Trustees of SMSFs (self-managed superannuation funds) have, for some time, been able to purchase residential property in Australia on behalf of their fund. Although our property market may be “coming off the boil”, prices are still high, and many SMSFs are looking elsewhere to build retirement income.
Interest in overseas properties has been a hot topic in the media lately, especially in parts of Europe where the long-term effects of the global downturn are still being felt, and property prices are low. Some cashed-up Australians are taking advantage of this situation; however, does this mean that trustees of SMSFs can also invest fund money in overseas property?
The current advice is that there is nothing to stop an Australian SMSF from acquiring property abroad, but continued compliance with our tax laws still must be considered. Here, the key issue still, is whether an overseas property investment meets the sole purpose test, along with some other factors that need to be checked and addressed.
The sole purpose of superannuation is to provide retirement benefits to members and beneficiaries of the superannuation fund. Provided the trustees or members do not use the overseas property for their own benefit prior to retirement, such property should meet the sole purpose test.
Before going any further, it would be wise to check that the trust deed allows for overseas investments. Most deeds do, but a quick check will allow you to proceed with certainty. You should also ensure that the purchase of property abroad is also included in your written investment strategy, with a thorough description of how you intend to make money for the fund. This should also include insurance to protect the investment.
Thoroughly investigate any legal compliance issues before committing any funds to this type of investment. For example, because SMSFs are a uniquely Australian vehicle, do not assume that our laws and rules will apply outside of the country. Here, the SMSF trustee is legally required to hold the title to the property. This may not be the case elsewhere and, in fact, it will vary from country to country.
Some foreign countries do not recognise our trust structure for SMSFs, and many do not allow a foreign entity to hold property directly. As a result, you may be required to set up a limited liability company in a foreign country and open a bank account in its name. It is the limited liability company that purchases the overseas property and the SMSF then invests in shares in that company. This will have tax implications both here and overseas, so make sure you check these out before proceeding.
There will also be additional costs involved, as there is no getting around the Australian Tax Office (ATO) audit requirements for SMSFs. This may involve having to hire a local accountant in the country of your investment to assist with tax and auditing issues. This will be an additional cost on top of the audit costs here in Australia.
If you do your research and purchase an overseas investment property, knowing all the costs involved as well as the legal, compliance and tax requirements in both countries, there is no reason for you not to proceed. Like any other investment, do your research, balance risk and reward, so that your fund may have a very lucrative asset working for its members.