Guide On Using SMSFs To Buy Property Overseas
The allure of retiring in an overseas exotic location has become evident in recent years for the typical Australian. The strong Australian dollar coupled with the financial stress in leading economies such as Europe, United States, Japan and England following the Global Financial Crisis, can make the idea of acquiring overseas based rental properties very inviting. Given the hustle and bustle of modern life, who wouldn?t want to retire to the South of France or that favorite beach hideaway? The very idea seems tempting. That is why more and more people are asking about using their SMSFs to invest in overseas real estate.
What The Law Says About Using SMSFs To Invest In Overseas Real Estate
The Superannuation Fund legislation and regulations do not explicitly prohibit SMSFs from investing in properties located overseas. Nonetheless, before jumping on the next plane to purchase that dream property, SMSF trustees must consider certain investment rules and restrictions that are applicable.
Issues To Consider Before Investing In Overseas Property Using Your SMSF
Although there are no specific rules with Superannuation legislation which provide specific guidance on the types of property that can be purchased by trustees, there are certain practical and commercial issues that need to be considered.
The following are some of the issues:-
SMSF trustees must be able to articulate why the purchase of a particular property is consistent with the investment strategy of the fund. This entails demonstrating an understanding of how the risks, return, liquidity and diversification of the fund are affected by the investment strategy in question.
Sole Purpose Test
SMSF trustees must be able to demonstrate that the investment in overseas real estate is made solely to provide retirement benefits to members. A number of issues regarding sole purpose are often raised when an SMSF chooses to invest in overseas real estate. For example, questions will be asked of members who choose to invest in a villa in the south of France for their future retirement.
Related Party Acquisition
The overseas real estate property should not be acquired from a related party except when the property in question is a business real estate property.
Arms Length Transaction
This is closely related to the point above. Any purchase and subsequent rental of property must be on an arm?s length basis. Although not defined by the Act, an arm?s length transaction could be deemed to be a transaction whose terms would be agreeable to a prudent person acting with due regard to his or her commercial interests.
In-house Asset Rules
In-house asset rules may present complications to SMSF trustees who are purchasing overseas property directly via a company and/or trust. In the USA for example, it is common for property to be acquired by a Limited Liability Company (LLC). In Australia on the other hand, such an acquisition would be deemed to be a breach of in-house asset rules.
No Borrowing Or Charges
Generally, a super fund is prohibited from borrowing and from placing a charge over an asset unless it is specifically exempted under sections S.67a and S.67b. It can prove an uphill task to obtain finance from an overseas bank that is familiar with these specific regulations.
Can Travel Costs Be Reimbursed By My SMSF?
Trustees have an obligation to manage investments of the super fund in a way that maximizes the retirement benefits of members. That being said, there is still a compelling reason that supports the view that SMSFs can pay or reimburse travel costs incurred by trustees while looking for overseas property. Nonetheless, it would be naïve not to appreciate the ATO?s reluctance to these arguments. Therefore, before using SMSFs to pay for or reimburse travel costs, trustees need to ask themselves a few questions. Does the trust deed allow that? Is the expense necessarily incurred? Is the expense reasonable? Is the cost wholly incurred in carrying out the trustees? duties? To be on the safe side, SMSF trustees should seek financial and tax advice before proceeding to use their SMSFs to pay for or reimburse their travel costs.
Indeed the Global Financial Crisis has resulted in financial pain for many. The astute investor will however look at the other side of the coin and identify opportunities to acquire highly desired assets. When SMSFs are involved in the process, a more prudent investor will emphasize on doing it in the right way. Other siginificant risks include lack of control due the distance of the property being so far away and currency risk, should currency fall the wrong way your property value could be heavily discounted if you decide to sell it.
In all case the advice of a good tax accountant or financial planner should be sought if buying property is something on your radar. For further information contact us here.
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Disclaimer: The information on this site is general in nature and not financial advice. Visitors should consider obtaining independent advice before making any financial decisions.