INTHEBLACK June 2025 - Magazine - Page 20
FEATURE
“It’s somewhat terrifying that, if something is not done,
you’re going to have people with very small amounts
to invest being put into some probably riskier investments,
compared to what they would have had access to many
years ago — just given the effects of inflation.”
RICHARD WEBB, CPA AUSTRALIA
Richard Webb, CPA Australia’s
superannuation lead, policy and advocacy,
says the parliamentary review has “kicked
the can down the road” for the time being.
“We are quite downhearted about the
fact that what we thought were some fairly
reasonable updates to the tests haven’t been
recommended by the committee. But, at
the same time, I think we knew it wasn’t
going to come out with anything
earth-shattering anyway,” Webb says.
WHAT ARE THE CURRENT RULES?
The current sophisticated and wholesale
investor tests, covering individual wealth
levels and investment values, were introduced
by the Financial Services Reform Act 2001
amendments incorporated in the
Corporations Act.
They prescribe that individuals can
ask an accountant to certify them as
a sophisticated investor if they can prove
they earned at least A$250,000 in pre-tax
income in each of the two previous financial
years or that they have net assets of
A$2.5 million (which can potentially
include the family home).
An individual can also be classified
as a wholesale investor if they make
an investment of A$500,000 or above.
Certified sophisticated and wholesale
investors can gain access to investment
products that are not available to general
retail investors. But, by being certified
as such, they may also lose access to many
of the consumer protections that are readily
available to retail investors under
the Corporations Act.
When the sophisticated and
wholesale-test levels were first set almost
25 years ago, only 1.4 per cent of Australian
households (104,000) met the minimum
criteria for income or net assets. Very few
were able to access the capital needed
to make wholesale investments.
However, the substantial growth in average
wages and asset prices since 2001, especially
in property prices but also in share market
20 INTHEBLACK June 2025
holdings, means millions of Australian
households are now eligible to be certified
as sophisticated investors.
Research by Australian National University
projects that almost 20 per cent of Australians
currently qualify, and more than 40 per cent
of Australians (11.5 million individuals)
are likely to qualify by 2041, under the
current threshold rules.
“It’s crazy that there haven’t been any
changes after nearly a quarter of a century,”
Webb says. “It’s somewhat terrifying that,
if something is not done, you’re going
to have people with very small amounts to
invest being put into some probably riskier
investments, compared to what they would
have had access to many years ago — just
given the effects of inflation.”
THE RISKS OF BEING SOPHISTICATED
Being classified as a sophisticated
investor can open new investment
opportunities, but it may also expose
those investors to greater risks, as wholesale
investment product issuers aren’t under
any obligation to provide them with
a regulated disclosure document.
Similarly, there is also no legal
requirement for sophisticated investors
to be provided with a prospectus, a target
market determination document, or,
where the investor has received personal
financial advice, a formal Statement
of Advice.
According to the Australian Securities
& Investments Commission (ASIC),
certified sophisticated investors “are more
likely to be able to evaluate offers of
securities and some financial products
(such as interests in managed investment
schemes) without needing the protections
of a regulated disclosure document”.
They’re also considered to be sufficiently
skilled to understand the value of investment
products or services and the risks associated
with investing.
But there are many examples of investors,
having been classified as sophisticated,
