Can My SMSF Purchase Overseas Property?
A SMSF can directly purchase overseas property anywhere but certain countries are very litigious and how the fund acquires them can be quite tricky. Remembering the trustees must organize independent audits of the fund each year and this could increase the costs of audit for the following reasons:
The fund auditor would expect documentation evidence of ownership
The fund auditor would require documentation evidence of the value of the property as assets are to be recorded at the market value at the end of the financial year.
The trustees of the SMSF would have to ensure that the trust deed allowed the trustees to purchase overseas property as well as acquiring property directly.
Australian superannuation law
The SIS legislation does not prevent trustees from buying property overseas.
As with any SMSF investment, the trustee needs to ensure overseas property is a good fit with the overall investment strategy and that it complies with a number of rules.
The property cannot be acquired from a related party (ie, the trustees can not buy from themselves, a family member or family entity) and there is a limit on how much can be invested in related party assets, known as the “in-house assets rule”.
Trustees also need to have commercial pricing for in-house transactions.
Investing in overseas property does not have many implications in terms of Australian super legislation unless the property is acquired from a
related party, or has a related party as a tenant.
Be aware of the issues associated with it!
There are no special rules within the Superannuation Legislation which provide specific guidance on the types of property that trustees are entitles to purchase. That being said there are certain practical and commercial considerations that need to be considered.
So lets 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 there 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 law.
- No Borrowing or charges – Generally a super fund 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.
In summary, it is possible for an SMSF to purchase overseas property, but the trustees will need to consider and address the risks and practical issues that result from the transaction.