As property prices in Australia continue to rise, some investors are turning to overseas properties as a more viable and attractive option. In the US, for example, suitable investment properties can range from $40,000 to around $150,000.
This is certainly much more affordable than purchasing investment properties in Australia. Plus in countries such as the US, rental yields are also higher, averaging between 7% and 22% depending on the property and the state it's located in.
Of course, there are plenty of other countries where investment property prices are much more affordable including Europe and South East Asia.
The good news is that an SMSF can invest in overseas properties however, this can be quite complex depending on which country you want to purchase property in. Some countries in Asia prohibit a foreign SMSF from holding the title of the property and thus this requires the set up of a local entity.
Some Basic Structures Which Need To Be Set Up For Investing In Overseas Property
Depending on the country where the property is being purchased it is possible to set up a Bare Trust or Custodian Trust which then holds the title of the property. This is the same as using borrowed funds by an SMSF in Australia to purchase an investment property here.
In this scenario, the SMSF holds 100% ownership of the Bare/Custodian trust and in turn the Trust has one hundred percent ownership of the investment property and must also have a local overseas bank account.
If purchasing a property in the US however, a Limited Liability Company (LLC) needs to be established and the SMSF will purchase all the shares in the company. In this situation, the LLC has 100% ownership of the investment property and also a US bank account.
Basic Requirements For An SMSF To Purchase Overseas Property
Here are some basic requirements which need to be established and adhered to for an Australian SMSF to purchase an overseas investment property:
- As is the case if an SMSF wishes to purchase an investment property in Australia, the fund needs to include property investing in it's 'Investment Strategy' as well as the 'Trust Deed'
- Depending on which country you want to invest in, a separate structure will need to be established to meet the local property ownership laws of that particular country.
- The SMSF or Custodian/Bare Trust has to hold the title of the overseas property.
- Some Asian countries do not allow foreigners to own property in their own right. Therefore the fund will need to engage a local resident who is able hold the title of the property for the fund. This can be quite a complex situation and requires both legal and financial advice to ensure that the structure of this type of property purchase is set up correctly to protect the interests and assets of the SMSF.
- It's crucially important that the investment property is unencumbered and is not being used as security for a mortgage or other type of loan. This will need to be verified on a regular basis with the correct documentation.
- It's also important that the SMSF adheres to the customs and laws of the country in which the investment property is purchased.
- Once you have set up an appropriate entity in the country in which you want to purchase your investment property, this entity will be required to pay tax in the country it has been established in. This will usually require the services of a local accountant to ensure that all the local taxation laws are adhered to.
- The ATO does have a reciprocal tax treaty with a large number of countries including the US, most European countries and also a lot of Asian countries. This means that you won't be required to pay double taxes.
- If your SMSF is going to borrow money to purchase the investment property, then the loan needs to include the required 'limited recourse structure' to satisfy the rules of borrowing funds with your SMSF as set down by the ATO.
- The investment property needs to be an income producing asset of course, just as would be the case if the property was situated in Australia. It can also not be rented to a family member or friend of the SMSF trustees as the same 'at arm's length' rules apply.
- It's also important that your SMSF or the overseas entity such as a Bare Trust or LLC has a local bank account in the country that the investment property is situated. This enables the property management company to deposit funds from rental payments and also to pay for property maintenance expenses. This bank account must be with a financial institution which meets the requirements of a 'deposit taking institution' as set down by the Banking Act 1959.
- Another important thing to take into consideration is the exchange rate between Australia and the local currency of the country in which the investment property is situated. Because an Australian SMSF can only receive funds in Australian dollars, any transaction fees also need to be taken into consideration and accounted for in the financial records of the fund. This could add some additional administrations costs to the management of the fund.
Seek Professional Advice
Before you venture into purchasing an overseas investment property with your SMSF, it's really important that you seek both legal and financial advice regarding this type of investment. You may speak to an accountant who is very familiar with SMSF investment strategies or even a mortgage broker who understands the special requirements of an overseas investment property.
You may also speak to a representative at the ATO as to the legalities and tax obligations of purchasing an overseas investment property.
In summary, your SMSF is certainly legally able to invest in overseas property however you need to take into account the requirements of each country that you're interested in and it's policies on foreign property investors.