Mon 19 Nov, 2018
Can You Invest in Overseas Property with an SMSF?
Whether you’re new to SMSFs or you’re a seasoned investor, buying property is a big benefit to self-managing your superfund. However, one thing many don’t know is that SMSF trustees are actually permitted to invest in overseas property! Of course, the property needs to be invested for the sole purpose of growing your fund for retirement. In other words, you can’t use your SMSF to invest in your dream holiday home. Sorry!
It’s important to note that Squirrel Super is not able to assist trustees with the purchase of overseas property. While we are not licensed on overseas property investments, we can offer some insights into the important factors you need to consider. So, in today’s blog, we’ll discuss seven tips on how you can invest in overseas property with your SMSF.
Tips on How to Invest in Overseas Property with an SMSF
1) Choose the Country of Your Property Carefully
If you’re considering investing in overseas property, it’s crucial to carefully choose which country to invest in. Not only can things like language and currency hinder your ability to make a profit, but some countries don’t even allow SMSFs to invest in their property. So make sure the country you choose does in fact allow SMSFs to invest before making any concrete plans.
Remember, SMSF assets are required to be kept separately from any personal assets. This means any assets, including property, that are purchased for your SMSF, must be purchased under your fund’s name. So, if the country of your choosing doesn’t allow SMSFs to invest, don’t purchase the property under your personal name. The ATO does not allow SMSF property to be purchased under a trustee’s personal name in any circumstances.
2) Ensure You Have a Sufficient Enough Balance in Your Super for the Property
If you’re thinking of applying for an SMSF loan for your overseas property, you may have to think again. Unfortunately, it is difficult to secure lending to invest in overseas property with an SMSF. Lenders often consider overseas property as riskier than property located here in Australia. As a result, depending on where your overseas property is located, and what kind of property it is, you may have to rely on your own super balance to purchase the property.
3) Consider Why You Want to Invest in Overseas Property
As with any asset acquisition in an SMSF environment, you cannot buy the property for your personal use. This means no holiday homes in Bali, sorry! You also can’t lease the property out to any known or related party. So your family and friends also can’t take vacations in your overseas property.
That’s why it’s important to carefully consider why you want to invest in an overseas property. If it’s for a holiday home for yourself or your friends and family, then you may find yourself in a lot of legal and financial trouble with the ATO. Remember, just because the investment property is located in another country doesn’t mean you don’t have to adhere to the ATO’s rules and regulations.
4) Familiarise Yourself With the Local Country’s Tenant and Landlord Laws
Assuming that you will be leasing out the property in order to generate an income stream, remember that different countries will have different laws in place concerning landlords and tenants. Buying property overseas with your SMSF means you will become responsible for ensuring you are meeting all the necessary requirements as a tenant – and keeping up to date with them as they change.
5) Recognise that Financials in a Different Country Could Be Complicated
Making money off of your overseas property investment can be a difficult process. For one, you will have to establish a bank account under your SMSF’s name in the local country and currency in order to receive the rental income. You will also need to keep up to date with foreign investment laws, taxes and regulations as these can suddenly change and negatively impact your investment’s profitability. Any fluctuations in the exchange rate could also mean foretasted income is lost. So make sure to keep an eye on the exchange rate of the country’s currency and the AUD.
When an SMSF purchases a property in a given country, the fund becomes a tax resident of that country. That means your fund will need to adhere to tax returns, audits and accountancy services of that country. These are all extra accounting services your fund will need to comply by - in addition to the annual accounting and auditing done for the ATO. Besides being costly, these extra services can be particularly difficult to execute offshore. It’s important to pay any outstanding axes on time to ensure that the there is no charge on the property or compliance issues under the SIS Act.
6) Don’t Forget About the Possibility of a Language Barrier
Depending on where you invest in your property, you may face a language barrier. This can complicate things both during the purchase of the property and after. For example, if there is a language barrier, negotiations during the purchase of the property can be difficult without a translator. Once the property is purchased, you may still find difficulty communicating with your tenants or the property manager. Additionally, gathering the documents for your property can be challenging and costly as all the documentation must be accompanied by a certified translation for the fund’s annual audits.
A language barrier could also increase the level of risk in your investment property. So make sure to strongly consider the challenges of a language barrier when thinking of investing in overseas property.
7) Consider the Extra Costs of an Overseas Property Investment
An overseas investment property could possibly mean a lot of extra costs for you and your SMSF. As mentioned, if there’s a language barrier, you will have to pay to translate the documents. You may also have to pay for a translator when you communicate with the property manager or tenant. Additionally, if your overseas property is relatively far from Australia, your travel costs could be costly, especially since any travel costs to and from the property cannot be paid from the SMSF. These are all extra costs that you will have to bear in mind when considering an overseas investment property.
While investing in overseas property may seem like a holiday dream come true, in reality, it’s a complex matter that must be approached with caution. Especially since the property most definitely cannot be used as a holiday home for you or your family members.
If you’re seriously considering investing overseas with your SMSF, make sure you source the right qualified legal support to help keep your property compliant. Otherwise, weigh up why you want to invest in overseas property and consider if there may be a lower-risk, more profitable asset class in Australia that could be better suited to your fund.