A regulation sandwich

From the Editor: Darin Tyson-Chan

Inaugural SMSF Association Trade Media Journalist of the Year

The main event for the sector, the SMSF Association National Conference, has been completed for another year and one of the main talking points to emerge from it in 2025 was the uncertain predicament of some trustees as to whether they have to date illegitimately been operating as wholesale investors.

The conundrum has resulted from an Australian Financial Complaints Authority (AFCA) determination that applied the strict interpretation of section 761G(6)(b) of the Corporations Act 2001 whereby a financial service provided that relates to a superannuation fund means the individual involved must be considered to be a retail investor.

As such, any SMSF trustee or member must have assets totalling at least $10 million before they can be treated as a wholesale investor. Hard to argue with seeing the stance is pretty black and white from a legal perspective.

But the Corporations Act contains a lower threshold whereby an individual with net assets of $2.5 million and a certificate from an accountant confirming this fact could be considered as a wholesale investor.

However, an announcement from the Australian Securities and Investments Commission (ASIC) in 2014 is really what has thrown a spanner in the works. At that time, the regulator stated while it acknowledged SMSF trustees should strictly not be using this lower wholesale qualification parameter, it would not be allocating any enforcement resources to stamp out the practice.

Naturally many SMSF trustees saw this as the green light for them to use the lower wholesale investor qualification mark, but now the AFCA decision has put them in uncertain territory.

You might be asking why many trustees would be so keen to be treated as wholesale investors and that is because it gives them the ability to access certain asset classes, such as infrastructure, not widely offered to retail investors.

But now they find themselves basically pieces of meat in a regulation sandwich due to the fact two government bodies don’t seem to be on the same page.

Worst-case scenario is if these trustees are not granted relief, they will have to divest the holdings they secured as wholesale investors and this of course will trigger capital gains tax liabilities. These won’t be insignificant if you consider a minimum investment for a retail managed fund might be $5000, whereas the qualifying amount for a wholesale fund could be $500,000.

Further, while this is obviously an SMSF problem, the impact of what comes next will not be confined to this sector. Consider what will happen to the fund managers themselves if large amounts of money are having to be exited from their products pretty much all at once. How many of them will have the liquidity to facilitate this and will the offering actually be able to survive this scenario?

If there is a positive note, it might be that the government will have to review the wholesale investor thresholds in the Corporations Act that have remained unchanged as they have no indexation measure built into them. The situation should also confirm, once and for all, how the wholesale investor rules apply to SMSF trustees.

The SMSF Association is on the case and is already urging Canberra to come up with a legislative amendment to fix the problem. Hopefully the politicians will apply some common sense when formulating a solution as the stakes here are pretty high.