SMSF Investing in International Property | Overseas Property Investment

SMSF Investing in International Property

SMSF Investing in International PropertyAn SMSF can invest into overseas property.  Foreign property can be an attractive investment allowing for diversification of the fund’s investments. However, the crucial consideration is whether it is advisable for your SMSF to do so.

It is essential to make sure that the advantages for SMSF members are worth the additional costs and the risks undertaken in relation to superannuation laws, the Australian tax act, and the laws and regulations in the country where the property is located.

Assessing the advantages of owning a foreign property within an SMSF is crucial, as it may involve extra expenses associated with setting up a foreign entity, bank account, or agency for the acquisition and maintenance of a rental property in various international locations.

Does buying overseas property in SMSF comply with the objectives of the SMSF investment strategy and meet the members retirement requirements?

 Have you obtained all of the documents your SMSF auditor requires to ensure your fund will meet the legislative requirements in Australia as well as the legislative requirements in the foreign country?

What are the Superannaution Legislation Requirements?

Similar to any property being purchased which is located in Australia the SMSF is required to meet the superannuation legislation laws and regulations. Investing in an overseas property requires the SMSF to consider the laws and customs of the foreign county where the property is located in addition to Australian laws.

The purchase of property, regardless of its location, needs to be allowed under the fund’s trust deed and investment strategy.

Other general considerations the fund will have to address include:

  • the sole purpose of the SMSF to purchase a property must generally be for the members retirement
  • annual valuation of the property
  • there cannot be a charge put over the property unless it is subject to a limited recourse borrowing arrangement (LRBA)
  • the title of the property should be in the name of the trustee unless the property is subject to a LRBA or not held directly by the SMSF
  • funding the purchase using cash directly from the SMSF, using a LRBA or possibly indirect arrangements such as tenants in common or a unit trust which can be closely held or an unrelated trust
  • if purchasing a property from a member (or other related party) obtaining an arms length independent valuation and ensuring the SMSF trustee is able to acquire the property without breaching the in-house asset rules
  • who is leasing the property? 
  • valuation of the rent at the start of the lease term when the tenant is a related party
  • all rental expenses should be paid directly from the fund’s bank account or the interposed foreign company

Investing in an Overseas Property

Additional considerations are required when thinking of overseas property investment. 

The significant considerations when considering investing in overseas countries include:

  • the laws and customs of that country
  • documentation when the language spoken in the investing country is not English 
  • can the SMSF own the international property directly?
  • can the SMSF hold an overseas bank account if it is required in the investing country?
  • tax may be payable in the investing country
  • financial statements and a tax return may be required in the investing country
  • fluctuations in foreign currency
  • sovereign risk  
  • collection of rent and related expenses
  • maintenance of the property

Key Concerns for Superannuation Funds when Buying Overseas Property

The ATO mandates that auditors must verify that adequate audit evidence is provided for an investment property located in a foreign country which is owned by a superannuation fund. Below, we explore some of the key concerns.

Audit considerations should be addressed before investing into overseas property.

Title of the property 

The SMSF trustee should be the legal owner of the foreign property held on behalf of the fund which clearly identifies that the asset is owned by the SMSF.   

Property in many overseas countries can only be purchased by a local resident. 

Example – in America a SMSF can establish an American (US) limited liability company (LLC) which can be established by the SMSF to purchase US property. However, the investment is in foreign shares and not direct property. 

It may be possible to establish a bare trust or a declaration of trust for a local resident to hold the property title on behalf of the self-managed super fund.  A resident of that foreign country can acquire the property.  There is less risk If one of the members is a resident who can represent the SMSF in the investing country.   Otherwise, using a non-fund member may introduce additional risk making this option unattractive. 

It can be difficult for an auditor to obtain evidence of the title from a foreign jurisdiction. Furthermore, if the SMSF owns 100 % (or the majority of the shares or units) of an interposed foreign entity it is a related party in-house asset. An entity, known colloquially as a non-geared unit trust or company, is an exception to the in-house asset rules provided the company does not borrow, no charge over the property which cannot be used or leased to a related party of the fund (unless it is business real property) and the only assets are the foreign property and a bank account (defined as an authorised deposit-taking institution within the meaning of the Banking Act 1959).

Valuation of Overseas Properties

Similar to Australian properties an annual valuation is required. Additionally, a market valuation is required at the time when a pension is established or the death of a member.

Obtaining the valuation for a foreign property can be difficult, time consuming and costly. However, there are companies who provide an independent property valuation on foreign property which can be used as audit evidence.

Bank

A foreign bank account is established to receive rent and pay for rent expenses and maintenance. 

Example – Opening a US bank account can be difficult if you are a non-resident.  Similar to the holding of a US property a separate bare trust using an American LLC can be used to open a US bank account. 

Tip – If the property is purchased by an American LLC the bank account must be an authorised deposit-taking institution to comply with the non-geared company rules or it will breach the in-house asset rules.

