SMSF trustees can invest in overseas property, but they must adhere to compliance rules both domestically and internationally, according to a legal expert.
Daniel Butler, director of DBA Lawyers, notes that while overseas property may seem like an appealing investment, SMSF trustees must navigate several compliance pitfalls.
“SMSF trustees can purchase property outright using SMSF funds or through a limited recourse borrowing arrangement (LRBA),” Butler explained.
Although legally permissible, many practical challenges arise when an SMSF trustee purchases overseas property.
An SMSF must be maintained solely for purposes such as providing retirement benefits, Butler emphasized.
In the Swiss Chalet Case (Case 43/95 [1995] ATC 374), a super fund trustee invested in a unit trust owning a Swiss chalet. The issue was whether the fund met the sole purpose test.
The problem wasn’t the investment itself but that fund members and their friends stayed in the chalet rent-free, violating the sole purpose test, Butler pointed out.
Thus, SMSF trustees should acquire real estate only if it genuinely supports the core purpose of providing retirement benefits to members.
Some SMSF members wrongly believe the ATO won’t discover their use of overseas property. However, records such as immigration, phone, credit card, and GPS data can easily reveal their location.
Property ownership in many countries is restricted to residents, often necessitating the establishment of a resident company to purchase property.
In this scenario, the SMSF trustee buys shares in the overseas company, which then uses the share capital to purchase the property.
Butler warned that if SMSF members and their associates control the overseas company, the shares might constitute in-house assets.
For example, if the overseas company has a non-Australian Approved Deposit Institution bank account or places a charge on the property, the shares won’t meet the exception in division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (Cth).
Exceeding the five percent in-house asset threshold can lead to significant penalties, an SMSF being non-compliant with substantial tax liabilities, and disqualification of SMSF directors/trustees.
Another SMSF investment strategy involves making, holding, and realizing assets consistent with the trustee’s investment objectives, requiring authorization by the SMSF deed and alignment with the fund’s investment strategy.
“Formulating and regularly reviewing an investment strategy is mandated under regulation 4.09(1)(a) of the SISR,” Butler said.
An SMSF trustee/director who fails to maintain an investment strategy risks significant fines upon conviction.
If borrowing to acquire property via an LRBA, additional risks include whether a bank would lend to an SMSF for overseas property, Butler added.
Banks are often reluctant to lend based on shares in a foreign company or units in a unit trust, preferring security on the property itself.
Loans to an SMSF must be limited recourse borrowing arrangements, complicating overseas property purchases as few overseas banks provide documents meeting s67A requirements of the Superannuation Industry (Supervision) Act.
Borrowing from a related party can also pose challenges, particularly in ensuring arm’s length terms and obtaining appropriate evidence of such practices.
Dealing with differing laws, tax systems, and regulations in overseas countries adds complexity, making it crucial to ensure compliance with both overseas and Australian rules to avoid costly contraventions.
If you need assistance with SMSF compliance or overseas property investments, contact BOA & Co. at 1300 952 286, email info@boanco.com.au, or visit www.boanco.com.au. Our expert advisors are here to help you navigate the complexities and ensure full compliance.