While overseas markets provide relatively simple investment options for things like shares, ETFs and unit trusts, purchasing direct property internationally comes with a lot more complexities for investors. While it is possible, the strict rules and risks involved often make Australian property a more practical and compliant investment choice over international investment properties purchased via SMSFs. Learn more below.
Why SMSFs are Exploring Overseas Property For Their SMSF
As Australian property prices continue to rise, some self-managed super fund (SMSF) trustees are looking to international markets for potentially more affordable investment opportunities. Exploring international markets may provide:
Portfolio diversification
Expanding an investment portfolio beyond the Australian market may help reduce risks associated with local economic fluctuations. If Australian property prices decline, holding assets in foreign markets might provide a buffer. This diversification reduces reliance on a single economy and spreads risk across multiple markets.
Access to high-growth markets
Some international property markets may offer opportunities for higher capital growth and rental yields than those currently available in Australia. For example, emerging markets or regions experiencing strong economic development may provide lower entry costs and greater appreciation potential over time.
Currency and economic benefits
Overseas investments provide exposure to different economies and currencies, potentially acting as a hedge against Australian market downturns. If the Australian dollar weakens, rental income and property values in a stronger foreign currency may increase in relative value.
Rules and Restrictions
Purchasing property in a different country doesn’t mean SMSF trustees get around the superannuation rules. The rules that apply to Australian property still apply in other countries. Here is an overview of the essential rules to understand:
- – Sole purpose test. The property may only be purchased for the sole purpose of providing retirement benefits to the fund members. This means the property cannot be used by SMSF members or their relatives, including as a holiday home.
- – Arm’s length rule. Property must be rented at arm’s length on commercial terms at market rates, with all rental income going into the SMSF.
- – Single acquirable asset rule. If purchased using a limited recourse borrowing arrangement (LRBA), the property cannot undergo major renovations or be built from vacant land.
Challenges of Purchasing Overseas Property with an SMSF
Legal and structural complexities
Purchasing property overseas through an SMSF is more complicated than buying in Australia due to foreign ownership laws, legal structures, and compliance requirements.
The SMSF trust deed and investment strategy must explicitly allow for overseas property investments. If not, trustees may need to update these documents before proceeding.
Purchasing overseas property through an SMSF can be challenging due to foreign ownership laws and the recognition of SMSF structures. Some countries do not recognise Australian SMSFs, meaning trustees may need to establish a suitable legal entity, such as a Bare Trust, Custodian Trust, or local holding structure, to hold the property on behalf of the fund. In some countries, non-residents are restricted from directly owning property, requiring SMSFs to structure ownership through a local entity (e.g., an American LLC) or appoint a resident representative to comply with local laws.
Financing difficulties
Borrowing to fund an overseas property purchase is significantly more challenging than financing an Australian investment due to lender restrictions and compliance issues.
- – Limited bank lending options. Australian banks generally do not finance overseas SMSF property purchases because they do not accept foreign property as security. If the structuring requires the SMSF to purchase shares in the foreign company or structure that was set up to purchase the property (for example, an American LLC), it’s unlikely that an Australian lender would be comfortable accepting these shares as security.
- – Foreign bank compliance issues: While some foreign lenders may offer loans, they are unlikely to provide documentation that meets ATO Section 67A requirements for LRBAs.
Taxation and compliance considerations
Foreign property investments come with additional taxation obligations and compliance requirements that must be managed carefully.
- – Overseas tax registration. The SMSF (or its established entity) must register for tax in the foreign country, potentially requiring local accountants and legal advisors to manage obligations.
- – Double taxation risks. If the property is located in a country without a reciprocal tax treaty with Australia, trustees may be subject to double taxation; once in the foreign country and again in Australia.
- – Foreign bank accounts. The SMSF or its associated trust must maintain an overseas bank account to receive rental income, pay maintenance costs, and manage property-related expenses.
- – Translation of legal documents. If investing in a country where English is not the primary language, all contracts and agreements must be translated to ensure compliance with Australian auditing and reporting requirements.
Is Investing in Overseas Property a Good Idea?
While SMSFs potentially can invest in overseas property, the complexities involved, particularly around legal structuring, financing, and taxation, make it a challenging option.
Trustees should seek expert SMSF advice to ensure compliance with Australian superannuation laws and foreign regulations before proceeding.
At SMSF Loan Experts, we specialise in helping SMSF trustees set up LRBAs to purchase investment properties in Australia. If you’d like to understand more about purchasing property through an SMSF, please get in touch with us today.
