The short answer is yes, providing the following criteria are met by the SMSF:
- The SMSF’s trust deed (legal document) must allow for the SMSF to purchase overseas investments. This must also be covered in the SMSF’s investment strategy.
- The overseas property can meet the sole purpose test at all time during the period of ownership of the overseas property. SMSFs that purchase overseas property often fall into the trap of assuming that they can lease or offer the property to the members for use at no charge. This can cause the sole purpose test to be breached and the result can be very costly.
- If the SMSF can purchase the property in the name of the trustee(s) then there would not be a problem. However, strict foreign ownership rules will often require an overseas vehicle (i.e. a company) to be setup to purchase, and the SMSF in turn would own the shares in this related overseas company. This can trigger in-house assets problems for the SMSF where the related company borrows money or have a loan owing to other parties. To avoid the in-house assets problem, the related company must remain ungeared at all times during the property ownership period.
Having an overseas related company will also mean that you may need to have an overseas bank account in the name of the company to transact on the property (i.e. collect rent and pay the outgoings). Care needs to be taken to ensure that the overseas bank account complies with our Australian banking law (the Banking Act 1959 (Commonwealth)).
Also, where an overseas related vehicle is involved, how will the tax on the income or capital gains be treated for the property? This will mean it is complicated as the double tax agreement will need to be reviewed and considered. Taxation issues such as foreign withholding tax (range from 0-30% depending on the overseas country) and claims for foreign income tax offset will need to be looked at. Where the SMSF is in pension or tax free mode, any overseas tax burden would be wasted in Australia by the SMSF.
- Where borrowing is involved for the funding and purchase of the overseas property (i.e. using a limited recourse borrowing arrangement – LRBA), there will be added complexity. Issues such as, will the local Australian bank lend an SMSF money to purchase an overseas property and how would it take security over an asset situated overseas. If an overseas lender is used, will the loan arrangement be complying with the SMSF’s LRBA rules.
In summary, purchasing an overseas property is doable but what will be the cost for getting it right from the start and also what would be the cost to the SMSF if it was found to be in breach of the in-house assets or sole purpose tests or the LRBA rules? Any overseas investments by an SMSF should not be taken lightly, and should you be interested in purchasing an overseas property or want to know more about this topic please do not hesitate to contact your client manager.
*Correct as of October 2014
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.