and accountants that they need to be aware of how an accountant's certificate can be used under the wholesale clients rules – and the “difficulties that can arise with SMSF clients”.
Mr Court said one of the means of classifying a client as a wholesale client for the purposes of the financial services laws is to obtain a certificate from an accountant “to the effect that the client meets either the income or assets individual wealth tests”.
“However, these tests are not straightforward and raise a number of issues when the client is an SMSF,” he warned.
For example, Mr Court explained that the SMSF trust fund is itself not a legal entity and the status of the fund's trustees as wholesale clients has to be looked at rather than the trust itself.
“Where the SMSF has a corporate trustee then the company is the client and it is the status of the company that needs to be considered,” he clarified.
Mr Court said there are five classes of eligibility to be a wholesale client, with only one of these classes, the individual wealth tests, requiring certification by accountants.
“The individual wealth tests are frequently used by financial advisers as they are relatively straightforward tests and the adviser can rely on the certification provided by the accountant. While many SMSFs will have the necessary level of assets or income within the fund, the "controlled entity" rules also offer scope to include assets or income additional to those of the SMSF,” he said.
“It is crucial in this regard to keep in mind that individual trustees must be considered as a joint entity and not as the sum of their individual circumstances. Therefore, it is only assets or income that the individual trustees jointly own that can be counted towards the individual wealth tests.”
The individual wealth tests also have an extended operation in relation to controlled entities, he said.
“Control is defined as the capacity of one entity to determine the outcome of decisions about another entity's financial and operating policies. It is possible that more than one person or entity may meet the legal meaning of control in relation to a subject entity at the one time,” he said.
“Due to the nature of the superannuation rules, [however], it is unlikely that such control could be shown other than in limited circumstances. For example, an individual trustee of an SMSF would be unlikely to control the SMSF as there must always be another individual trustee of the SMSF.”
Mr Court said a similar lack of control would exist between the multiple directors of the corporate trustee of an SMSF.
“However, it is possible to have a single director trustee company — and a single member SMSF with a corporate trustee that had that member as sole director and shareholder would be controlled by the member,” he explained.