“However, these tests are not straightforward and raise a number of problems when the client is an SMSF.”

Wholesale clients do not receive the same protections as retail clients and many of the disclosure and conduct rules don’t apply when dealing with wholesale clients, making proper classification vital.

According to Court, whether the SMSF uses a corporate or individual trustee structure can impact the classification.

“At law, the SMSF trust fund is itself not a legal entity and the status of the fund’s trustee(s) as a wholesale client needs to be looked at rather than the trust itself,” he said.

“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.

“Where the SMSF has individual trustees then the client is the joint individual trustees. 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.”

Court added that there is considerable confusion around whether the trustee of an SMSF with less than $10 million in assets can be treated as a wholesale client under any of the tests, saying that recent AFCA determinations have “cast doubt” on the issue.

“AFS licensees should be wary of treating eligible SMSF clients as wholesale until this issue is clarified by the Courts or through legislative amendment,” he said.

Last year, Alex Sidoti, senior ombudsman for AFCA, told SMSF Adviser that applying the general wholesale test could pose risks for advisers due to unresolved legal uncertainties within AFCA.

“Everyone needs to be aware that the risk is there until such time that it is resolved,” Sidoti said.

As things stand, the individual wealth tests for wholesale classification require a person to have either 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 accountant’s certificate lasts for two years before requiring renewal.

“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,” Court said.

“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.”

However, it is crucial to keep in mind that individual trustees must be considered as a joint entity and not as the sum of their circumstances.

“Therefore, it is only assets or income that the individual trustees jointly own that can be counted towards the individual wealth tests,” Court said.

“For example, a husband and wife who were individual trustees of an SMSF could also include the value of the family home if they owned it jointly. Similarly, if they were joint trustees of a family trust. However, if the wife owned an investment property in her own name, then this could not be included.”

The wealth test also extends to controlled entities, he said, as the net assets or gross income of a company or trust controlled by a person can be included in determining the net assets or gross income of that person.

“This has obvious application in relation to an SMSF given that such funds are established as trusts,” Court added.

“If a person is eligible to be a wholesale client (under any of the eligibility tests) then a company or trust controlled by that person is also a wholesale client even if they do not otherwise qualify.”

With an SMSF specifically, the trustee or trustees own and control the assets of the SMSF, and as such the income and assets of the fund “can be included for the purposes of whether the trustee(s) themselves meet the individual wealth test”.

“However, can an SMSF be also controlled by a person other than the trustee(s)? If so, and that person is themselves a wholesale client, then the trustee(s) of the SMSF will also be a wholesale client (as trustee(s) of a controlled trust),” Court said.

“Due to the nature of the superannuation rules 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.

“As the individual trustees must act unanimously none of them would have individual control of the SMSF. They would always require the other trustees to agree to any course of action that was proposed in relation to the SMSF.

“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.”

Finally, advisers also need to consider the possibility of a “puppet-master” situation, he said, where an individual exerts influence behind the scenes.

“By its nature, it can be difficult for a third party such as an accountant to identify whether such a situation exists in practice.”