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SMSFA flags ‘murky’ area of sophisticated investor definition

By Miranda Brownlee
12 August 2022 — 3 minute read

The control test is a particularly complicated and unclear aspect of the sophisticated investor definition where individual trustees are involved, a technical expert warns.

Speaking at a recent event, SMSF Association policy manager Tracey Scotchbrook said one of the most popular ways of classifying SMSF clients as sophisticated investors is through the provision of accountant certificates under chapter 60, section 708(8)(c).

“Interestingly, this particular provision actually only applies to the provision of security, so we can’t use it to treat all of the advice process — it’s only going to apply where there’s an offer of security [such as] capital raising and those types of scenarios,” Ms Scotchbrook noted.


“We need a qualified accountant to issue a certificate to the person to whom the offer has been made.”

Before the actual issuing of the accountant certificate and the meeting of the asset test, one of the first aspects that needs to be looked at, said Ms Scotchbrook, is control.

The control test is one of the areas where SMSF professionals can run into issues, particularly where individual trustees are involved, she warned.

“This is an area where people get themselves all entangled about making sure they’ve got the shareholdings right or other mechanisms in place but when we look at Section 50AA, it actually says that regardless of their legal obligation or their rights, it doesn't necessarily mean they have control. So it's a practical test, and it comes down to their actions,” she said.

“The challenge with that is how do you demonstrate that someone has control based on their actions? I don't think there is a black and white answer, it's going to come down to the specific facts and circumstances at play with that particular fund.”

For SMSFs with corporate trustees, it's a bit simpler, she explained.

“It’s straightforward if we have a single director corporate trustee to meet the control test. If we’ve got two or more directors, we need to determine whether we have someone who can meet the control test,” she explained.

“[We then need to look at whether the SMSF meets the asset test. Does it have $2.5 million in net assets, if it does, it will meet the test.  If the director alone meets the test, but the SMSF doesn't, unfortunately, this doesn't work. Similarly, we can't use the assets of the fund to help that individual director meet the test outside of superannuation.”

However, when it comes to individual trustees, Ms Scotchbrook warned that it can become “very murky and complicated”.

“We need to ensure that we’ve got a controlling individual. So we need to look at that practical test. [However], if the fund itself meets the asset test, it may not be sufficient,” she cautioned.

“There are differing legal opinions on this. One view is that where you have multiple trustees, then you need to divide the value of the assets amongst the trustees and the controlling trustee will be able to count those assets to see whether the fund meets the test.”

Ms Scotchbrook said there are other views which suggest that you can never include the SMSF’s assets because of the preservation rules.

“There's also an alternative view out there, which says that so long as you've got a controlling individual and the fund meets the test, that you can count all of the assets of the fund,” she stated.

“However, when we look at the duties of the trustee and their obligations, typically what I’ve seen in practice is that they are divided up across the trustees. This highlights some of the complexities and uncertainty around SMSFs.”

Where there are individual trustees and the controlling individual personally has sufficient assets outside of super, Ms Scotchbrook noted that this can be used to help the fund meet the test.

“The question then becomes well, what's the value of fund? Is it appropriate to be doing so bearing in mind preservation rules, the difficulty of getting money into superannuation and so forth but it can be done if the individual meets the asset test,” she said.

“If you're sort of half pregnant and you've got assets held personally and assets in the fund and separately that don't make the test but when we bring it together, it meets the test, this isn't going to work. You need to have a clear one or the other.”

Ms Scotchbrook noted that the Corporations Act doesn’t expressly talk about rules for SMSFs.

“We’ve got these sort of opaque rules dealing with superannuation, but it doesn't address this particular environment,” she said.


Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
SMSFA flags ‘murky’ area of sophisticated investor definition
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