SMSF Foreign Property

 In SMSF, SMSF Property, Uncategorized

SMSF Foreign Property

Australian investors love of property investment is often not restricted to domestic property.  Many SMSF’s are targeting foreign property for a variety of reasons, such as cheaper purchase costs and higher rental yields. With amazing 13%-22% returns on foreign property and property values around the $40,000 to $150,000, it is not hard to see why US and foreign property has caught the interest of many SMSF investors. There is little doubt that property in many parts of the world is cheaper than in Australia. This makes them far more affordable to most Australians and their Self-managed Super Funds( SMSF’s)

Here are some important considerations with foreign property purchases:

  1. Demonstrate that the property is legally owned by the SMSF and not a related party. In the US an LLC, is used with the SMSF controlling a majority of the shares in the US, LLC entity
  2. A lot of property arrangements in foreign countries require a local individual or entity to hold the ownership of the property. This mayresult in it being considered an in-house asset of which the SMSF is allowed to invest 5% of total assets. If the asset appreciates you will need to sell the asset so you don’t breach these provisions.
  3. Ensure you are investing in an asset that satisfies the sole purpose test ( section 62 SIS Act)
  • You need to make sure that you invest in assets with the intention of providing retirement income or death benefits to you and your next of kin. It cannot involve any activity to gain a present day benefit to any member of the SMSF personally or to a related party such as a family member, trust or company which is controlled by any SMSF member.
  1. Make sure that all arrangements are at arm’s length. (Section 109 SIS Act/ section 66 SIS Act)
  • You must make sure rent is at commercial rates, neither above market nor below and the tenant must not be related to you.
  1. Accounting/ Auditing requirements
  • Open a bank account with an ADI (Authorised Deposit Institution) and not all foreign banks are ADI’s
  • Convert all foreign currency holdings into Australian dollars when completing an Australian Tax return. Be mindful that currency fluctuations can reduce your returns.
  • Obtain a valuation on the property. This is hard in some countries.
  • You might be required to complete a tax return in the country of purchase, although double tax agreements (DTA) may apply,  further, the foreign tax offset (FITO) might not cover the tax paid on all of the rental income you receive on your property

ATO: https://www.ato.gov.au/Forms/Guide-to-foreign-income-tax-offset-rules-2016/

Australian auditors would need proof, that the super fund owns the property and that this ownership is recognised in the country of purchase. That rental income must be paid to the SMSF. This is a really important point to consider when purchasing international property within an SMSF. Other points to consider are collecting rent and obtaining finance for the property, which can be problematic in foreign countries.

SUMMARY

Whilst foreign property may be cheaper, with higher rental returns, it is not as easy to setup or borrow funds or to manage these arrangements. The time, costs, non-compliance risks and the reporting requirements are also far greater, so the key question to ask yourself is, if you will achieve higher returns compared to purchasing Australian property, which is easier to manage. The US or foreign property fund might be an easier way to gain this type of exposure without the complexities high costs and the hassles. Ultimately, it is up to you to determine whether the lower cost of entry is worth the risks to obtain potentially better returns in foreign property markets.

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