SMSF Investing in International Property
As property prices have risen in Australia due to rising demand, many Self-Managed Super Fund (SMSF) trustees are now looking further afield for more potentially cost-effective investments. This has led to foreign properties becoming an attractive investment for SMSFs.
Like with Australian property, there are rules and restrictions as to what you can use the property for:
- You are unable to live in the property or rent it to a related party. This includes being able to use it as a temporary holiday home (unless the property is commercial).
- The property must be rented at arms length market rates under an enforceable lease agreement
- Short term rentals such as AirBnB arrangements are allowed however you do still need to ensure that no member or relative stays at the property at any time.
- You will also need to have the property valued or appraised at 30 June each year
- All income from the property needs to be received in the SMSF and all expenses need to be paid from the SMSF. Documentation confirming both will need to be kept for auditing purposes.
- If using a LRBA structure to purchase the property (ie using a loan) you are restricted from making any improvements to the property such as undertaking major renovations or extensions. Likewise you are unable to use the structure to build a property on vacant land
While owing a foreign property is allowed under the Superannuation laws, it is not as straightforward as owning an Australian property. There are a number of additional options and requirements that the fund will have to address before investing in an overseas property.
- The Fund will need to ensure the Investment Strategy and the Trust Deed allows the SMSF to invest in an overseas property.
- An SMSF structure may not be recognized in the country you are investing in. This will mean you also need to establish a suitable structure that will meet the legislative requirements both abroad and in Australia. This is known as a Bare or Custodian Trust. We can also assist in the creation of this structure if required.
- The overseas property will need to be in the name of the SMSF or a Bare/Custodian Trust that the fund has control over, there are also some exceptions where foreign investors are restricted to buy property.
- In some countries, foreign overseas investors are not allowed to own any property. The fund will need to find a resident (preferably a member of the SMSF) in the country who can represent the fund, so the title of the property can be accommodated in the structure.
- Like Australian properties, the SMSF needs to make sure that the property has not been used as security for a loan or mortgage.
- The laws and customs are different in all countries and the implications specific to that country will need to be adhered to.
- The entity you have established will have to be registered to pay taxes in the overseas country. An accountant in that country will be able to provide the appropriate assistance. We will be able to help you with the tax obligations locally.
- To avoid paying double taxes here is a list of countries that the ATO has a reciprocal tax treaty with. While investing in a country not of this list is still allowed, you will need to factor in the fact that you will be paying taxes both in Australia AND the chosen country.
- If you are planning to borrow funds to make the overseas property investment, the fund must confirm that the SMSF loan includes limited recourse borrowing arrangements (LRBA) and the correct limited recourse clauses.
- The LRBA terms and conditions must be consistent with all arm’s length practices. That is repayments and interest rates need to be consistent with independent local markets.
- The SMSF or Bare/Custodian Trust will need to have an overseas bank account to receive rent payments, and pay for maintenance and other related expenses.
- Where the language spoken in the investing country is not English you will need to ensure that a translation is obtained of all documents, contracts and agreements. This will allow the auditor to confirm that all compliance requirements are being adhered to.
- Be mindful that an additional Bare Trust may be required to open and operate an overseas bank account to be used in conjunction with an overseas property.
- A third party can hold the title of the overseas property as long as a Declaration of Trust is set up to reflect that the property being held by the third party is on behalf of the Fund and the ultimate ownership lies within the SMSF. This is particularly relevant to countries where only residents or citizens may own property.
If you are not borrowing to purchase the property then you will not need to worry about the LRBA requirements.
Due to the added complexities in buy a property overseas, it is recommended that you discuss your plans with a specialised SMSF professional to ensure any purchase is compliant with current Superannuation laws. At SMSF Australia, not only can we help guide you through the steps, we can also assist in creating the legal documentation required to make sure the purchase is processed in the most efficient and stress free way possible.