Where possible the SMSF can engage a local real estate agent to undertake the collection of rent and payment of rental expenses including maintenance. The agent’s statements provide the auditor with third party evidence of the rental transactions. The real estate agent will require a local bank account to transfer the net rent.  

Rent Considerations 

 The trustees need to ensure a formal lease agreement is entered into with the terms and conditions reflecting a commercial arrangement and that rent is paid in accordance with that agreement, regardless of the tenant being a member (or other related party) or an unrelated arms length tenant.

Obtain a market valuation of the rent at the start of the lease term when the tenant is a related party.

All rental expenses should be paid directly from the fund’s bank account if the property is owned directly by the SMSF or from the foreign company’s bank account if the company holds the foreign property.  Ensure any rental expenses paid to a member for services provided must be at commercial rates and the member providing the service is qualified to do so. Services provided by a member and not paid by the SMSF may lead to the expense being classified as non arms length expense potentially resulting in all of the rental income and the sale of the property subject to penalty tax at 45%.                                                                                                                                                                                                             

Financial Statements 

Financial statements are used as part of the audit evidence showing the transactions in relation to the purchase of the property, valuation and the rental transactions.  Engage a local accountant in the investing country to prepare the statements and any required tax returns.

Foreign Tax

An SMSF is a resident of Australia and has to pay tax on income earned worldwide.  Depending on the investing country the superannuation fund may pay tax in both Australia and the foreign country.  If the investing country has a reciprocal tax treaty, such as the US, UK, France and many more countries, the SMSF can avoid double taxation as a foreign tax credit is generally available on local taxes paid in relation to foreign rental income and capital gains on disposal of the foreign property.

Who is using the property?

The foreign property may not be used or leased to a related party unless the property is used for business purposes.

The Swiss chalet in the Alps is not available to be used for your skiing holiday or the flat in central London when visiting your relatives.

Prohibited from using Property as Security

Just like in Australian property, a foreign property cannot have a lien on it unless it is under a Limited Recourse Borrowing Arrangement (LRBA). If a foreign entity is created to own the international property, a lien on the property is not allowed because the shares are the assets subject to the LRBA, not the property itself.

Borrowing to Purchase Overseas Property

Using a LRBA to purchase a USA property or other foreign property has additional risk compared to Australian property.

Many overseas investors are not allowed to hold properties as they are not local residents. In many overseas countries a local company can be incorporated which will be a resident. Thus, establishing a resident company in conjunction with an overseas property purchase can allow the S MSF to indirectly hold the property as an investment.

From a practical view a LRBA, generally, would reflect a loan made to acquire shares in a company which purchases the property. A suitable structure that will meet the residency rules of the foreign country such as an American LLC can purchase the property.

Australian banks are hesitant to provide loans when shares are the only form of security available, and the property cannot be used as security. It is improbable that a foreign bank would offer the necessary documentation to meet the requirements of Section 67A, allowing a Self-Managed Super Fund (SMSF) to adhere to the superannuation laws.

 A related party can provide a loan to the SMSF. The ATO are focused on a LRBA which is not at arms length.  The safe harbour rules do not apply to the acquisition of private company shares and the evidence required to show that the loan is arms length would be difficult to obtain.

Foreign exchange Fluctuations and Sovereign Risk

Consider the risk involved due to the foreign exchange rate of the investing country.  A  Self managed super fund is required to report fund assets in Australian currency which may impact on the calculations of the member balances and the minimum pension payments. The total superannuation balance for a member is valued annually at the 30th of June and used as an eligibility threshold which can affect the non-concessional contributions cap for the following year and determine if the member can utilise the carried forward unused concessional contributions for the following year (if under $500,000 the member may be able to increase their concessional contributions).

A foreign government may amend or change the rules in relation to taxation or foreign investors.  Obviously, some countries are higher risk than others. In unstable political environments a government could resume domestic properties owned by foreigners without any compensation.

Documents Related to Buying Overseas Property  

Where the language spoken in a foreign country is not English and the purchase contract, related documents and lease agreements are in a foreign language a translation into English is required for audit purposes.

Investing in International Property – The Key Takeaways

  • obtain advice from a specialised SMSF professional prior to buying overseas property 
  • consider if foreign agents are required to prepare financial statements, tax returns and manage the rental property
  • do your research into the laws and customs the fund is subject to in the country you are investing into
  • do your cost and benefit analysis
  • review the risk associated with SMSFS purchasing overseas property 
  • review and update the fund’s investment strategy and trust deed
  • review if the SMSF has sufficient cash and investment diversity
  • consider market valuations required in relation to the property and rent

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.

Give us a call on 1300 392 544 or get in touch online to discuss your plans and options with us today!

Contact Us

If you’re interested in learning more about SMSF and International Property Investment? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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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.

Do you want to learn more about SMSF and International Property Investment

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Share Investment? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)