Things To Consider For SMSFs Buying Overseas Property

AdobeStock 85369091
10
Oct

Things To Consider For SMSFs Buying Overseas Property

10.10.16

A key benefit of establishing and operating a Self Managed Superannuation Fund (“SMSF”) is the flexibility to acquire a wide range of assets, including the ability to acquire overseas property.  This can occur either by an outright purchase by the SMSF trustee or by borrowing using a limited recourse borrowing arrangement (LRBA).  

 

There are however a number of considerations SMSF holders should take into account before embarking on overseas property investment, both for outright purchase of property and investment with borrowings.

 

OUTRIGHT PURCHASE OF PROPERTY

While SMSF trustees can purchase a property overseas, there are many compliance issues that need to be considered.  In particular:

  • The acquisition must meet the sole purpose test.
  • The acquisition must comply with the in-house assets rule. This is particularly an issue for investments in overseas jurisdictions that require property to be held by a company or similar vehicle in the foreign country.  In such cases the SMSF member will need to establish a company in the overseas jurisdiction and the SMSF trustee will invest in shares of that company, which will be used to fund the overseas property acquisition.  This can often lead to complications around in-house assets if not treated carefully.
  • The acquisition must be authorised by the SMSF deed and be consistent with the investment strategy of the fund.
  • Foreign taxation rules concerning the nature of a SMSF which is an Australia specific type of entity.

 

AQUIRING PROPERTY WITH LRBA

Further issues arise if the SMSF trustee wishes to borrow to acquire the property using a LRBA.  Particularly in cases where the acquired property must be held via a foreign company, banks may be reluctant to lend money to acquire shares in a foreign company.  Borrowing through overseas banks can also cause problems where documents are inconsistent with Australian superannuation requirements.

 

If the SMSF trustee were to borrow from a related party rather than a bank, there can be issues in complying with arm’s lengths practices, meaning the transaction must be conducted on a commercial basis as if there were no relationships between the parties.

 

OTHER CONSIDERATIONS

It is important to consider additional costs in sourcing the property through an agent or advocate in the foreign country, undertaking repairs and maintenance and legal costs to complete the conveyance and provide ongoing advice.

 

SMSF trustees looking to invest in overseas property should be aware there are a number of complications that can arise from acquiring property in a foreign country.  Compliance issues and processes that are relatively clear-cut in Australia are not necessarily straightforward in overseas jurisdictions.

 

ESV is experienced in navigating the complex provisions surrounding acquisition of property in SMSF’s.  If you have any queries in relation to property acquisition, LRBAs or SMSFs generally, please do not hesitate to contact us or call your ESV engagement partner on 02 9283 1666.