Compliance & Regulation, Investments

Wholesale investor test requires revision

Wholesale investor AWOTE Joint bodies

Any increase to the wholesale investor tests must include indexation to keep them current, but accountants’ certificates should be removed as they are no longer fit for purpose.

The wholesale investor tests should be lifted across the board, with indexation added to match increases in asset valuations, while accountants’ certificates should be removed from use, according to three accounting bodies and the SMSF Association.

The call for the changes was made in a joint submission to a Treasury inquiry into the tests by Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants and SMSF Association, which noted the current thresholds are more than 20 years old.

“The current wholesale investor/client tests – the product value test and individual wealth test – were introduced by the Financial Services Reform (FSR) Act 2001 amendments incorporated in the Corporations Act 2001,” the submission stated.

“Although the FSR Act received royal assent more than 20 years ago, the initial thresholds of $500,000 for the product value test and $2.5 million in assets or gross income of $250,000 per annum for each of the last two financial years for the individual wealth test have not increased in that period.”

It noted that when the tests were implemented, only 2 per cent of Australian adults could meet them, but this figure had increased to 16 per cent by 2021 and would reach 29 per cent by 2031.

As such, the joint bodies called for the product value test to be lifted to $1 million and indexed in line with average weekly ordinary time earnings (AWOTE), but only increased in $100,000 increments. Additionally, the individual wealth test, which is measured using net assets or gross income, should also be raised.

This increase would result in the net assets threshold moving to $4 million, reflecting the impact of rises in asset values, inflation and wages since 2001, and it should be indexed in line with AWOTE, but only lifted in $250,000 increments.

The revised threshold would be an individual’s principal place of residence as it was not an asset an investor should have to sell if their other investments failed, the submission noted.

“Further, for some individuals it may be their only significant asset and therefore arbitrarily inflate their financial wealth position or dealings with financial products,” it said.

Where investors chose to use the gross income test, that threshold should be increased to $350,000, excluding capital gains, employment termination payments and franking credits, and indexed in line with AWOTE, but only raised in $25,000 increments.

The submission also called for the end of accountants’ certificates that verify an investor meets either of the individual wealth tests and recommended a financial adviser or product issuer becomes responsible for ensuring it is appropriate to invest outside the retail client protections.

“The legislative framework for the provision of financial advice has significantly changed since the wholesale and sophisticated investor regimes were first introduced,” it said.

“Unless an accountant is licensed to provide financial advice, they are prohibited from providing personal financial advice. This includes advice to not invest in or dispose of a financial product.

“This is problematic where it is clear to an accountant that it is inappropriate for a client to be moved away from the retail client environment.

“Despite the intention that accountants’ certificates are to be a pure statement of fact, the risk to accountants is high and the interaction of the law and their obligations highly complex.”


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