6 Considerations When Investing SMSF on Overseas Property
In recent years, as Australian property prices have soared, an increasing amount of self-managed super fund (SMSF) investors have turned to overseas property as a more alluring proposition. While there's nothing to stop an SMSF trustee from adding an international property to their investment portfolio, the practicalities, logistics and continued compliance needs to be factored in.
As with any investment, risk and reward need to carefully balanced, especially any potential traps associated with an international investment. So, if you're planning on owning an overseas pied-Ã -terre, here's what you need to consider.
Check the Trust Deed
When SMSF trustees are considering any investment, it's imperative to check the trust deed allows for international investment, and the SMSF investment strategy permits investment in overseas property. Generally speaking, most deeds do allow for the purchase of international property, but it always pays to check.
As a general rule of thumb, the same stringent regulations that apply to owning Australian property in an SMSF, also apply to overseas properties. For example, if you already own a residential property overseas, this can't be transferred to your SMSF, even if it's sold at market rates.
The rules for commercial properties are a little different. The trustees or any related party can lease commercial premises held by a SMSF.
Check for Other Charges
Title deeds differ from country to country, and the last thing you want is to purchase an international asset and discover there are existing charges attached to the title. Before making any decisions, take the time to familiarise yourself with how property titles are kept in overseas countries. As all SMSFs need annual auditing, be sure to get all the information verified so you can pass it onto your accountant and auditor when it's time to do the accounts.
To get around this issue, Australian SMSFs wishing to purchase international property may need to set up a Limited Liability Company (LLC) in a foreign country and open a bank account in its name. The LLC can then purchase the overseas property, and the SMSF can invest in the shares of the LLC. As each country has their own tax rules, be aware, the company you set up in the foreign country may also need to be a taxpayer in that jurisdiction. If this is the case, any tax paid can be claimed back in Australia if a double tax agreement exists.
The 'In-House Asset' Test
If an LLC invests in international property, the investment held by the SMSF is actually the shares in the LLC and not the property directly. If the LLC's bank account is used to collect rent and pay expenses and isn't determined to be an 'authorised deposit-taking institution,' then APRA will deem the LLC an 'in-house asset.'
Finding a foreign bank that meets Australian conditions can be challenging for SMSFs looking to invest internationally.
Consider Additional Costs
There's no way around audited accounts for an SMSF, and it all comes at a cost. Trustees looking to invest internationally should consider any additional costs like local taxes, duties and potentially hiring a local accountant to help with reporting.
Back in Australia, the auditor of the SMSF will need to be certain that every aspect of the international investment complies with Australian Superannuation laws. This may involve additional checks, administration and charges.
These days, finding finance for an SMSF to purchase investment property in Australia involves lots of hoops and hoopla, but it's a lot harder internationally. SMSFs relying on finance to invest internationally may wish to get solid pre-approval before engaging in any legally binding contract to purchase foreign property.
It's important to remember SMSFs are unique to Australia, and an overseas bank is unlikely to understand the structure and provide loans for a foreign property purchase. Given the high risks and additional costs involved, it always pays to do your research and carefully consider whether investing internationally is the right strategy for your SMSF.
Disclaimer: The information provided is general in nature, and as such it should not be relied upon for making decisions without seeking expert opinion or personal advice. H&R Block disclaims all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable, for any loss or damage whatsver (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice provided. The user must accept sole responsibility associated with the use of the material in this article, irrespective of the purpose for which such use or results are implied. The information applies the law as stated at the time of writing, and is no substitute for financial advice.
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