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.
1. 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.
2. 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.
3. 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 (SIS) compliance issues in Australia, under the SIS Act 1993.
4. 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.
5. 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.
6. Foreign currency
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.
7. Sovereign risk
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.
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