Owning overseas property in an SMSF has become an alluring proposition over recent years. Whilst it is a permissible asset for a self managed super fund to hold, the logistics and practicalities of doing so can be tricky as the Trustees must also ensure that they continue to adhere to all the rules and regulations that govern SMSF’s.
Some of the factors that need to be considered are as follows:
Check the Trust Deed
As with any investment being considered by the trustees of an SMSF, you must check that the trust deed allows for the investment in overseas property. Generally, most deeds should allow it, but make sure you check before entering into any transaction. Ensure the investment strategy of the fund also permits overseas property investment.
Same rules apply to overseas property as they do Australian property
This means if you or a related party already own a residential property overseas, your SMSF can’t buy this from you, even at market rates. Similarly, neither yourself or anyone related to you can stay or live in the property – regardless of any rental charged or the number of days. It is strictly prohibited.
A commercial property owned by the super fund can be leased by you or a related party.
Ensure no other charges exist over the property.
Familiarise yourself with how property title is kept in the country you wish to purchase the property and ensure there are no other charges existing over the property. Get this information in a verified format so you can provide to your accountant and auditor when it comes time to do the annual accounts.
The Trustee of the SMSF must hold the legal title of the property
Australian law requires the trustee to hold the legal title of the property. This can be difficult to ensure as many countries do not recognise the trust structure involved for SMSF’s. Further, many countries will not allow a foreign entity to hold property directly.
To deal with this issue, it may be possible to set up a Limited Liability Company (LLC) in a foreign country with its own bank account. The SMSF can then invest in the shares of the company which then finances the acquisition of the overseas property. Be aware the company you set up in the foreign country may also need to be a taxpayer in that jurisdiction, although any tax payable may be eligible to be claimed back as a credit in Australia if a double tax agreement exists.
The ‘in-house asset’ test
If an LLC is used to invest in the property, the investment held by the SMSF is the shares in the LLC. Unless the bank account held by the LLC to deposit rental incomes and pays expenses is an ‘authorised deposit taking institution’ as determined by APRA, the LLC will be deemed an ‘in house asset’. It may be tricky to find a foreign bank that would meet these Australian conditions. If that is the case, the super fund’s investment in the LLC is deemed to be an ‘in house asset’. Then only %5 of the total market value of the SMSF can be invested in the company holding the overseas property.
Be aware of the additional costs to your SMSF when holding property overseas
You need to consider the additional costs of owning overseas property in your SMSF. This includes any local taxes and duties that may be payable, and therefore the need to hire a local accountant to assist you in correctly reporting and paying these.
The auditor of the SMSF needs to be satisfied themselves that every aspect of the property investment adheres to Australian Superannuation laws. This includes its existence, use and market value. This may result in additional auditing and administration costs. Alternatively, if the auditor can’t be satisfied of all the elements, the audit may be qualified which will can result in scrutiny of the fund by the ATO.
Obtaining finance to purchase overseas property
The hoops needed to be jumped through just to get finance for an SMSF to purchase an Australian property means obtaining finance to purchase property overseas is near impossible. If you are relying on finance to purchase overseas property ensure you have some solid pre-approval before entering into any legally binding arrangements to purchase the property.
Given that SMSF’s are unique to Australia, an overseas bank is unlikely to recognise the structure and provide finance for a property purchase.
Given the high risks and additional costs involved, always consider carefully the overseas property option when determining how best to save for your retirement.
Kimberlee Brown is the SMSF Director at H&R Block.
The content above has been prepared by H&R Block Ltd (“H&R Block”), ABN 89064268 800.The above information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, H&R Block, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.