All of an SMSF’s investments must meet the requirements of its investment strategy including liquidity, diversification and cash flow, and the sole-purpose test for the provision of retirement benefits for its members.
While an SMSF can hold overseas property, you will need to consider the laws in that country, particularly in respect of how or to what extent a foreign entity (an SMSF) can own land.
The main issues surrounding investing in overseas property generally involve the practical aspects of satisfying the relevant laws of the foreign country and how these relate to Australian superannuation law. Following are some of the major considerations.
No Charge Over the Property
Generally an SMSF asset is not allowed to have a charge against it. A charge may be a bank loan, or the asset may be security for another loan. With real property, the auditor of the SMSF would generally do a title search at the end of each year to confirm ownership and no charges are held over the property. It can sometimes be difficult to obtain documents confirming no charge is in place over a property in countries where there is no Australian-style register of titles. If documents relating to the property are not provided in English, they would have to be translated to prove ownership. This could result in additional fees.
The Entity that Holds the Property
In several countries, a foreign entity such as an SMSF cannot hold property directly. One option is to establish a local entity that buys the property, with the SMSF owning all the interests in the entity. This structure is quite complex and should be discussed with a financial adviser.
Different Laws and Customs
You need to carefully consider the laws and customs of the country where you intend to buy the property. Remember that issues can arise over applicable tax, and landlord and tenant laws. For example, in some US states, authorities have the power to sell property where there are outstanding fees. This would result in Superannuation Industry Supervision (515) compliance issues in Australia, under the SIS Act 1993.
Payment of Taxes
The investment entity may need to be a taxpayer in the country in which you buy the property. This may mean you have to lodge additional tax returns and pay extra taxes. In this case, you’ll need additional specialist assistance, probably from an expert in the country where the asset is located.
Local Real Estate Agents
The property is expected to receive rent and the SMSF would be expected to pay for all expenses related to the property. However, doing this from Australia could be impractical, particularly if you establish an overseas bank account. A locally based real estate agent could run an account for the SMSF, with rent and expenses being channelled through this account. In this scenario, the trustees would need to ensure they received regular statements and had an agreement in place covering how frequently net proceeds would be transferred into the SMSF.
The trustees of the SMSF need to consider the risks associated with fluctuations in foreign currency and exchange rates. All superannuation assets need to be converted into Australian dollars for financial statements, so they will be affected by movements in the exchange rate. These variations could in turn affect other superannuation calculations such as member balances and minimum pension levels. Additionally, you should be careful when considering the tax treatment on profits that may result from currency movement.
You also need to consider sovereign risk. A foreign government could change the rules relating to taxation or foreign investment. This could result in the SMSF no longer being able to own property in that country. In fact, there is even the possibility of the foreign regime resuming ownership of their domestic assets from foreigners without compensation.
You should also consider that residential property cannot be leased to a related party of the SMSF and it would not be possible for members or relatives of the fund to use the property personally.
You should talk with a financial adviser if you are interested in purchasing overseas property within a superannuation fund.
So let’s look at some of these issues:
Investment Strategy – The trustees of the SMSF must be able to articulate why the particular property purchase is consistent with the investment strategy of the fund. When doing so that should be able to demonstrate an understanding of how the risks,
diversification, return and liquidity issues associated with the fund are impacted by the investment in question.
Sole Purpose Test – The trustees of the SMSF must be able to show that the investment is being made solely for the purpose of providing retirement benefits for members, investing overseas raises a number of issues regarding sole purpose especially if for instance members are investing in a villa in the south of France for their future retirement. Related party acquisitions – The property should not be acquired from a related party unless it is business real property. I have had associates in the past who have wished to acquire a French farmhouse from a family member, before proceeding I asked them to look closely at the definition of a related party prior to considering whether to proceed or not
In-house asset rules – Accountants and lawyers like to complicate things and this is the same the world over. This may be an issue if the SMSF trustees are not purchasing the property directing but via a company and or trust In the USA it is common for property to be acquired by a “LLC” a Limited Liability Company, such an action may be fine in the USA but breach the In-house asset rules in Australian
No Borrowing or charges – Generally a superfund is prohibited from borrowing and from placing a charge over assets unless it is exempt under section S.67a and 67b. Obtaining finance from an overseas bank familiar with these specific regulations can be very problematic.
Arm’s Length Transactions – Any purchase and subsequent rental of property must be on an arm’s length basis. Arm’s length is not defined in the act, but a useful test is to ask yourself whether a prudent person, acting with due regard to his or her own commercial interests, would have agreed to the terms if this arrangement.
Travel costs reimbursed by SMSF – The trustees have an obligation to manage the investments of the superfund in a way that maximises the retirement benefits of members. With that in mind there is a compelling argument that supports s the notion that SMSFs can pay or reimburse the travel cost that trustees incur whilst inspecting overseas property. However it would be naive not to recognise the ATO’s reluctance to accept these arrangements, As such it is highly recommend that the trustees apply a number of test before paying or reimbursing costs. These tests hinge around, what the trust deed allows, Is the expense necessarily incurred, is the expense reasonable, is the cost whole incurred in carrying out the trustees duties to name a few. The rule here is seek advice before proceeding.